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State and Local Taxation
University of California, Hastings School of Law
Shanske, Darien

–          Brief Overview of U.S. Sub-National Public Finance
o   Diversity in the U.S. state and local tax base
§  Federal à revenue comes mainly from income and wage taxes
§  State and local à property tax, sales tax, and income taxes (“Big 3”)
·         State à property tax is no longer as important at this level
o   Ind. inc. tax and sales tax are the two leading sources state revs
·         Local à property tax brings in most of their revenue
o   Non-property taxes are available (i.e. local income + sales taxes)
–          Legal Framework of U.S. State and Local Taxation
o   State and local tax laws must comply with federal constitutional requirements
§  Commerce Clause, Priv. and Immunities Clause of Article 4, Due Process and Equal Protection of 14th Amendment, Supremacy Clause, etc…
o   Congressional action in state and local tax is relatively rare
o   There exists state constitutional imitations on state and local taxes (uniformity clause)
–          Key Institutions in U.S. State and Local Taxation
o   State departments of revenue (state tax collection agencies)
o   Can be a single department or divided between multiple departments (CA)
o   State tax adjudication (almost all SALT controversies are adjudicated in state courts)
o   State tax courts (some states have it, some states don’t)
o   Multistate Tax Commission
o   Streamlined Sales Tax Governing Board
–          Anatomy of a State Tax Case
o   File the tax return
o   State administrative proceedings  (their decision can be appealed to state court)
o   State judicial proceedings (some have indep. state tax courts, some use reg. superior ct)
–          COTCE – A Recent Reform Proposal
o   CA has shifted to a greater reliance on income taxes (a more volatile tax base)
o   State sales tax is a more stable tax base
o   Property taxes are relatively stable
o   Recommendations
§  Lower income taxes
§  Increase property taxes (but there’s Prop. 13)
§  Adopt a business net receipts tax (not a sales or income tax)
–          Kirk Stark – A Recent Analysis of CA State Taxes
o   CA needs to find a tax that ISN’T a sales or income tax b/c of Quill + PL 86-272
o   Business net receipts tax (BNRT) might just fit the bill
§  Deduct purchases and other expenses from total revenues/gross receipts and tax that difference (but can’t deduct wages)
 
 
 
 
 
 
JURISDICTION TO TAX
 
 
–          Constitutional Limits on State Taxing Jurisdiction
o   Generally, state tax JX implicates different DP and CC nexus concerns
§  Due Process à minimum contacts or purposeful availment nexus between state and person/property/transaction it seeks to tax
§  Commerce Clause àsubstantial nexus  standard in CAT (req. physical presence)
o   Bella Hess
§  Seller whose only connection w/ customers in a state is by common carrier/ U.S. mail LACKS the req. minimum contact w/ the state to be taxed
§  Physical presence is NECESSARY for JX, CC, and DP requirements
o   International Shoe
§  Relevant DP inquiry for state tax is whether a def. had min. contacts w/ JX such that the tax DOESN’T offend trad’l notions of fair play and substantial justice
o   Burger King Corp
§  If foreign corp. purposefully avails itself of benefits of an econ. market in forum state, it’s subject to the state’s JX (NO physical presence; applies to DP req.)
o   Quill Corporation v. North Dakota
§ 
 
SALES AND USE TAX (COLLECTION)
A state CAN’T impose a USE TAX collection obligation on out-of-state vendors
 
§  Due process JX issue à Tax OK b/c there’s min. cont. and purposeful availment
§  Commerce Clause JX issue à Not OK; CC requires physical presence to tax Quill
§  How much physical presence?
·         Unsure…there’s a split between the states (from min. to substantial)
–          Physical presence standard and the rise of e-commerce
o   To the extent that online retailers can avoid establishing physical presence in the states where their products are consumed, Quill would prohibit those states from imposing a use tax collection obligation on such vendors
o   Amazon.com LLC v. NY State Dep’t of Taxation and Finance
§  Physical presence test would arguably be satisfied here
§  The NY residents entered into a business agreement with Amazon so their presence in the state could be attributable to Amazon
·         NY law imposes a tax collection obligation on an out-of-state vendor only where the vendor enters into a business-referral agreement with a New York State resident, and only when that resident receives a commission based on a sale in New York
–          Constitutional Limits on State Income Tax Jurisdiction
 
INCOME TAXES
Tax Commissioner of W.V. v. MBNA
 
§  Quill

solicitation of orders
·         Replacing stale gum, supplying new gum through agency stock checks, and the storage of gum AREN’T solicitation of orders
·         In-state recruiting and training of sales reps, and the use of hotels and homes for sales-related meetings served role of facilitating solicitation
§  There is a DE MINIMIS exception to activities beyond “solicitation of orders”
·         Depends on WHETHER the activity establishes a NONTRIVIAL additional connection w/ the taxing state (small % of total sales CAN be nontrivial)
·         If de minimis DOESN’T apply, all net income generated in state is taxed
o   PL 86-272 TAKES AWAY some of the force of the significant economic presence test
o   Franchise Tax Board on COTCE Report
§  For the purpose of analyzing the CC substantial nexus requirement, the BNRT is MORE SIMILAR to an income tax than a sales tax (i.e. taxes the seller)
§  Therefore, substantial economic presence test should be applied to the BNRT
§  BNRT SHOULDN’T be viewed as a tax on net income, so not subject to PL 86-272
o   Franchise Tax Board 1050
§  1) Nature of Property Being Sold
·         Only solicitation to sell personal property is protected under P.L. 86-272
·         The leasing, renting, and licensing of tangible personal property AND transactions involving intangibles are NOT protected under P.L. 86-272
·         The solicitation for the sale or delivery of services ISN’T protected
§  2) Solicitation of Orders and Activities Ancillary to Solicitation
·         For an activity to be PROTECTED under P.L. 86-272,it must be limited to solicitation (there IS an exception for de minimis activities)
·         Solicitation means
o   (1) speech/conduct that explicitly or implicitly invites an order;
o   (2) activities that are entirely ancillary to requests for an order
§  Ancillary activities serve NO indep. business function