When is a tax statute so poorly worded that it violates due process by being unconstitutionally vague and failing to give taxpayers fair notice of their compliance obligations? On August 5, 2022, the Alaska Supreme Court overruled a lower court decision that had struck down as unconstitutionally vague a tax statute requiring that corporations incorporated in or doing business in a so-called “low-tax jurisdiction” be included in an Alaska combined return. The Court here found instead that the statute could “be given meaning in the adjudication process” and, therefore, could be constitutionally applied to the taxpayer. State v. Nabors Int’l Fin., Inc. & Subsidiaries, No. 7609 (Alaska Aug. 5, 2022). This case is a reminder to taxpayers that in addition to the most discussed requirements for a state tax to pass constitutional muster (i.e., substantial nexus, fair apportionment, non-discrimination, fair relation to the services provide by the state), a state tax may also be struck down on other constitutional grounds, such as if the tax is unconstitutionally vague.

The Facts: Within an international conglomerate of corporations, Nabors International Finance, Inc. (“Nabors”) was the parent company of the U.S. group and provided oil field services throughout the world, including in Alaska. Nabors was audited by the Alaska Department of Revenue for the tax years 2007 through 2010. The Department included in Nabors’ Alaska combined return the income of its affiliated corporations that were incorporated or doing business in so-called “low-tax jurisdictions.”

The statute in question stated that a corporation incorporated or doing business in a so-called “low-tax jurisdiction” must be included in the combined return if “(A) 50 percent or more of the sales, purchases, or payments of income or expenses, exclusive of payments for intangible property, of the corporation are made directly or indirectly to one or more members of a group of corporations filing under the water’s edge combined reporting method; (B) the corporation does not conduct significant economic activity.” Alaska Stat. § 43.20.145(a)(5). The lower court ruled that the missing conjunction in the statute (i.e., either “and” or “or”) between (A) and (B) rendered the statute unconstitutionally void for vagueness. That is, the lower court reasoned, the statute was invalid because it failed to indicate whether either (A) or (B) or both (A) and (B) were required for the company to be included in the combined return.

The Decision: The Alaska Supreme Court overruled the lower court and found that “a reviewing court could consider the statute’s language, legislative history, and purpose to determine the proper interpretation.” Analyzing those factors here, the Court concluded that the statute at issue had a “reasonably clear meaning” and that was that (A) and (B) should be read disjunctively, that is a company should be included in the combined return if it satisfied either (A) or (B). Nabors further argued that the requirement in (B) that the company “does not conduct significant economic activity” was itself unconstitutionally vague because the statute did not define “significant economic activity.” The Court also rejected this argument finding that the Alaska Administrative Code defines “does not conduct significant economic activity” and “[i]f a taxpayer is unsure which affiliates to include, it can request guidance from the Department.” Finally, the Court rejected Nabors’ alternative arguments that the statute discriminated against foreign commerce in violation of the Foreign Commerce Clause and that the statute was irrational and violated Nabors’ substantive due process rights.