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By Ryan J. Voorhees
December 22 — This year was a busy one for the U.S. Supreme Court's constitutional state tax jurisprudence, according to leading tax professionals.
Jeffrey A. Friedman, a partner with Sutherland Asbill & Brennan LLP in Washington, and Richard D. Pomp, a professor at the University of Connecticut School of Law, offered insight on the year's developments during a Dec. 17 panel at the 34th Institute on State and Local Taxation hosted by the New York University School of Professional Studies.
At the forefront were three decisions handed down earlier this year: Direct Mktg. Ass'n v. Brohl, No. 13-1032, 135 S. Ct. 1124 (2015); Ala. Dep't of Revenue v. CSX Transp., Inc., No. 13-553, 135 S. Ct. 1136 (2015); and Comptroller of Treasury of Md. v. Wynne, No. 13-485, 2015 BL 152755 (2015).
The panelists observed that the high court's majority opinion in DMA dealt with a “narrow case,” but that Justice Kennedy's concurring opinion “set the state tax world on fire” in calling on the states to revisit Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Quill, the decision that 25 years ago established physical presence as the nexus standard with respect to sales and use tax, has increasingly come under fire as being out of touch with the modern economy (2015 Weekly State Tax Report 21, 12/4/15).
The panelists acknowledged that although Justice Kennedy's concurring opinion alerted the tax community to his thoughts, he would need three additional Justices' support to grant a petition to revisit Quill. Because none of his fellow justices joined him in his concurring opinion in DMA, it remains difficult to speculate on their positions regarding Quill’s continuing relevance.
“It could be that [other justices] agreed with Kennedy but thought it was inappropriate to raise this issue when it had nothing to do with the merits,” Pomp said. “I don't know—it's hard to get excited if it is a single-person concurrence.”
Even still, the panelists explained that states have accepted Justice Kennedy's invitation. In Alabama, effective Jan. 1, 2016, a new regulation asserts that an out-of-state retailer has a “substantial economic presence” in Alabama—and therefore must collect and remit use tax—if the retailer sells more than $250,000 of tangible personal property into Alabama and is doing business in Alabama (2015 Weekly State Tax Report 21, 12/4/15).
“Their definition of ‘doing business' is a very broad one and is likely to catch people who don't have a physical presence but satisfy the regulation,” Pomp said. “They want a test case.”
Indeed, the panelists noted that the Alabama Commissioner of Revenue has promoted on social media that the state is trying to challenge Quill.
However, Alabama's aggressive nexus claim “puts the people in this room in somewhat of a bind,” Pomp said. “Do [retailers] collect under a regulation that violates a Supreme Court case?”
The panelists next turned to CSX, an “interesting but complicated” competitive discrimination case in which the Supreme Court examined whether railroads are taxed more heavily than other industries (2015 Weekly State Tax Report 20, 3/6/15).
The issue before the Court in CSX was whether a discrimination analysis should focus on a particular tax type only or whether it should instead address all taxes imposed on the industry.
“When you examine this kind of discrimination under the federal statutes, do you look at just the tax being challenged, or do you look at the regime being placed on railroads, and the regime imposed on truckers, the regime imposed on boatpeople?” Friedman said. “Do you look at the totality of the taxes and consequences or just this specific tax?” The Court seemed to be endorsing the latter.
Pomp noted that the real issue is whether the methodology spills over into the commerce clause or even the Internet Tax Freedom Act, which uses the term “discrimination.” “Is what the Court said here about how to evaluate discrimination limited to the 4R Act, or does it have implications beyond? It is useful to claim that [the analysis] has implications beyond, and we'll be seeing those cases. But the Court has given absolutely no hint about what it was thinking.”
The panelists next discussed Wynne, suggesting that the justices' analytical struggle in that case was similar what it had been in CSX. “In Wynne, you had a battle between the majority and the minority in which some of the justices viewed [the case] as a tug-of-war between the source state and the residence state, and some of the Justices were focused on how much tax Wynne was paying to Maryland only,” Friedman said (2015 Weekly State Tax Report 14, 5/22/15).
Pomp compared Wynne—a case involving state law—to its international counterpart. “We basically teed off of the international pattern: residence [country] gives credit to source [country].” Even still, the panelists observed that Wynne was a “surprisingly close call” due to several justices' vigorous dissents.
The panelists opined that the Court's decision in Wynne leaves intact the internal consistency test's existing substantive analysis. “Anything that was inconsistent before Wynne is inconsistent post-Wynne,” Pomp said. “It adds nothing to our substantive understanding; it simply tells us that [the test] is alive and well.”
Friedman explained that, as the Supreme Court noted, the case involved an unusual fact pattern. “Almost every personal income tax has a sufficient credit. It is a rare bird to see a non-full credit like in Maryland's system.”
The panelists noted that after the Court handed down its decision, Maryland retroactively reduced the interest rate on refunds' interest component from 13 percent to 3 percent, but for purposes of Wynne refunds only. A class action is pending (2015 Weekly State Tax Report 25, 11/20/15).
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For a discussion of Congressional measures aimed at permitting states to tax remote vendors selling products on the Internet, see 1420-2nd T.M., Limitations on States' Jurisdiction to Impose Sales and Use Taxes, at 1420.06.E.8.
For a discussion of the prohibition against discriminatory railroad taxation, see 1810-2nd T.M., State Taxation of Transportation, Telecommunications, and Energy Companies, at 1810.05.G.
For additional discussion of the credit for taxes paid to other states and interest rates on refunds in Maryland, see Individual Income Tax Navigator, at Maryland 188.8.131.52.2 and Individual Income Tax Navigator, at Maryland 5.12.2.
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