MeadWestvaco Corp. v. Illinois Department of Revenue
The Supreme Court threw out an Illinois ruling that let the State tax part of the huge profit Mead Corporation made selling its Lexis/Nexis division, because the lower courts skipped a required step: deciding whether Mead and Lexis were run as a single, unified business.
The decision clarifies that a state can only tax a share of income from a company's out-of-state operations if those operations are truly part of the same unified business — a separate 'operational purpose' test the Illinois courts had used instead is not a valid substitute for that core question.
How it got here: A trial court found Lexis and Mead were not run as one business but still let Illinois tax the gain; the Illinois Appellate Court affirmed on a different rationale, and Mead appealed to the Supreme Court.
The Case in Depth
What happened
Mead Corporation, an Ohio paper and office-supply company, bought a small tech company in 1968 and eventually grew one of its assets into the Lexis/Nexis legal research service. In 1994 Mead sold Lexis for $1.5 billion, earning roughly $1 billion in profit. Illinois taxed part of that profit as business income, even though Mead argued Lexis operated largely independently and the gain should go untaxed by Illinois.
The question before the Court
Could Illinois tax a share of the billion-dollar profit an Ohio paper company made selling its Lexis/Nexis division, even though a court found the two businesses weren't run as one?
Why it matters
Multistate and multinational companies rely on clear rules for how states can tax profits from selling business divisions or investments. This ruling limits states' ability to reach beyond genuinely unified business operations, which could reduce tax bills for companies selling loosely-related subsidiaries and forces states to prove real operational unity before taxing a share of such gains.
What changes now
The case returns to the Illinois Appellate Court, which must now actually decide whether Mead and Lexis formed a unitary business, using the functional-integration, centralized-management, and economies-of-scale factors the trial court already applied. If the appellate court agrees Lexis wasn't unitary with Mead, Illinois likely cannot tax any share of the capital gain. The Court left open, for another case, the State's untested theory based on Lexis's own in-state contacts.
What this does not decide
The Court did not decide whether Mead and Lexis actually were a unitary business — it left that question for the Illinois courts on remand. It also did not decide whether a state could tax based on a sold asset's own in-state contacts rather than the parent company's, since that argument was raised too late.
Concurrences and dissents
Concurrence — Justice Thomas
“I write separately to express my serious doubt that the Constitution permits us to adjudicate cases in this area.”Thomas questions whether courts should even be deciding these state-taxation disputes.
Justice Thomas joined the Court's opinion but expressed doubt that the Constitution even allows courts to police how much multistate income a state can tax. He argued the negative Commerce Clause has no constitutional basis and should be overruled, and questioned whether the Due Process Clause's 'rational relationship' requirement improperly reads in an unenumerated right resembling discredited Lochner-era reasoning. He would leave such disputes to Congress, but did not push this view here because no party raised it.
How the Court got there
The legal reasoning, step by step
- The Court explained that under the unitary business principle, a state can tax an apportioned share of a multistate company's income only if the in-state and out-of-state activities together form one single ('unitary') business; if an asset is a separate, unrelated enterprise, the state cannot tax any share of gains from it.
- The Court traced how this principle developed from 19th-century railroad taxation, where courts realized a business's value as a whole is often greater than the sum of its geographically separable parts, to today's rule covering income, dividends, and capital gains from intangible assets.
- The Court clarified that its prior references to an asset serving an 'operational function' (as opposed to a mere passive investment) were never meant to create an independent, alternate basis for taxation. Instead, that concept only helps explain why an asset can be part of a unitary business even when the company isn't itself unitary with the other party to a transaction, like a bank or hedging counterparty.
- Applying this, the Court held that a court must first determine whether the business at issue is unitary — using the traditional hallmarks of functional integration, centralized management, and economies of scale — before it can even ask whether an asset served an operational purpose.
- Because the trial court found Lexis and Mead were not unitary under those hallmarks, and the appellate court skipped that finding entirely by resting solely on its operational-function analysis, the appellate court's reasoning rested on a legal error that required correction.
- The Court also declined to resolve a new alternative theory the State raised for the first time on the merits — that Illinois could tax based on Lexis's own contacts with the state rather than Mead's — because that issue had not been raised or decided below.
Doctrinal impact
Cases affected by this decision
Reaffirms Allied-Signal, Inc. v. Director, Div. of Taxation (504 U. S. 768)
The Court relies on Allied-Signal's operational-function analysis but clarifies it doesn't create a new basis for taxing non-unitary businesses.
Reaffirms Container Corp. of America v. Franchise Tax Bd. (463 U. S. 159)
The Court reaffirms Container Corp.'s unitary-business framework while rejecting a broader reading of its operational-function language.