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Mark Wilkerson, Wilkerson Hozubin, Anchorage, Gregory A. Castanias, Jones Day, Washington, D.C., and David E. Cowling and Roy T. Atwood, Jones Day, Dallas, Texas, for Appellants.
R. Scott Taylor, Senior Assistant Attorney General, Anchorage, Deborah J. Stojak, Assistant Attorney General, and Michael C. Geraghty, Attorney General, Juneau, and Louisiana W. Cutler, Jennifer M. Coughlin, and Serena S. Green, K & L Gates LLP, Anchorage, for Appellee.
Before: FABE, Chief Justice, CARPENETI, WINFREE, and STOWERS, Justices, and EASTAUGH, Senior Justice.[*]
EASTAUGH, Senior Justice.
Tesoro Corporation challenges income taxes assessed against it by the Alaska Department of Revenue (DOR) for 1994 through 1998. DOR calculated Tesoro's Alaska income by applying a three-factor apportionment formula to Tesoro's worldwide income, including that of its non-Alaskan subsidiaries. Tesoro challenged DOR's apportionment in a trial before an administrative law judge, who ruled that Tesoro was a unitary business that could be subject to formula apportionment, and that DOR could permissibly assess penalties against Tesoro. Tesoro appealed to the superior court, which affirmed.
Tesoro argues here that only the income of its Alaska-based subsidiaries should have been subject to taxation in Alaska because Alaska's tax scheme violates the Due Process and Interstate Commerce Clauses of the United States Constitution. Because Tesoro's business was unitary, we reject Tesoro's challenge to the constitutionality of taxing all of its income under formula apportionment. Because Tesoro lacks standing to challenge the formula's constitutionality, we do not reach the internal consistency issue Tesoro raises. We also conclude that applying the formula to Tesoro satisfied the statutory requirement of reasonableness. Finally, we conclude that DOR permissibly imposed penalties on Tesoro. We therefore affirm the superior court decision that affirmed the administrative law judge's decision and order.
II. FACTS AND PROCEEDINGS
A. Tesoro's Business Activity
At relevant times, Tesoro Corporation was a petroleum company headquartered in San Antonio, Texas. Tesoro had 33 subsidiary corporations that were organized into five business segments: (1) the Exploration and Production (E & P) segment based in Texas and Bolivia; (2) the Retail and Marketing (R & M) segment based in Alaska;  (3) the Marine Services segment based in Louisiana and Texas;  (4) the Corporate segment based in Texas; and (5) the Finance segment based in Texas.
Tesoro's board of directors had an active hand in shaping the financial, operational, and managerial decisions for Tesoro's subsidiaries. During the relevant period, the board met almost monthly to discuss and approve various aspects of the subsidiaries' operations. Furthermore, Tesoro's Corporate and Finance segments provided a number of administrative and financial services that were shared across all subsidiaries.
Two developments during the relevant tax years caused the companies within E & P to realize profits greater than those realized by the subsidiaries within R & M. In 1995 Tesoro sold part of its interest in a valuable natural gas field. And in 1996 Tesoro prevailed on a breach of contract claim and later that year sold its remaining interest in the same contract. Those events brought E & P nearly $200 million in revenue. Tesoro's appeal here effectively tries to shield the profits related to those events from taxation in Alaska.
B. Tesoro's Tax History In Alaska
In 1959 Alaska adopted the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA was drafted and approved by the National Conference of Commissioners on Uniform State Laws in 1957 in an attempt to bring uniformity to state tax codes. In 1970 Alaska adopted the Multistate Tax Compact, which is a restatement of UDITPA with some minor changes. The Multistate Tax Compact is codified at AS 43.19.010. Per AS 43.19.010, article IV, section 9, the portion of a business's total income apportioned to Alaska is determined by " multiplying the income by a fraction, the numerator of which is the property factor
plus the payroll factor plus the sales factor, and the denominator of which is three." The property factor is the fraction of the taxpayer's total property and the property attributable to the taxpayer's business in Alaska; similarly, the sales and payroll factors are fractions of the taxpayer's respective total sales and payroll attributable to the taxpayer's business in Alaska.
Alaska Statute 43.19.010, article IV, section 18 permits DOR to adjust a taxpayer's tax burden if the statutorily mandated apportionment does not " fairly represent the extent of the taxpayer's business activity in this state." Subsection 18(a) allows DOR to apportion the taxpayer's income based on separate accounting, while subsection 18(c) allows DOR to add " one or more additional factors" to the apportionment formula. The statute effectively requires that any remedy DOR enforces under section 18 be " reasonable." 
Alaska Statute 43.20.144 modifies AS 43.19.010's apportionment scheme for all taxpayers " engaged in the production of oil or gas ... in this state or engaged in the transportation of oil or gas by pipeline in this state." Alaska Statute 43.20.144(c) provides three different apportionment formulas for such taxpayers, depending on the nature of the taxpayer's oil or natural gas business in Alaska. Under AS 43.20.144(c)(1), a taxpayer that only transports oil or gas in Alaska is subject to a two-factor formula based on property and sales. Under AS 43.20.144(c)(2), a taxpayer that only produces oil or gas in Alaska is instead subject to a two-factor formula based on property and extraction. Finally, under AS 43.20.144(c)(3), a taxpayer that both transports and produces oil or gas in Alaska is subject to a three-factor formula based on property, sales, and extraction.
From the time it began doing business in Alaska in 1969 until 1994, Tesoro filed its tax returns as a unitary business. During this period all of Tesoro's corporate income was subject to taxation in Alaska, and the amount actually apportioned to Alaska was determined by the three-factor property, sales, and payroll formula of AS 43.19.010, article IV, section 9. In 1995 Tesoro purchased the Kenai Pipeline (KPL), the pipeline that serviced its Kenai-based refinery. As a result of this purchase, Tesoro became a taxpayer " engaged in the transportation of oil or gas by pipeline" in Alaska, and thus became subject to taxation under AS 43.20.144.
In its tax return for 1995 Tesoro took the position that KPL was not unitary with the remainder of Tesoro's business segments. Tesoro thus claimed that only KPL was subject to taxation under the two-factor property and sales formula specified by AS 43.20.144(c)(1), while Tesoro's remaining business segments were subject to taxation under the three-factor property, sales, and payroll formula specified by AS 43.19.010, article IV, section 9. This was the first time Tesoro had ever asserted in an Alaska tax return that its subsidiaries were not unitary with each other. In its tax returns for 1996 and 1997 Tesoro again took the position that KPL was not unitary with the remainder of Tesoro's subsidiaries. And in those returns Tesoro also asserted for the first time that its Finance segment was not unitary with the remainder of its subsidiaries and as such was not subject to taxation in Alaska at all.
On October 1, 1998, DOR completed an audit of Tesoro's tax returns for the years 1994 and 1995 and rejected Tesoro's position that KPL and the Finance segment were not unitary with the remainder of Tesoro's subsidiaries or each other. DOR's resulting assessment stated that " Tesoro is one unitary petroleum business" and that " the entire group is subject to modified apportionment under AS [43.20.144]." DOR accordingly apportioned all of Tesoro's business income under the two-factor property and sales formula of AS 43.20.144(c)(1) for nine months of 1995 to account for Tesoro's March 1995 purchase of KPL. DOR also disallowed the exemptions for Tesoro's foreign subsidiaries for this same nine-month period.
After receiving this assessment, Tesoro filed its 1998 tax return in which Tesoro again asserted that KPL was not unitary with the remainder of Tesoro's business segments. This return also took the position that the subsidiaries within R & M were not unitary with the remainder of Tesoro's subsidiaries, including KPL. Thus, this 1998 tax return treated only the R & M subsidiaries and KPL as subject to taxation in Alaska: KPL under AS 43.20.144(c), and the R & M subsidiaries under AS 43.19.010, article IV, section 9. In response, DOR conducted a second audit assessment of Tesoro's tax filings, this time for the years 1996, 1997, and 1998. In the resulting assessment, DOR rejected Tesoro's theory concerning the unitariness of Tesoro's business and reasserted that all of Tesoro's businesses were a single unitary group subject to AS 43.20.144.
But during the interval between DOR's first audit and its second, the Attorney General of Alaska issued an opinion calling into question the constitutionality of AS 43.20.144(c) as applied to businesses that produce oil or gas in state but transport it out of state. In response, DOR issued an advisory letter on November 19, 1999 to all oil and gas taxpayers in Alaska; the letter stated that DOR would exercise its authority under AS 43.19.010, article IV, subsection 18(c) to fashion a remedy to the constitutional infirmity identified by the Attorney General. DOR's letter stated that this remedy would allow a taxpayer that both produced and transported oil or gas to use the three-factor property, sales, and extraction formula of AS 43.20.144(c)(3). The letter stated:
The department will follow the [Attorney General's] opinion and allow taxpayers to use the three-factor apportionment formula in these circumstances pursuant to the authority of AS 43.19.010 Art. 4, Sec. 18(c). Accordingly, an AS [43.20.144] taxpayer engaged both in the production of oil or gas from a lease or property in any jurisdiction and in the pipeline transportation of oil or gas in any jurisdiction may use an apportionment formula consisting of extraction, property and sales....
In its assessment for the years 1996, 1997, and 1998, DOR adhered to its November 19, 1999, letter and applied the three-factor formula of AS 43.20.144(c)(3) (hereinafter " the section 18 remedial formula" or " remedial formula" ) to Tesoro. DOR also assessed penalties against Tesoro for its repeated unwillingness to recognize KPL as unitary with Tesoro's other subsidiaries.
C. Past Proceedings
Tesoro first appealed the assessments for the years 1994 to 1998 during informal conferences with DOR; it next appealed in proceedings before an administrative law judge; it finally appealed to the superior court. The adjudicators at each stage agreed with DOR's initial assessment that Tesoro was a single unitary business during the relevant years; that the three-factor formula applied to Tesoro produced a constitutionally and statutorily fair apportionment of Tesoro's total income; and that Tesoro's conduct in filing its tax returns justified penalties.
Thus, Administrative Law Judge Mark T. Handley conducted a ten-day hearing at which Tesoro and DOR presented testimony from Tesoro employees and executives, DOR auditors, and expert witnesses familiar with Tesoro's business activities. The administrative law judge also reviewed hundreds of exhibits, including Tesoro's internal financial records, Tesoro's public financial filings, correspondence between Tesoro employees, and reports drafted by expert witnesses. In determining that Tesoro's subsidiaries were a unitary business for the relevant years, the administrative law judge made factual findings referring to the evidence and relied heavily on the testimony and reports of two of DOR's expert witnesses: Professors James Smith and Richard Pomp. The administrative law judge found these two witnesses to be " very persuasive," and stated that " these experts demonstrated an impressive understanding of Tesoro's organization and
business activities." Both experts looked at evidence in the record and found Tesoro to have exhibited functional integration, centralized management, and economies of scale and thus found Tesoro's subsidiaries to be one unitary business. The administrative law judge found these witnesses were particularly persuasive as compared to Tesoro's witnesses, whom he found " less convincing" because he found Tesoro's witnesses tried to divert focus away from relevant facts and were dismissive of the relevant legal factors. By contrast, the administrative law judge found that Professors Pomp and Smith identified which facts in the record were significant and that these experts provided " strong, but objective, opinions" as to the import of these facts.
When Tesoro appealed to the superior court, Superior Court Judge Fred Torrisi affirmed the administrative law judge's decision. The superior court held that Tesoro was a unitary business, that the formula applied to it was not constitutionally unfair, and that penalties were justified. In its unitary-business holding, the superior court relied mainly on the factual findings of the administrative law judge and cited to the findings of shared administrative and financial services across Tesoro's subsidiaries.
Tesoro now appeals to us.
III. STANDARD OF REVIEW