STATE AND LOCAL TAX SHANSKE FALL 2016
FIRST PRONG: JURISDICTION TO TAX
Under Quill (1992), the Court distinguishes between the Due Process Clause (DP) and DCC for purposes of substantial nexus.
DPC nexus only requires minimum contacts and purposeful availment.
DCC substantial nexus requires physical presence. Before a State can require a seller to collect and remit a use tax, they must have a physical presence in taxing state.
Under Quill, SCOTUS has distinguished the nexus analysis under the DPC from that under the DCC.
DPC = minimum contacts and purposeful availment.
DCC = substantial nexus.
Substantial nexus requires physical presence at least as to sales and use taxes.
What we don’t know:
How much physical presence is required? (NY v. FL)
NY: any measurable amount of physical presence rather than substantial physical presence is the constitutional standard. See Overstock/Amazon.
FL: temporary in-state presence of corp.’s president insufficient for impose use tax on mail-order sales; i.e. looks to # visits, etc.
Can internet commissions establish physical presence? (NY Amazon law)
NY Amazon law: “click-through nexus” statute which imposes a use tax collection obligation on Internet retailers that enlist in-state persons to refer customers to the retailer through links on their websites.
Overstock/Amazon (NY 2013) (Overstock/Amazon challenged NY subjecting online retailers to sales tax; only had “associates/affiliates” who were 3d party retailers in state)
Held economic activities performed in state by seller’s employees, or on its behalf, so long as it’s more than the slightest presence.
Is being part of a combined reporting group with an in-state business enough for physical presence? (CA Amazon law)
CA statute establishes physical presence this way. See also Joyce-Finnegan.
Does the physical presence test apply to other kinds of taxes? See below.
MBNA (WV 2007) (CIT) (DE corp. promoting business of credit cards by phone/mail to WV residents, but no employees or real/tangible property in WV)
Held physical presence is not required for CIT.
Instead, substantial nexus is met for the CIT when there are minimum contacts (DP) + “systematic and continuous business activity” in the taxing state.
Geoffrey (SC 1993) (CIT) (corp. derived income from intangibles licensed for use in the taxing state, but no employees or tangible/real property in SC)
Held physical presence does not apply to income taxes. Intangible property, such the licensing of trademarks, creates substantial nexus permitting income taxation.
ConAgra (WV 2012) (CIT) (corp. received royalty income from trademark licensing, but didn’t manufacture/sell those products, had no property/employees in WV, all products manufactured out-of-state)
Held taxation of intangible property revenue invalid b/c the licensees were independent actors that received no direction from foreign licensor.
Also, products bearing trademark manufactured out-of-state by those unaffiliated with licensor; and licensee had no retail stores of their own.
Tyler Pipe Co. (1987) (GRT) (corp. solicits business in WA by single in-state independent contractor, but have no office, property, or employee in WA; corp. sells to robust WA market established by IC)
Held there was jurisdiction to tax b/c the distinction b/w “employee” and “independent contractor” does not matter for constitutional substantial nexus purposes. The key factor is whether the in-state activities (sales person) are significantly associated with helping the TP establish and maintain a market in the state.
Note: PL 86-272 did not protect TP here b/c it was a GRT not CIT.
CA Statutory Standard (CIT): TP is “doing business” in CA if they are commercially domiciled here or their Sales exceed either $500K or 25% of TP’s total sales. Sales of TP include those by an agent or independent contractor of the TP. CTR §23101.
“Doing business” = “substantial nexus” for CA CIT purposes.
For taxable years after Jan. 1, 2011.
PL 86-272: no state may tax income from any person (corp.) whose only business activities w/in the state consist of “solicitation of orders” for tangible goods, provided the orders are sent outside the state for approval and the goods are shipped from out-of-state.
A corp.’s in-state activity which is “entirely ancillary” to solicitation and does not serve and independent business function will not blow the exemption. (de minimus exception).
Wrigley (1992) (sold gum worldwide, based in IL and had agents in WI. Issue: whether the activities of Wrigley’s agents fell w/in the definition of “solicitation of order”)
Held there were six activities and ct weighed them all cumulatively, not in isolation, for determining whether they were “entirely ancillary” to requests for purchases.
(1) replacement of stale gum [not ancillary b/c strong incentive for Wrigley] (2) supply with new gum (“agency stock check” i.e. charged for it) [not ancillary; it’s buying and selling!] (3) storage [not ancillary] (4) recruitment [ancillary] (5) use of employee’s homes [ancillary]
But see having an office is per se outside PL 86-272 protection; however, ICs can maintain offices, but the company cannot.
(6) mediation of credit disputes [ancillary]
But see investigating, handling, or otherwise assisting in resolving customer complaints is not protected, other than mediating direct customer complaints when the sole purpose of such mediation is to ingratiate the sales personnel w/ the customer. MTC regs. & CA FTB
Under PL 86-272 an Independent Contractor can consummate a sale in state (i.e. accepting the solicited orders) and maintain an office in the state.
But see IC criteria: (1) must be engaged in selling or soliciting orders for more than one principal; and (2) the independent contractor must “hold himself out” as an independent contractor.
Jurisdiction to Tax Analysis Framework
Does activity meet state statutory standard of “doing business”?
Does the tax satisfy constitutional standards?
DP – minimum contacts and purposeful availment.
DCC – “substantial nexus” requires evaluation of (1) the tax, then (2) the jurisdiction.
(1) Sales and use tax? à physical presence standard. Quill.
(2) how does jurisdiction interpret “physical presence”? i.e. how much, what kind. Overstock/Amazon v. FL.
(1) Other type of tax?
(2) How does jurisdiction interpret “substantial nexus”? i.e. is significant economic presence enough?
Even if constitutional nexus met (DP + DCC), does PL-86-272 nevertheless deprive the state of jurisdiction to tax?
PL 86-272 Checklist:
(1) net income
(2) tangible property
(3) orders fulfilled out-of-state
(4) no office, unless IC
(5) less than de minimus (cumulatively) only if not direct solicitation or entirely ancillary to solicitation
(6) solicitation – can be either direct or entirely ancillary, but activities cannot be for an independent business function.
See also CB 113.
SECOND PRONG: FAIR APPORTIONMENT
BLL: the SOR for a state’s apportionment determination is RBT, where the burden is on the TP to provide “clear and cogent” evidence.
Norfolk & Western (1968) (TP-corp. acquired another corp. which had rolling stock in MO. TP had no other ties to MO, but the year after acquisition the state increased its rolling stock assessment by over 100%)
Held the state’s assessment violated the constitutional requirement of fair apportionment b/c it failed to pass rational basis review.
TP met their burden by showing evidence there was no change in rolling-stock value.
State also failed to enter any evidence supporting its enhancement theory (i.e. rolling stock value increased b/c its connected to greater operational whole outside of the state).
THIRD PRONG: NONDISCRIMINATION
BLL: state laws discriminating against interstate commerce on their face are virtually per se invalid.
SOR = strict scrutiny
Camps Newfound/Owatonna (1997) (TP-religious camp located in ME but 95% of campers were out-of-state. ME charitable tax exemption had different rules for those institutions operating principally to benefit non-residents, and TP received no tax exemption at all.)
Held statute facially invalid b/c it burdened orgs w/ out-of-state clientele with a discriminatory tax that orgs w/ in-state clientele did not face.
Camp’s status as a non-profit did not preclude application of DCC.
compensatory tax doctrine.”
Use tax on out-of-state goods offset w/ “complementary” sales tax on in-state goods purchases.
Public Utility Exception
Tracy (1997) (ct. considered sales and use tax scheme where local sales of nat. gas from regulated public utility were not taxed, but sales from an unregulated interstate seller of nat. gas were taxed)
Held sustained the tax b/c there is a distinction b/w regulated utility and seller; in effect, the court found they weren’t in competition since the utility was controlled by gov’t.
Reason: utilities are different than regular market participants, they serve a more typical gov’t function, are entangled with gov’t and forced to provide services.
Exam: when there is facial discrimination but one of the actors is a governmental entity, then beware and think about an analogy to public utility.
Prong 3 Analytical Framework
Basic Test: discrimination is per se invalid unless it “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”
Internal Consistency: to prevent discrimination “the tax must be such that, if applied by every jurisdiction, there would be no impermissible interference with free trade.”
External Consistency: this test asks “whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed.”
Exceptions
Complementary Tax Doctrine: the ct sometimes sustains state taxes that appear discriminatory b/c a complementary exaction offsets the apparent discrimination. See Oregon Waste Systems.
However, only example is sales and use tax (less an exception, more like discrimination that survives strict scrutiny).
Direct Subsidy: although discriminatory tax exemptions are unconstitutional, direct subsidies that discriminate are not. Camps Newfound. But when a subsidy is closely linked to a tax, which in effect creates a tax exemption, the subsidy may be struck down. West Lynn Creamery.
Reasonable Fees: some fees which are not internally consistent may nonetheless be sustained when they are “reasonable” and a “finely calibrated” levy. ATA II.
“The fee seeks to defray costs such as those of regulating vehicular size and weight, of administering insurance requirements, and of applying safety standards.”
Public Utility Exception: discriminatory taxes involving public utilities may be constitutional. Tracy.
Incentives
BLL: a state tax incentive is unconstitutional under DCC when it (1) favors in-state over out-of-state activities; and (2) implicates the coercive power of the state.
Cuno (6th Cir. 2004) (vacated by SCOTUS; NOT law) (corp. agreed to expand in OH for tax incentives)
OH’s ITC: grants TP non-refundable credit against the state’s corporate franchise tax if the TP purchases new manufacturing machinery and equipment during the qualifying period, provided that its installed in Ohio.
Property Tax Exemption: permits municipalities to offer specified incentives to an enterprise that agrees to establish, expand, renovate, or occupy a facility and hire new employees, or preserve employment opportunities for existing employees in economically depressed areas of Ohio.
Held (1) ITC fails the test above, and (2) the property tax exemption falls within the category of tax incentives escaping invalidation.
