Individual Income Insights: MTC Supports ‘Unequivocal and Nearly Universal’ Call to Overturn Nevada v. Hall in Upcoming Hyatt III


 

As discussed previously by Bloomberg Tax, Franchise Tax Board of California v. Hyatt, which has been ongoing for nearly three decades, is about to take its third trip to the Supreme Court. The basic issue is that a Nevada court found that California used improper methods to pursue Gilbert P. Hyatt for taxes that were not owed. The verdict awarded Hyatt $300 million in damages.

The California Franchise Tax Board then filed suit and asked the Supreme Court to overrule Nevada v. Hall and hold that Nevada lacked jurisdiction to hear the case. Eight amicus briefs have been filed in the case so far. For their brief submitted on Sept. 18, the Multistate Tax Commission, state governors, and legislators joined forces in support of an “unequivocal and nearly universal” call to overturn the longstanding case in upcoming Hyatt III.

Here is a breakdown of the arguments:

I. States Subject to the Processes and Choice-of-Law Decisions of Their Sister-States’ Courts

The MTC’s first argument rests on the premise that “Hall was wrong to conclude that the Constitution had not resolved the inherent conflict between state adjudicatory authority and state sovereign immunity.” The MTC asserts that Hall is erroneously premised on the idea that states didn’t retain the right to assert sovereign immunity when the Constitution was ratified. As a result, a state is potentially subject to a sister-state’s laws that are in direct conflict with its own laws with “few apparent limits.”

II. Taxpayer Can Disrupt Tax Enforcement

Further, the MTC expresses concern that the ability to carry out suits in sister-states can potentially disrupt tax administration. The brief refers to Fair Assessment in Real Estate v. McNary, where the Supreme Court held that principles of comity bar damages actions brought in federal courts to redress unconstitutional administration of state tax systems. In its holding, the court recognized several problems, including intruding on the enforcement of state law and suspension of collection efforts. The MTC contends that a taxpayer could thwart the administrative process by resisting requests for information and petitioning courts for protective orders against the taxing state as Hyatt had done.

III. Hall Poses Greatest Threat to State Interests and Interstate Cooperation

Additionally, the organization opines that states are engaged in a fine balance of competition versus cooperation. Citing dormant commerce clause cases, the MTC emphasizes that states operate under certain limitations, including not having the ability to impose trade barriers and not discriminating against foreign commerce, among others. On the other hand, states compete for investment and job creation through more favorable tax policies while also engaging in efforts to streamline their state tax systems. The MTC concludes that Hall disturbs this delicate balance, stating “Hall raises the specter of states used as pawns in economic warfare.”

IV. Hall Offers Opportunity for ‘Forum-Shopping’

Next, the MTC contends that Hall would allow taxpayers to actively seek out state forums in which to challenge other states’ tax policies. In support, the brief notes a Virginia Circuit Court case where a taxpayer has challenged a Massachusetts sales tax collection obligation. Under the Virginia statute, a business can seek a special declaratory judgment determining whether it has nexus in another state in order to require collection and remittance of sales and use taxes. Stating that “the seeds of such a threat have only recently been planted,” the MTC argues that forum shopping prompted by Hall is just on the horizon.

V. Hall’s Failure to Recognize Sovereign Immunity Cannot Be Remedied by a ‘Side Agreement’

Lastly, the MTC considers the discrepancy in which states must enforce the tax judgments of sister-states’ courts while most countries are not likewise obligated under the “’revenue rule.’” Citing to the Supreme Court in Pasquantino v. United States, the organization notes “the ‘principal evil’ against which the rule was thought to guard as ‘judicial evaluation of the policy-laden enactments of other sovereigns.’” Additionally, the MTC argues that an agreement between states to recognize sovereign immunity would fail because of the hurdles involved—it would have to be universal and approved by Congress in order to be binding as federal law. However, not only would states withdraw at any time, the inherent competition present amongst states makes such an agreement unfeasible.

To date, the California Franchise Tax Board has filed its opening brief on the merits and the respondent’s brief is soon to follow in mid-November. With the addition of Justices Gorsuch and Kavanaugh now on the bench, it will be interesting to see how the Supreme Court decides. It is likely that the 4-4 tie reached in the two prior decisions will be broken this time around.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Does Hall pose a threat to interstate cooperation?

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