Perspectives

Arizona Supreme Court continues support of state's unique approach to defining a 'unitary business'

Arizona’s legal framework for unitary reporting is unique in that shared, significant flows of value are insufficient in characterizing a unitary business. Even a group of corporations in the same line of business may not have sufficient unity.

Under Arizona’s combined reporting rules, the basic operations of each member of a combined group must be analyzed to determine whether each entity is operationally integrated. The analysis generally comes down to whether an entity performs an accessory function or a function that is operationally interdependent with other members at the revenue producing level.

The evolution of Arizona’s unitary analysis

The Arizona Supreme Court recently denied review in R.R. Donnelley & Sons Co. v. Arizona Dept. of Rev.,1 thus making final the Arizona Court of Appeals decision that reinforced the state’s unique unitary standards. In R.R. Donnelley, the appellate court concluded that true operational integration beyond administrative and accessory functions was required.

This article, written by Barb Dickerson and Krista Howard of Deloitte Tax LLP, explores the evolution of Arizona’s unitary analysis. First, they detail the inception of Arizona’s unitary concepts from the state’s 1986 rule. Then, they review the first Arizona appellate court decision to address this issue, namely, Arizona v. Talley Indus. Inc.2 The 1994 decision in Talley followed many of the concepts found in the 1986 rule. The case detailed the elements of Arizona’s unitary analysis, even though the tax year at issue, 1983, predated the adoption of the rule. They also review an unpublished decision by the Arizona Court of Appeals3 that applied Arizona’s unitary rules to corporate members that were more in the same line of business than the Talley group of entities, as well as a second unpublished decision by the Arizona Court of Appeals that addresses the flow of unity through a partnership.4 Finally, they provide a summary of the 2010 R.R. Donnelley decision and analyze how it followed the principles of the 1986 rule and the Talley decision.

1 R.R. Donnelley & Sons Co. v. Arizona Dept. of Rev., 224 Ariz. 254 (Ariz. Ct. App. 2010), rev. denied, No. CV-10-0223-PR (Ariz. Nov. 30, 2010)

2 Arizona v. Talley Indus. Inc., 893 P.2d 17 (Ariz.Ct. App. 1994)

3 F.W. Woolworth Corp./Kinney Shoe Corp./Kinney Svc. Corp. v Arizona, Ariz. App. Ct. No. 1 CA-TX 97-0007 (Dec. 11, 1997), cert. denied, 1998 Ariz LEXIS 693, CV-98-0095-PR (Ariz. Sept. 19, 1998)

4 Phoenix Newspapers Inc. v. Arizona Dept. of Rev., Arizona Ct. App., No. 1 CA-TX 04-0014, 2005 Ariz. App. LEXIS 175 (Dec. 6, 2005)

By Barb Dickerson and Krista Howard of Deloitte Tax LLP | Originally published in Bloomberg BNA "Tax Management Multistate Tax Report" on April 22, 2011
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