Bloomberg BNA Q&A With Charles A. Rothfeld, Special Counsel With Mayer Brown

The Bloomberg BNA Tax Management Weekly State Tax Report filters through current state developments and analyzes those critical to multistate tax planning.

Charles A. Rothfeld, special counsel in the Washington-based office of Mayer Brown, recently sat down with Bloomberg BNA to discuss appellate work in tax cases, including the hurdles in seeking certiorari and succeeding on a Quill challenge before the U.S. Supreme Court.

Interview by Jennifer McLoughlin

Charles Rothfeld, Special Counsel with Mayer Brown, is a leading Supreme Court and appellate attorney and who has handled cases involving numerous state and local tax issues. Since joining Mayer Brown in 1991, Charles has represented foreign governments, states, municipalities, members of Congress, Indian tribes, groups of state and local officials, and leading academics before the Supreme Court. His representations also have included Fortune 500 companies and other businesses in a range of industries, for which he has worked on cases involving various aspects of constitutional law, as well as antitrust, banking, securities regulation, patent and trademark law, taxation, ERISA, criminal law, and international law.

Bloomberg BNA:

When did you first become involved in a case at the Supreme Court level that addressed a tax issue?

Charles Rothfeld:

I clerked for Justice Blackmun on the Supreme Court, a very long time ago. He, I think, was the only one of the justices on the court at the time who actually was interested in, and enjoyed working on, tax cases. So, the year that I was there, I worked on a number of tax decisions, including federal tax and constitutional state tax questions, which I found very interesting.

One of the curious things about state taxation is that it's one of the relatively few areas where you can practice constitutional law. There are a lot of federal constitutional questions involved in state taxation. The commerce clause has generated an enormous number of Supreme Court cases. The due process clause, not surprisingly, has a big and very significant role to play in state taxation. It controls the authority of the states to exercise their jurisdiction over taxpayers. There are a number of other clauses of the Constitution, including the First Amendment, which have generated restrictions on state taxing authority.

Working on these issues, you get into the meaning of the Constitution and what the framers thought about these various questions. For example, I argued a case a couple of years ago involving the tonnage clause of the Constitution, which is not a clause that most people have heard of. But, it was very important to the framers, relating to the relationship between the colonies and then the first states. Because no one had thought about the tonnage clause for a very long time, to figure out what it meant, we had to go back to what the framers of the Constitution thought. And so it was a very interesting question.

There are a lot of things that are kind of lurking in the background in the taxation area, which you would not necessarily expect if you get into the field. When I was working at the State and Local Legal Center, which does Supreme Court litigation for state and local governments, there were a lot of very interesting constitutional questions involved in state taxation that I got involved in. So I've tried to keep my hand in it since then.

Quill is a very important and interesting case that was decided around that time, just as I was working for the State and Local Legal Center, and then came to the law firm. I continued my interest in it. Since then, I've kept following federal constitutional issues as they relate to state taxation.

Bloomberg BNA:

You just mentioned the Polar Tankers case, in which you argued on behalf of the petitioner. And, as you said, the tonnage clause is a foreign concept to probably most attorneys and judges. What was it like bringing a case like that before the Supreme Court?


It was a very interesting problem to be presented with, because the Supreme Court literally had said nothing about the tonnage clause since the 1930s. They have not struck down any state law under the tonnage clause since the 1870s. It's not a clause of the Constitution that gets invoked very often at all. Usually when the Supreme Court takes cases, it's because there is a conflict in law in the lower courts. There was no conflict about the tonnage clause, because there were no cases about the tonnage clause. So, when presented with a case like that, you think how do you get the court interested in taking it in the first place?

The fact is, the justices are interested in the Constitution, and I think they like when they have an opportunity to go back to what the framers thought and the debates about the Constitution. I think they find it very interesting and enjoyable. It's more engaging for them to think about questions like that than about the meaning of their own decisions from three or four years ago.

We came up with a way to tell them, ‘here is an interesting opportunity for you to get into this area of the Constitution that you haven't thought about for a very, very, very long time.’ Our petition to the court in that case said that the state court just completely misunderstood what the U.S. Supreme Court had said many, many years ago about the tonnage clause. The Supreme Court thinks that it has an obligation to keep state courts in line when states are doing things that have an effect of discriminating against out-of-state taxpayers or out-of-state citizens, which is what was going on in the Polar Tankers case. It was a way of telling them that this falls within your area of essential responsibility, as the U.S. Supreme Court, to make sure state courts are not doing that. And now we have this exotic question: when is the next time you're going to get to think about the tonnage clause?

Bloomberg BNA:

Were you surprised with the court's ruling in Polar Tankers, which found in favor of your client?


If you aren't persuaded when you start working on a case, and you haven't at least persuaded yourself that you're right by the time you're done, that's a very bad sign. I think all of us working on Polar Tankers on our side of the case thought that we were right going into it. The hardest question was getting the court to take it, as is often the case with a cert petition. At least I had persuaded myself that we were right, so I was not surprised that it came out the way that it did.

Bloomberg BNA:

What are your general observations of the current landscape in which states are seeking to capture revenue from digital remote sellers?


All of these attempts founder on the rule of Quill, that taxation of out-of-state entities is barred by the commerce clause. Absent physical presence in the taxing jurisdiction, states simply lack the authority to tax the transactions.

The Supreme Court, for many years, has been trying to figure out how to deal with that problem, which was a big problem when the court decided the Quill case in the early 90s. But that was just before the foundation of the Internet, and before anybody even thought of the cloud or any of the digital products that are now ubiquitous. The doctrine that the Supreme Court developed never adapted to dealing with the realities of the current situation.

What states have been trying to do, with more or less success, is find things that take place in their state that could qualify as physical presence. They'll say that use of a particular digital product in a state gives the transaction a physical connection to the state, in a way the seller actually located in the state would do, because you can't really tell exactly where the product originates or where the cloud is located. So why can't it be in New York rather than California?

I think that there is a lot of discussion by state taxing authorities about how to limit Quill, and I'm sure they are thinking about it. I'm not sure to what extent they've tried to implement the various, more intrusive approaches that they could take. My sense is that a lot of this is at the conceptual stage, rather than at the actual implementation stage.

A lot of the attention, I think, has been focused on trying to get legislation out of Congress that would allow states not to worry about the physical presence rule, which is an effort that has been going on for also a very long time. There are so many conflicting interests at stake that it's never quite gotten to the point where there is an agreed upon vehicle that would be the basis for consensus legislation. My sense is that, if this is ever going to get resolved, it's going to have to be through legislation and not by state taxing authorities' mechanisms.

Bloomberg BNA:

Do you have an opinion why state legislatures have for so long not taken action to address the issue of taxing digital remote sellers?


The state legislatures have relatively limited authority here. So long as states are bound by the commerce clause rules, stated by the Supreme Court, the only way to change that, unless you evade it in some way by chipping away at the margins, is to get the Supreme Court to change its mind. Which is something people have also been talking about for a long time.

There was a case in Colorado last year, the actual issue before the court had very little to do with the substance of this. But Justice Kennedy took the opportunity to write in a separate opinion that, ‘the world has changed. When this court decided Quill, no one imagined there would be an Internet. And clearly the dollars and sales that originate out of state, we really should do something about it, because it's depriving the states of all this revenue and it's terrible for them.’

That prompted a huge amount of speculation, as to, ‘is the court really starting to think about this?' Because there have been cert petitions asking the court to reconsider the issue in the years since Quill, all of which have been denied without any comment by the Justices. This really is the first time that one of them has expressly started to suggest the court is troubled by what damage it has caused, or the confusion that it has caused. Which has prompted a lot of speculation. Is the court really possibly prepared to move in that direction?

You can look at Kennedy's statement in two ways. Either it's the first time anybody has said this and that's movement, or it's only one of the Justices, and no one else joined Kennedy. So maybe that suggests that the center of gravity on the court has not changed.

The only way for states to really make significant headway is either through getting the Supreme Court to reconsider Quill or through congressional legislation. The states, by their own state legislation, can try to chip away at the margins. But the basic physical presence rule is a federal rule, and the states can only do so much about that.

Bloomberg BNA:

Based on your experience, working on hundreds of cases before the Supreme Court, you may have a sense of their temperature in terms of granting cert. It may be difficult to speculate. But what do you think is the likelihood that the Supreme Court grants cert to a case that calls for a reexamination of the Quill case?


As a general matter, it's not easy to get the Supreme Court to take the case when there is no conflict in the lower courts. They do it sometimes, like with the petition in Polar Tankers, they do it when there is a compelling reason to. But, that's hard to overcome.

In Quill, there is some degree of murkiness in the state courts, as to where the lines get drawn exactly, but there certainly is no conflict as to whether or not Quill is good law. The Supreme Court says that's the law, and until they change it, it won't be changed. So that's a hurdle to begin with.

Getting the court to reverse itself is extremely difficult. Again, they do it sometimes. They may do it this year in the labor case, Friedrichs, where the petitioners are asking them to do it.1 But it's a very, very heavy lift to get the Supreme Court to overrule its decision.

So, in challenging Quill, you start with two very significant, heavy burdens to overcome. And, in addition, the court is concerned about defeating the expectations of people. Congress can come in and see what the practicalities are if the law is going to be changed and what effect changing the law will have. Will it trigger an economic problem? Will it put companies out of business? And the people who based their business models and hired a lot of people based on the Quill rule? It's very difficult for the Supreme Court to understand those kind of practicalities, because they can't do fact finding, or they're not supposed to go out and talk to people in the real world. They get amicus briefs, with people telling them what the practicalities are. They get briefs on both sides telling them opposite things, and it's hard for them to know which one of those is right.

Now Justice Kennedy of course wrote his DMA opinion, saying we can't ignore the ways in which the world has changed. There is no question that the world is vastly different than it was when Quill was decided. Quill came down just before the Internet took off. There were mail order sales, real Sears & Roebuck, old fashioned, L.L. Bean mail order sales. That was the model that the Quill court had before it. Now, in the age of Amazon, it's a completely different situation. Maybe the court can be convinced that they just decided Quill in a different era and things have changed, but I'm sure the push back to that will be, ‘well, if that's true, go to Congress. If there really is a need for a new rule, the political process should take care of it, not the Justices.’ So, it will be a difficult set of problems presented to the court.

Bloomberg BNA:

You raise an additional issue, whether the Supreme Court will be open to reversing its earlier decision in Quill. The Supreme Court denied cert to Amazon and Overstock in 2013 arising out of the New York click-through nexus laws. Do you think that is an indication of whether or not the Supreme Court will grant or deny cert to a future case challenging a state's nexus regime?


Aside from Justice Kennedy's writing, I do not think there would be much reason to be optimistic if you want to challenge Quill. The world has changed. But, there have been a number of challenges that have been brought over the years to the court, in cert petitions that have been denied without dissent.

This is a not a situation in which, if the court doesn't do anything about it, nothing could ever change. Because Congress could in fact overrule Quill. The court went out of its way in Quill to write its opinion in a way which gave Congress an opening, by saying this is based on the commerce clause. Commerce clause rules are things that Congress can set aside if it wants to. And, so, if a national catastrophe were going to follow from the Quill rule, it wouldn't be up to the Supreme Court to change it. Congress could take care of it.

It's hard to see where the compelling change is, other than the fact that the world has changed over the years, to get the court to overrule its decision.

Bloomberg BNA:

Do you think the Supreme Court would accept a case with the agenda to draft an opinion to entice or prompt legislative action?


It would put the court in a somewhat peculiar position. I wrote an article about the Quill problem before Quill was decided. It suggested at the time that the Quill rule was wrong—that the original rule of a case called Bellas Hess from the 1960s that was re-affirmed in Quill, was based on a misunderstanding of both the commerce and the due process clauses of the Constitution. Had the Supreme Court based its decision on due process, when it decided Quill, Congress couldn't have done anything about it. But Congress gets to set aside commerce clause restrictions on what the states can do.

And, so, it seems very clear that what the court was doing in Quill was setting up for Congress, by saying ‘we're going to retain this rule, this physical presence rule, which has been in existence for a long time, but we're going to tell you Congress that this is based on the commerce clause, not the due process clause. And since it's based on the commerce clause, Congress can fix it, change it, if it wants to.’

That is one of the clearest examples of the Supreme Court going out of its way to say to Congress, ‘this is now in your court. And if it really is true as people are arguing to you, as the states and the brick-and-mortar companies are saying that this is a really big problem, they will go to you and you ought to do something about it.’ The court didn't quite say it expressly in those terms, but it's pretty clear what they thought was going to come out of their decision.

One of the difficulties now with going back to the court and saying, ‘you ought to pose this for Congress’ is they've already done that. So, what will be different by doing it a second time? It would seem peculiar for the court to take the case and reaffirm Quill and say, ‘well, we were right. The law hasn't changed. Our Constitution hasn't changed. So, no reason for us to come at it any differently. But if it's a big problem, Congress can take care of it.’ They've already said that.

Nothing in that sense has changed. So, I think it would be odd to pitch this to the court by saying, ‘you ought to set this up as a congressional problem.’

Bloomberg BNA:

Congress has been deliberating this issue for around 15 years with no universal agreement. Can the Supreme Court have confidence in the idea of a congressional solution?


I don't think anyone anticipated when Quill was decided that gridlock would develop in Congress. Partially, it's the issue. And partially, it's just that Congress has become so mired in partisan back-and-forth, that it's difficult to get anything done. That's much more so now than it was in 1992, when Quill was decided. But, I don't know that that makes the court any more likely to take the case.

Bloomberg BNA:

Can you think of other arguments that may be raised in an effort to convince the Supreme Court to re-examine Quill?


It is certainly true that there are changes in how people do business and consumers buy things, where Amazon will get something to you in the afternoon if you order it in the morning, and you can get literally anything you want online. I don't know what the numbers are, but surely the percentage of people in the United States who do most of their shopping online is exponentially greater than anyone imagined it could have been in 1992.

I think I would tell the court that the change in how the world operates is just so fundamental. All of the background understanding that went into the commerce clause in Quill has to be re-thought. As a practical matter, Quill was decided in a different age. And, insofar as the court was moved by the practical realities of doing business in its commerce clause interpretation in Quill, it has to look at what the current practicalities and realities are. That's what Justice Kennedy was telling you in his concurrence. Sales, remote sales, are now so much a part of everybody's life. There is so much more of a threat to revenue generation by state and local governments. The court should give it a second look.

Bloomberg BNA:

Do you have an opinion regarding the proper nexus standard? Should Quill stand or is it time to change the rules because of the evolving digital economy?


I think part of what the court was thinking about when it decided Quill was practical difficulties that would be posed by having different tax rates and tax collection rules in various local jurisdictions across the country. That would make it very problematic, particularly for small businesses, if they actually had to collect and remit taxes to 15,000 local jurisdictions.

One way in which the world has changed is that technology has become so much more advanced. I think it's now much easier now to comply, nationwide, with different rules. There is software that will do that for you.

Maybe you could say to the Supreme Court, ‘well, you were moved by this commerce clause consideration. That is no longer the case as a practical matter, if you re-visit the basis for what you thought was going on in Quill.’ The economic world and the world over the Internet operate in a very different way now than they did in 1992. If I were to present the case to the court now, and say you want to re-think the Quill rule, that would be at least a partial focus of what I would do.

Bloomberg BNA:

Do you believe there will ever be a universal solution to this issue?


You would think that Congress ought to fix it, because there are a lot of competing interests that are at stake. To some extent, there are reliance interests on the part of businesses that have grown up around the Quill rule. On the other hand, there are unfair aspects to the Quill rule, and serious revenue problems for state and local governments. If you had a functioning Congress, it would take all those interests into account and offer a solution that would try to account for all these things, in the ideal world that is how it would operate.

A dilemma for the Supreme Court is, they look at the current political reality. I think they would like to function as though they could say, ‘we rely on the political branches to resolve what are essentially political questions. And this really is a political practical problem more than a legal problem. And, so, that really is the kind of thing you should address to Congress.’

Forty years ago, I think you could do that and say, ‘if there is a solution to be had here, Congress will figure it out.’ In the current political environment, if you think of yourself as a Supreme Court Justice and are presented with this problem, what would you do? Kick it to Congress, knowing that Congress is going to have a very difficult time producing anything just because of the current nature of the institution? It's a dilemma for the Supreme Court.

Bloomberg BNA:

You have a widely recognized and very well respected appellate practice before the Supreme Court, including 31 oral arguments before the court. And your practice encompasses a wide range of industries that comprise tax. How did your career develop into such a broad scope of practice?


As an appellate practitioner, you're prepared to take on anything that comes to you that involves legal work, as opposed to factual development. As you do more cases in a particular area, you develop an expertise in that area, and end up with a “mini-specialty.”

For me, one of those areas includes some of the constitutional aspects of taxation—commerce clause, due process clause, First Amendment, and other aspects of the Constitution that bear on taxation.

I spent a number of years with the Solicitor General's Office at the Justice Department, which handles the Supreme Court cases for the U.S. One of the reasons that the Solicitor General's Office is so successful is that people in the office are not specialists—they are general appellate practitioners. They develop experience translating technical things into language that is intelligible to the Justices, who are not experts in a particular field, as they take on a variety of cases. That skill ultimately comes with you into private practice, and leads you to want to take on a wide range of subjects and do a variety of things. I fall into that category.

Bloomberg BNA:

How does an attorney become a “renaissance man,” in terms of practicing in so many industries?


I'd hardly say “renaissance man,” but I think the Solicitor General's Office at the Justice Department is kind of the gold standard for appellate practice. In that office, the lawyers there get briefs or drafts of briefs that are written by other agencies, by specialized agencies like the Federal Trade Commission or the Food and Drug Administration or agencies that have particular expertise in technical areas. And the agencies have great lawyers who are extremely knowledgeable. But they spend all their time working on a particular, relatively narrow focused subject. Doing that, you can get tunnel vision eventually. And you lose track of what other people don't know about the subject. It's an inevitable thing. This is not criticism of people who are specialists, who are very, very good at what they do.

But the challenge comes in presenting an argument on this kind of technical subject to a judge, at a court that is not a specialist court. There are courts that specialize, the Federal Circuit for example specializes in certain kinds of intellectual property law. But at the Supreme Court, you're presenting cases to justices who take on everything, an ERISA case, an antitrust case, a First Amendment case. They don't have the background when they see a very technical brief to necessarily understand off the bat what they are being told. And being able to translate the technical stuff into terms that the generalists can understand and process, and that makes sense to them, is a very useful skill if you're going to be doing appellate-type litigation. It's a skill you have to develop if you're going to be an appellate lawyer, being able to take material that you're not necessarily really familiar with and understand it well enough to figure out what arguments to make about it, and then put it in a package that will make sense to the non-specialist judge.

Bloomberg BNA:

How difficult is that in an industry such as tax, which can be fairly complicated and technical?


It can be difficult. One thing that a lot of appellate lawyers do, including me, is work with subject-matter specialists to get their guidance on a case. The fact is, if you put in the time to get to the bottom of things, it can be done. A judge on a court of appeals or the Supreme Court is presented with some very technical questions of patent law or antitrust law or ERISA law, and you expect them to be able to learn what the case is about, learn what the issues are, and learn what the background of the law is. You should expect the lawyers presenting to them to do the same thing.