Three important nexus rulings discussed at a recent Bloomberg BNA State Tax Advisory Board Roundtable most likely did not show up on the radar screens of many state tax practitioners. This is so even though two of the decisions were from the U.S. Supreme Court and one was from the U.S. Second Circuit Court of Appeals. (The State Tax Advisory Board Roundtablespecial reportwas published Jan. 27 and is available to subscribers).
The U.S. Supreme Court cases both involved attempts by a state court to assert jurisdiction over one or more defendants located in Europe. In each case, the high court ruled that the plaintiff failed to establish that the defendant had sufficient contacts with the state to warrant jurisdiction under the Due Process Clause.
The U.S. Second Circuit of Appeals case dealt with the tax treatment of cigarettes sold on an American Indian Reservation.
One of the U.S. Supreme Court cases--J. McIntyre Machinery LTD v. Nicastro, 131 S. Ct. 2780 (2011)-- arose after the plaintiff injured his hand while using a metal-shearing machine manufactured by J. McIntyre Machinery LTD, which is located in England. The plaintiff filed suit in New Jersey, which is the state where the injury occurred, and J. McIntyre Machinery moved to dismiss the suit on jurisdictional grounds. The company argued that no more than four of its machines were located in New Jersey. However, the New Jersey Supreme Court ruled that the company was subject to the state’s jurisdiction even though at no time had the company advertised in, sent goods to, or in any relevant sense targeted the state.
The U.S. Supreme Court reversed after finding that imposing New Jersey jurisdiction on J. McIntyre Machinery violated Due Process because the plaintiff never established that the company directed any purposefully driven activity at the state.
The other high court case--Goodyear Dunlop Tires Operations S.A. v. Brown, 131 S. Ct. 2846 (2011)—came after North Carolina residents whose sons died in a bus accident outside Paris, France, filed a suit for wrongful-death damages in a North Carolina state court. Alleging that the accident was caused by tire failure, they named as defendants Goodyear USA, an Ohio corporation, and three Goodyear USA subsidiaries, organized and operating, respectively, in Luxembourg, Turkey, and France. The defendants filed a motion to dismiss on jurisdiction grounds.
However, the North Carolina Court of Appeals held that the state’s courts had general jurisdiction over the defendants because their tires reached the state through ‘‘the stream of commerce.’’ However, the U.S. Supreme Court reversed after finding that the defendants lacked ‘‘the kind of continuous and systematic general business contacts’’ necessary to allow North Carolina to entertain a suit against them unrelated to anything that connects them to the state.
These two cases are likely to have important implications for state tax nexus jurisprudence, roundtable participants said.
When you appear before a judge that does not specialize in tax, the distinction between the state tax world and the world of civil jurisdiction gets blurred, said Richard Pomp, a professor at the University of Connecticut School of Law, said at the roundtable. “Cases like Goodyear and McIntyre aren’t off by themselves and viewed as having nothing to do with state tax. To a lay judge, McIntyre becomes part of Quill in a way that SALT lawyers may not initially think about,” he added.
Bruce Ely, a partner with Bradley Arant Boult Cummings in Birmingham, Alabama, agreed. J. McIntyre Machinery LTD and Goodyear Dunlop "seem to have raised the bar for Due Process nexus analysis to a point where I think a lot of these courts are going to have to reexamine the Due Process issues involving nexus over limited partners and LLC members.”
The U.S. Second Circuit of Appeals ruling-- Red Earth LLC v. U.S., 657 F.3d 138 (2d Cir. 2010)--upheld a U.S. District Court decision in Red Earth LLC v. U.S., 728 F. Supp. 2d 238 (W.D.N.Y. 2010), which granted on Due Process grounds an injunction in favor of a remote seller of cigarettes that challenged the federal scheme for taxing the sales.
“Everyone who has a nexus situation should read these two decisions because it’s two federal courts holding ‘we’re going to go back and look at Bellas Hess, then we’re going to look at Quill and going to say what we think the decisions say about nexus,’’’ said Maryann Gall, a state tax consultant with M B Gall Tax. “And they’re very instructive because both the Western District Court and the Second Circuit, which is pretty big time, hold that the retailers need physical presence to have nexus.”
The U.S. Supreme Court’s ruling in McIntyre is already beginning to affect state tax cases. “Red Earth LLC, cited McIntyre,” Pomp noted. “I wasn’t surprised that the Second Circuit saw a connection between McIntyre and Quill that maybe [a state tax practitioner] wouldn’t normally think of,” he said.
By Steven Roll
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