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Click here for the full text of this decision FACTS:California-based INOVA Diagnostics Inc. hired a salesperson in Texas, the only INOVA employee in the state. The employee worked an average of 7 to 10 days each month in Texas. Any sales the employee made were ordered from California and delivered by mail or common carrier. After sending INOVA a business tax questionnaire, the state comptroller concluded that INOVA owed franchise tax for the years following the hiring of the Texas employee. The franchise tax is calculated by adding the tax on net taxable capital and the difference between the tax on net taxable earned surplus and the tax on net taxable capital. INOVA paid the tax under protest then later filed for a refund of the taxes it paid from 1999 to 2003. The comptroller denied the request. INOVA filed suit in the trial court, which ruled for the state. On appeal, INOVA argues that 15 U.S.C. 381-84, also known as Public Law 86-272, exempts INOVA from paying any portion of the franchise tax that is measured by earned surplus, and the portion of the franchise tax imposed on capital cannot be separated from the portion imposed on earned surplus. HOLDING:Affirmed. The court explains what Public Law 86-272 does. Passed in 1959, Public Law 86-272 creates minimum standards for business activity required within a state before that state may impose state income tax on an out-of-state corporation. The statute prohibits a state from imposing a net income tax if the only in-state business activity of the out-of-state business is the solicitation of orders. The court further notes that while the controller agrees that it cannot tax the net earned surplus on a company whose only business in the state is from solicited orders, the comptroller further argues that Public Law 86-272 does not exempt an out-of-state corporation from the payment of franchise tax based on the business’ net taxable capital. So, while INOVA only solicits orders in Texas and its net earned surplus cannot be taxed, as the comptroller admits, the state says it can still tax INOVA’s net capital. Construing Public Law 86-272 within the context of the franchise tax statute, the court finds the comptroller’s interpretation proper. The state”s interpretation acknowledges that an out-of-state corporation that only solicits orders in Texas has no taxable earned surplus. Thus, applying Public Law 86-272 to the formula in 171.002, an out-of-state corporation”s net taxable earned surplus will always be zero, and the tax on capital will always be greater. When the statutory formula is applied to taxable earned surplus, the franchise tax will always be based on the foreign corporation’s net taxable capital. The court then turns to decide whether the taxable capital component is measured by net income. The court looks to other state court opinions in similar cases and the legislative history of Public Law 86-272 and finds that Public Law 86-272 “do[es] exactly what it says.” The statute exempts certain businesses from state taxes imposed on net income or measured by net income. “Extending the exemption in Public Law 86-272 to taxes that only use net income as a factor in calculating another tax would be inconsistent with the stated intent of the law, the longstanding interpretation by the Comptroller, as well as the decisions of all of the courts that have considered this issue. Because we interpret the definition of net income in Public Law 86-272 narrowly, we hold that the capital component of the franchise tax is not a net income tax under Public Law 86-272 and therefore INOVA is not exempt from paying franchise tax on its net taxable capital.” The court next looks at whether the comptroller’s rule violates the Commerce Clause. The court agrees that taxing a company with only a de minimus presence in a state would amount to discriminating against interstate commerce. The court, however, rules that the presence of INOVA is greater than a mere de minimus presence. OPINION:Smith, J.; Law, C.J., Smith and Pemberton, JJ.

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