State and Local Taxation
Hellerstein
Fall 2011
Chapter 1
1. INTRODUCTION
a. Basic Info
1. Sales and Use Tax
a. USE TAX
1. Tax on storage, use or other consumption in the sate of tangible personal property.
2. 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 too place.
3. The use tax is typically assessed at the same rate as the sales tax that would have been owed (if any) 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 (for things carried or sent home), through mail order, or purchases via telephone or internet.
4. HYPO: A car. Once you get back to the state, first thing you must do is register it. If you tell them that you paid a sales tax, they credit you for the sales tax up to the amount you would have paid in sales tax in the state of domicile.
a. However, it is these registered goods that make it easy for the state to collect. If there is no registration requirement it is VERY hard to put the onus on the state to collect these taxes.
b. Therefore, companies like Amazon do not need to collect the tax, it can be up to the consumer to pay a use tax.
5. HYPO: if you are Wal Mart and you want to compete with Amazon what do you do?
a. Create a separate entity – i.e. Walmart.com, to sell the book.
Chapter 2
2. CHAPTER 2: JURISDICTION TO TAX
a. Section 1: Due Process And Commerce Clause Restraints On State Taxing Jxn
1. Similar concept to jxn over person for purpose of non resident jxn, same inquiry.
1. 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 btwn state and person/property/or trans to tax.
2. CC: How is this analysis different from the DP analysis? The main issue is whether it is unduly burdensome to interstate commerce. Is it burdensome to require out of state vendor to collect tax (i.e. in Quill). Must have substantial nexus
a. 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.
1. Quill Corporation v. ND
1. ISSUE: When is there jxnal power in a state to require a non resident or a physically absent vendor to do what a present 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?
2. Held
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
3. The Due Process 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.
4. Ct bifurcates DP and CC 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. Due Process 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.
1. The court said that the due process clause does not bar taxation because THERE ARE CONTACTS. There is purposeful availment.
2. Minimum contacts do NOT necessarily mean physical contacts. All there needs to be are directed activities towards the state. The validity of the tax here is related to the benefit Δ receives from access to the state.
3. Has state provided some protection, opportunities, or benefit for which it can expect a return
b. Commerce Clause v. Due Process
1. Due Process: Based on fairness, and in this case it would not be unfair to call them into court.
2. Commerce Clause: based on not burdening interstate
t with Quill, if only connection with state is solicitation from out of state through catalogs, flyers, and delivery of merchandise to customers through mail, insufficient nexus for taxation.
· So as long as nexus, taxes that must be collected need not derive from seller’s in-state activity.
3. Section 2: Jurisdiction to Tax Income
a. Generally
a. One cannot assume that Quill’s “bright line, physical present” analysis will necessarily apply to other taxes.
b. Nexus or jxn to tax often involves two separate inquiries, even though they may not be separately explicated
1. Is there jxn over the taxpayer
2. Is jxn over the transaction, activity, or event or the income, or property.
c. As a practical matter
1. If only dealing with DP – looking to see if activities directed towards state.
a. Cases
(1) WV v. MBNA
· Bank’s only contact with state was through mail and phone solicitation regularly
· Physical presence is not necessary in order to show a substantial nexus for purposes of state taxation of forgein corporations.
· Same standard as due process. Sales and use has higher requirement b/c of stare decisis. Substantial reliance on that decision. Benefits of bright line rule. Applying to sales and use taxes is undue burden on interstate commerce. Not so for income. Lesser compliance burdens. Physical presence poor measuring stick of an entity’s true nexus with a state in today’s business world.
· Significant economic presence test – test used to determine of whether a substantial nexus exists for CC purposes. Incorporates due process purposeful direction towards a state while examining the degree to which a company has exploited a local market. Purposeful availment is analyzed as it is for DP. CC requires additional examination of frequency, quantity, and systematic nature of a taxpayer’s economic contacts with a state.
1. Residence v. source. Can be taxed by either jurisdiction. If conflict, usually source jurisdiciton yields
