Appellants in this litigation are 13 major oil companies that do business in the State of New Jersey. They are subject to New Jersey's Corporation Business Tax. They also are subject to the federal windfall profit tax imposed on producers of crude oil. None of appellants' oil production takes place in New Jersey.
Each appellant has sought to deduct its federal windfall profit tax in calculating "entire net income" for purposes of the New Jersey Corporation Business Tax. Under the applicable New Jersey statute, however, a corporation may not deduct a federal tax that is "on or measured by profits or income." The Supreme Court of New Jersey ruled that the windfall profit tax is a tax "on or measured by profits or income." The question before us is whether, as so construed, the New Jersey provision runs afoul of the Commerce Clause or of the Fourteenth Amendment to the United States Constitution.
* A.
In conjunction with the decontrol of oil prices, Congress enacted the Crude Oil Windfall Profit Tax Act of 1980, Pub.L. 96-223, Tit. I, 94 Stat. 230, now codified as 26 U.S.C. §§ 4986-4998 (Act). The Act imposes a tax on the "windfall profit" that a crude-oil producer receives from the oil it produces. The "windfall profit" for each barrel of oil is essentially the difference between (a) the deregulated price for the oil (that is, its actual sales price) and (b) the regulated price that would have applied had decontrol not taken place.
One significant provision of the Act, known as the "net income limitation," places a cap on the amount of a producer's windfall profit that may be taxed each year: "The windfall profit on any barrel of crude oil shall not exceed 90 percent of the net income attributable to such barrel." § 4988(b)(1). The net income attributable to each barrel is the taxable income derived from the oil removed from a particular property for a given year divided by the number of barrels from that property taken into account for that year. § 4988(b)(2).
Congress specifically has provided that, for federal income tax purposes, the windfall profit tax is deductible. 26 U.S.C. § 164(a)(4) (1982 ed., Supp. V). Although Congress may have assumed that "the windfall profit tax generally would be deductible under State income taxes," see H.R.Rep. No. 96-304, p. 9 (1979), U.S.Code Cong. & Admin.News 1980, p. 595, the Act does not require a State, in imposing a tax, to allow the deduction.
New Jersey's Corporation Business Tax Act, N.J.Stat.Ann. § 54:10A-1 et seq. (West 1986), imposes a tax on a portion of the "entire net income" of a corporation "for the privilege of doing business, employing or owning capital or property, or maintaining an office in this State." § 54:10A-2. For a corporation doing business both within and outside New Jersey, the portion of the "entire net income" to be taxed is determined according to a three-factor formula concerning property, receipts, and payroll. The formula calls for the average of three ratios: in-state property to total property; in-state to total receipts; and in-state to total wages, salaries, and other forms of employee compensation. § 54:10A-6. Cf. Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978).
Under the Corporation Business Tax Act, a corporation's "entire net income" is presumptively the same as its federal taxable income "before net operating loss deduction and special deductions." § 54:10A-4(k). The statute also provides: "Entire net income shall be determined without the exclusion, deduction, or credit of . . . [t]axes paid or accrued to the United States on or measured by profits or income." Ibid. The New Jersey Legislature adopted this "add-back" provision in 1958, long before Congress enacted the windfall profit tax in 1980. 1958 N.J. Laws, ch. 63. See 107 N.J. 307, 313, 526 A.2d 1029, 1032 (1987).
In reporting to New Jersey its "entire net income" for 1980 and 1981, each of the appellants did not "add back" the amount of its federal windfall profit tax. In effect, then, each appellant claimed a deduction for that tax from its "entire net income." As a result, appellee, the Director of the New Jersey Division of Taxation, assessed deficiencies. Appellants then brought suit against appellee in the Tax Court of New Jersey. They contended, first, that the windfall profit tax was not a "tax on or measured by profits or income," within the meaning of the add-back provision, and, second, that a contrary construction of the add-back provision would contravene the Federal Constitution.