Moorman Manufacturing Co. v. Bair

Moorman Manufacturing Company (Moorman) (plaintiff) was an Illinois company that manufactured and sold animal feed. Approximately 20 percent of Moorman’s sales took place in Iowa. Iowa levied a corporate income tax on all companies that did business in the state. To calculate a company’s tax liability, Iowa used a single-factor apportionment formula. Under the single-factor apportionment formula, Iowa first allocated income from an easily identifiable source to the appropriate state. Iowa then apportioned the rest of the company’s income according to the proportion of the company’s total sales that were made in the state. Every other state that imposed a corporate income tax used a three-factor apportionment formula other than West Virginia, which used a two-factor formula. Between 1949 and 1960, the Iowa Tax Commission (the commission) allowed Moorman to allocate its Iowa-derived income according to three factors—property, payroll, and sales—rather than the single-factor formula required by statute. The three-factor formula produced a lower tax liability for Moorman than the single-factor formula would have. In 1961 the commission required Moorman to use the single-factor formula. In 1965 Moorman resumed using the three-factor formula. In 1974, Bair, the Iowa director of revenue (defendant), assessed a deficiency against Moorman based on the difference in liability produced by the three-factor formula and the single-factor formula. Moorman filed a lawsuit in state court, arguing that Iowa’s single-factor apportionment formula violated the Commerce Clause of the United States Constitution and the Due Process Clause of the Fourteenth Amendment. The district court held that the formula was invalid. The Iowa Supreme Court reversed the district court, finding that the formula was not unconstitutional. The Iowa Supreme Court explained that a state apportionment formula is valid unless a taxpayer can prove that the formula allocated income to the taxing state that was out of proportion to the business that the taxpayer conducted in the state. The United States Supreme Court granted certiorari.