Defining a Unitary Business: An Economist's View

The definition of a unitary business has figured prominently in several recent decisions of the U.S. Supreme Court on the constitutionality of state corporate income taxes. This paper employs economic analysis to frame a three part test of whether a unitary business exists. Underlying the tests is the notion that a unitary business exists when separate accounting can not satisfactorily isolate the profits of individual firms. The first test is common control. The second is whether transfer prices on transactions within the group could be manipulated or are diificult to verify or substantial vertical integration, shared costs,economies of scale or scope, or other forms of economic interdependence make isolation of profits of affiliated firms impossible.The third test is one of substantiality.