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Click here for the full text of this decision FACTS:Home Interiors & Gifts Inc. (Home Interiors) is a Texas corporation that employs approximately 350 employees in Texas. Virtually all its operations occur in Texas. Home Interiors is in the business of purchasing home decor products, accessories and gifts and wholesaling them to independent contractors, known as displayers. Additionally, Home Interiors sells a variety of marketing materials to the displayers to aid in the retail sale of the products. All of Home Interiors’ profits are generated from the initial sale of the products to the displayers. During the period of time relevant to this appeal, Home Interiors sold products to displayers located in all 50 states. Between 1994 and 1999, Home Interiors timely paid its Texas franchise taxes. It then sought a refund of those taxes, contending that the statutory method for apportioning the earned surplus component of the franchise tax was unconstitutional. After refund hearings were held, Carole Keeton Strayhorn (the comptroller) issued a decision stating that she did not have the authority to rule on the constitutionality of the statutory provisions. Consequently, Home Interiors brought suit in district court, which upheld the constitutionality of the earned surplus throwback provision. Both Home Interiors and the Comptroller filed motions for summary judgment. The district court denied Home Interiors’ motion and granted the comptroller’s motion. On appeal, Home Interiors argued that the application of the earned surplus throwback provision causes the franchise tax to 1. be unfairly apportioned, 2. discriminate against interstate commerce, and 3. be unfairly related to services provided by Texas. HOLDING:Reversed and rendered. The court states that the purpose of the earned surplus throwback provision is to capture and tax income generated from sales in other states that would otherwise go untaxed as a result of Public Law 86-272, which was enacted in response to a U.S. Supreme Court decision that indicated that the federal constitution does not prohibit individual states from imposing an income tax on out-of-state corporations, even when their only business activity in the state is solicitation of purchases. Specifically, the statute prohibits a state from imposing a net income tax if the foreign taxpayer’s only business activity in the state is the solicitation of orders. All parties in this case concede that Public Law 86-272 protects Home Interiors from being taxed on income generated from sales of its products to displayers located in most states. But Home Interiors claims that the inclusion of the thrown-back receipts is significant because, during the time period at issue here, approximately 90 percent of its revenues were generated from sales outside of Texas. Accordingly, Home Interiors contends that the application of the earned surplus throwback provision results in an unfairly apportioned franchise tax assessment. The court cites Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), and holds that a tax will survive Commerce Clause scrutiny “when the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” The first prong of the Complete Auto test asks whether Home Interiors’ activities have a substantial nexus with the state justifying the application of the franchise tax. Both parties agree that Home Interiors’ activities within the state are sufficient to constitute a substantial nexus. The court states that the more difficult question is whether the application of the earned surplus throwback provision to Home Interiors results in an unfair apportionment of franchise-tax liability under the second prong of the Complete Auto test. In order to determine whether a tax is fairly apportioned, the court first asks whether it is “internally consistent,” and if so, whether it is also “externally consistent.” The court conducts its analysis and concludes that, because an interstate corporation could be subject to a tax that an intrastate corporation would never bear, the Texas franchise tax as applied to Home Interiors is not internally consistent. Therefore, the court holds that the interplay between the earned surplus throwback provision and Public Law 86-272 causes the Texas franchise tax to fail the internal consistency test as applied to Home Interiors. Accordingly, Home Interiors’ franchise tax assessment is unfairly apportioned. The court therefore reverses the district court’s grant of summary judgment in favor of the comptroller and renders judgment that the Texas franchise tax, as applied to Home Interiors, unconstitutionally burdens interstate commerce. The court further orders the comptroller to refund to Home Interiors the franchise taxes in controversy in the amount of $15,480,088 plus interest. OPINION:Smith, J.; Law, C.J., B. A. Smith and Pemberton, JJ.

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