Will a U.S. Supreme Court Decision on Due Process Kill Economic Nexus?

The U.S. Supreme Court recently decided a due process and jurisdiction case that clarifies where a defendant could be subject to suit.  The implications of the ruling and recent other high court decisions in other disputes over jurisdiction could extend to states’ taxable nexus determinations.

In the case, Daimler AG v. Bauman, U.S., No. 11-965, 1/14/14, Argentine plaintiffs sued a German parent company for activities that occurred in Argentina, and the plaintiffs brought the case in California, where the parent had an American subsidiary. At issue is whether due process prevents a state court from exercising general personal jurisdiction over a non-U.S. corporation based solely on the fact that an indirect corporate subsidiary performs services on behalf of the defendant in the forum state. And the court’s answer is yes, due process does prevent that.

This decision has clarified the court’s 2011 ruling on general jurisdiction in Goodyear Dunlop Tires Operations, S.A. v. Brown, 131 S. Ct. 2846.  In Goodyear, the court held that a state court may assert general jurisdiction over a foreign corporation to hear any and all claims against it only when the foreign corporation’s affiliations with the state in which the suit is brought are so constant and pervasive as to render it essentially at home in the forum state. In Daimler, the court concluded that Daimler is not “at home” in California and cannot be sued there for injuries that plaintiffs attributed to the conduct of the German parent company’s Argentine subsidiary in Argentina.

“At home” essentially means the company’s connections to the state are as if the company is headquartered there, said Leah Robinson, partner at McDermott Will & Emery in New York.  She said a party that meets the general jurisdiction standard then by analogy meets the “doing business” standard, and can be subject to tax.

In recent years, taxpayer advocates have been particularly attuned to the U.S. Supreme Court due process jurisprudence regarding a state court’s right to impose general jurisdiction over a foreign defendant. Another non-tax related decision in this area, which some believe has favorable implications for multistate taxpayers, is J. McIntyre Machinery LTD v. Nicastro, 131 S. Ct. 2780 (2011) .

Daimler, written by Justice Ruth Bader Ginsburg and joined by seven others, reversed the Ninth Circuit Court of Appeals decision that allowed the German parent company to be sued via its American subsidiary in California.  “Such exorbitant exercises of all-purpose jurisdiction would scarcely permit out-of-state defendants ‘to structure their primary contact with some minimum assurance as to where that conduct will and will not render them liable to suit,’” the opinion states.

In the past, Robinson said, advocates and courts in state tax disputes spent a lot of energy on commerce clause arguments. Due process was a “throw away” argument, but that has changed in recent decisions.

“I think the Supreme Court is reminding us that due process is alive and well and it’s important,” Robinson said.

One thing to watch, Robinson said, is the interplay of due process and economic nexus in situations where the only connection a company has in a state is customers.  Robinson said pure economic nexus does not pass the standards set by the Supreme Court, and now several states have economic nexus standards.

“I think all of those are really going to become suspect when one thinks about due process,” Robinson said.

Continue the discussion on Bloomberg BNA’s State Tax LinkedIn Group: How do you think this decision will impact economic nexus doctrine?

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