460
Opinion of the Court
Justice Breyer delivered the opinion of the Court.
A State may tax a proportionate share of the income of a nondomiciliary corporation that carries out a particular business both inside and outside that State. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U. S. 768, 772 (1992). The State, however, may not tax income received by a corporation from an " ' "unrelated business activity" ' which constitutes a ' "discrete business enterprise." ' " Id., at 773 (quoting Exxon Corp. v. Department of Revenue of Wis., 447 U. S. 207, 224 (1980), in turn quoting Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U. S. 425, 442, 439 (1980)). California's rules for taxing its share of a multistate corporation's income authorize a deduction for interest expense. But they permit (with one adjustment) use of that deduction only to the extent that the amount exceeds certain out-of-state income arising from the unrelated business activity of a discrete business enterprise, i. e., income that the State could not otherwise tax. We must decide whether those rules violate the Constitution's Due Process and Commerce Clauses. We conclude that they do.
I
The legal issue is less complicated than may first appear, as examples will help to show. California, like many other States, uses what is called a "unitary business" income-calculation system for determining its taxable share of a multistate corporation's business income. In effect, that system first determines the corporation's total income from its nationwide business. During the years at issue, it then averaged three ratios—those of the firm's California property, payroll, and sales to total property, payroll, and sales— to make a combined ratio. Cal. Rev. & Tax Code Ann.
Thorpe, Deputy Attorney General, Bruce M. Botelho, Attorney General of Alaska, Joseph P. Mazurek, Attorney General of Montana, and Heidi Heitkamp, Attorney General of North Dakota; and for the Multistate Tax Commission by Paull Mines.
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