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State and Local Taxation
University of Cincinnati School of Law
Hayden, Jeremy A.

STATE AND LOCAL TAX
HAYDEN
FALL 2013
 
 
 
 
1.       Introduction
a.       Basic info
                                                               i.      Sales and Use Tax
1.       Use tax:
a.       tax on storage, use or other consumption in the state of tangible personal property
b.       Assessed upon “tax free” personal property purchased by a resident of the assessing state for use, storage, or consumption of goods in that state regardless of where the purchase took place
c.        The use tax is typically assessed at the same rate as the sales tax that would have been owed had the same goods been purchased in the state of residence. Typical “tax free” purchases that require payment of use tax include those done while traveling, through mail order, or purchases via telephone or internet.
2.       Jurisdiction to Tax
a.       Constitutional Limits on State Taxing Jurisdiction
                                                               i.      Similar concept to jurisdiction over person for purpose of non resident taxation, same inquiry
                                                             ii.      DP: minimum contacts, purposeful availment, and NO REQUIREMENT OF PHYSICAL PRESENCE, fairness notion/notice, can’t offend traditional notions of fair play and substantial justice. Minimum connection between state and person/property/transaction to tax.
                                                           iii.      CC: How is this analysis different from DP? The main issue is whether it is unduly burdensome to interstate commerce. Is it burdensome to require an out of state vendor to collect tax (like Quill)? Must have substantial nexus
1.       It could be extremely burdensome, because all sorts of small vendors would have many tax laws to sift through in order to sell goods in another state
                                                           iv.      Quill Corp. v. North Dakota (US 1992)
1.       Facts: ND tax commissioner attempted to require Quill to collect and pay use tax on sales shipped into the state. ND supreme court upheld the statute. Quill was a Delaware corporation with no physical presence in ND, no workers located there. Quill sold office equipment and stationary in ND by using catalogs, flyers, ads, in national periodicals, and telephone calls. Deliveries were made by post and common carrier from out-of-state locations.
a.       ND argued that under DP, Quill had established a presence, as the floppy disks were physically located in their state. SC decided the case on CC principles and not DP.
2.       Issue: When is there jurisdictional power in a state to require a non resident or a physically absent vendor to do what a resident vendor does: collect taxes?
a.       The problem is there is no jurisdiction over the vendor to collect the tax – how can the state enforce the use tax?
3.       Decision
a.       The mail order business did not need to have physical presence in state in order to permit state to require business to collect use tax from its in state customers, BUT
b.       Physical presence in state was required for business to have “substantial nexus” with taxing state, as per commerce clause. Mere economic exploitation will not satisfy.
4.       The DP clause requires some definite link, some minimum connection between a state and the person, property or transaction it seeks to tax, and that the income attributed to the state for tax purposes must be rationally related to values connected with the taxing state.
a.       Relevant inquiry is whether defendant has minimum contacts with the jurisdiction such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice. In that spirit, the more formalistic tests that focused on a defendant’s “presence” within a state are set aside in favor of a more flexible inquiry into whether a defendant’s contacts with the forum make it reasonable, in the context of our federal system of government, to require it to defend the suit in that state. All assertions of state-court jurisdiction must be evaluated according to the standards set forth in International Shoe and its progeny.
5.       Court bifurcates DP and CC clause analysis and says physical presence test with regards to CC in sales/use tax area. Here there might have been DP rationale, but no CC rationale to tax.
a.       DP argument: that there were insufficient minimum contacts between the out of state vendor and taxing state to allow the state to impose the obligation on the nonresident vendor
                                                                                                                                       i.      Court said that the DP clause does not bar taxation because THERE ARE CONTACTS. There is purposeful availment.
                                                                                                                                     ii.      Minimum contacts do NOT necessarily mean physical contacts. All there needs to be are directed activities toward the state. The validity of the tax here is related to the benefit received by defendant from access to the state.
b.       Commerce clause v. DP
                                                                                                                                       i.      DP: based on fairness, and in this case it would not be unfair to call them into court
                                                                                                                                     ii.      CC: based on not burdening interstate commerce
                                                                                                                                   iii.      The court equates the burden on commerce to whether or not there is a physical presence
                                                                                                                                   iv.      FN8 – a few floppy diskettes to which Quill holds title seems a slender thread upon which to base nexus. Not enough
                                                                                                                                     v.      Under Complete Auto test, will sustain a tax against a CC challenge so as
1.       tax is applied to an activity with a substantial nexus with the taxing state (not same as DP, physical presence the line between jurisdiction and no jurisdiction) narrower than DP
2.       tax is fairly apportioned
3.       tax does not discriminate against interstate commerce
4.       tax is fairly related to the services provided by the state
6.       NOTE: Congress can change the rule of Quill
a.       Congress cannot authorize violation of the 4th amendment, but the basis of the commerce clause could be reversed with just a swipe of the pen by Congress
                                                                                                                                       i.      Whenever the SC hands down a decision under the CC, it is really a decision written in the absence of Congressional consent.
7.       HYPO
a.       What about Dell, where they send someone into your home, that is an independent contractor, to fix your computer?
                                                                                                                                       i.      They are collecting the tax that may be due on the warranty, and will remit a tax on behalf of the independent contractor. But they will not collect a tax on the sale of the CPU – not in state.
b.       Tyler Pipe and Scripto
                                                                                                                                       i.      The presence of an out of state taxpayers rep in the state COULD provide a constitutional basis for nexus and that it was not constitutionally significant whether such rep was designated an employee or an independent contractor.
                                                                                                                                     ii.      It is easy to see jurisdiction when an agent or principal present – this goes one step further and says jurisdiction when 3P is present
c.        Other situations
                                                                                                                                       i.      Subsidiary – having a sub in a state does NOT give jurisdiction over parent company and vice versa
                                                                                                                                     ii.      Mail order – generally courts have said not enough presence to collect tax
                                                                                                                                   iii.      WalMart situation – similar to Borders, CA court said the retail store is a rep of the mail order portion and therefore subject to tax under these cases
8.       Bright line rule – sales and use tax – under Commerce Clause, must have physical presence
a.       de minimis exception – floppy disks did not count
9.       Due process requires (1) minimum contacts, fairness, notice and (2) rational relation (is it equal to the benefit provided to their customers)
b.       The “Physical Presence” Standard and the Rise of E-Commerce
                                                               i.      To the extent online retailers can avoid establishing physical presence in the states where products are consumed, Quill prohibits those states from imposing a use tax collection obligation.
                                                             ii.      Amazon.com LLC v. NY State Dept. of Taxation and Finance (NY 2009)
1.       Facts: NY changed its sales tax law to include certain out-of-state retailers through a “substantial nexus” standard, with $10,000 threshold. Amazon has affiliate programs that enable other websites to maintain a link to Amazon’s site for incentives. Under the program, when a customer links to Amazon from the affiliate, that affiliate receives a commission on the customer’s purchases. These affiliates account for 1.5% of Amazon’s NY revenue.
a.       NY tax officials contended that Amazon’s program

les and use taxes, these taxes are paid from the corporation’s own pocket.
d.       The physical presence requirement is unworkable in the current economy. When National Bellas Hesswas decided in the late 1960s, it was difficult for a corporation to do business in a state without maintaining an office or an employee in state. Modern technology and communications equipment make it extremely easy for a corporation to have a significant economic presence in a state without any concomitant physical presence.
3.       In lieu of the “physical presence” test, the court articulated an alternative, the significant economic presence test, to determine if the taxation of a corporation is permissible pursuant to the dormant commerce clause. According to the court, this alternative test would examine both the quality and the quantity of a corporation’s contacts with a state in determining whether nexus exists.
4.       MBNA claimed that such a test muddied the waters between the Due Process Clause and Commerce Clause analyses required under the Constitution; in fact, it essentially removes the Commerce Clause analysis entirely. The Court of Special Appeals repudiated this assertion by claiming that the Commerce Clause analysis under the significant economic test would inquire into the systematic nature and frequency of the contacts, as opposed to the minimum connection required by the Due Process clause. The former, according to the court, requires greater nexus than the latter.
                                                           iii.      Geoffrey, Inc. v. SC Tax Commission (SC 1993)
1.       Facts: Toys R Us transferred its trademarks, trade names, and service marks to Geoffrey. Geoffrey does not own or operate any Toys R Us stores; rather, its sole business is to license, in exchange for royalty payments, its intangible property to other Toys R Us subsidiaries. Thus, except for its principal place of business, Geoffrey does not have any employees, agents, offices, real property, or even licensing activities anywhere in the Commonwealth of SC. Toys R Us-Mass, Inc. and Baby Superstore, Inc. (both subsidiaries) license trademarks from Geoffrey. Pursuant to their licensing agreements, Geoffrey’s trademarks are used on signs and displays in affiliated retail stores throughout the commonwealth. Geoffrey paid the taxes under protest and filed for a refund. It argued that the imposition of such tax under Section 39 is unconstitutional as Commerce Clause’s “substantial nexus” requirement mandates, under Quill, physical presence of the taxed entity in the taxing state.
2.       Decision: The court determined that Geoffrey had substantial nexus with SC because it licensed intangibles in the state and derived income from that licensing.
a.       Due Process: Geoffrey has not been unwillingly brought into contact with SC through the unilateral activity of an independent party. It licenses intangibles to Toys R Us, therefore Geoffrey purposefully sought the benefit of economic contact with several states, including SC. Geoffrey has the “minimum connection” with SC that is required by DP.
                                                                                                                                       i.      Also, Geoffrey meets the “minimum connection” test by the presence of Geoffrey’s intangible property in SC. The presence of these intangibles is sufficient to meet the test.
                                                                                                                                     ii.      “The real source of Geoffrey’s income is not a paper agreement, but SC’s Toys R Us customers.”
b.       Commerce Clause: “The presence of intangible property alone is sufficient to establish nexus…. A taxpayer who is domiciled in one state but carries on business in another is subject to taxation measured by the value of the intangibles used in his business.”
c.        Even with no physical presence, an out-of-state holding company that owned the trademark and trade name of a toy store that licensed the use of those intangibles to an affiliate’s SC stores, was sufficient basis to impose income tax.