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STATE & LOCAL TAXATION SPRING 2016 1.13.16 Class One Book Notes: Introduction Three Principal Limitations on SALT: o Federal constitutional limitations Commerce Clause (Art I) Import-Export Clause (Art 1) Privileges and Immunities Clause (Art IV) Due Process Clause (14 Am) Equal Protection Clause (14 Am) Supremacy Clause (Art VI) o Federal statutory limitations Power to regulate (via the Constitutional Commerce Clause) commerce with foreign nations and the states o State constitutional limitations General constitutional provisions that parallel federal provisions Tax-specific state constitutional provisions (uniformity clauses; e.g., Prop 13 in CA) Key Institutions in US SALT o State Departments of Revenue/Tax Commissions o Structure of State Tax Adjudication 28 USC 1341 o State tax courts o Multistate Tax Commission Central player in formulation of laws, regulations and administrative practices in SALT o Streamlined Sales Tax Governing Board SSUTA o State tax politics inside the Beltway Anatomy of a State Tax Case o Filing the tax return: the “return position” Allied-Signal o State administrative proceedings o State judicial proceedings o US Supreme Court proceedings Class Notes: Key Topics o Political/economic aspects of state taxation o State tax structures o Constitutional restraints on state taxation o Specific state taxes and issues State Tax Structures o No income tax AK, FL, NH (D&I), NV, SD, TN (D&I), TX, WA, WY o No sales tax AK, DL, MT, NH, OR 1.14.16 Class Two Statutory Issues: New Economy Travelocity Air BNB Netflix Xbox Live Dropbox Question: Should states be able to tax these businesses? Reality is that people’s perceptions of what is appropriate to tax is shifting Slides- Constitutional Issues STATE & LOCAL TAXATION SPRING 2016 Commerce Clause o Dormant Commerce Clause Commerce Clause- Q of whether Congress can implicitly restrict what the states do if what the states do has some effect on commerce Dormant Commerce Clause- balancing test of benefits and burdens (Pike Balancing Standard); states use different system Latent area where Congress has not exercised affirmative Commerce Clause power; saying a state has done something impermissible that affects interstate commerce Due Process o Personal jurisdiction o More? Equal Protection Clause Privileges Immunities Clause- theoretical limitation on state taxation Examples: o Amazon, Etsy, Ebay, KFC o Does NE have authority to collect sales tax on the stuff Amazon sells to us even though Amazon has no physical presence here? o Should board members of public corporations be taxed where they live or where they do their work (a different state)? Slides- Congressional Intervention Marketplace Fairness Act Remote Transactions Parity Act Business Activity Tax Simplification Act- business premise rule Mobile Workforce State Income Tax Simplification Act- addresses people working across state lines Internet Tax Freedom Act- prevents state taxes on internet access and discriminatory taxes on internet goods Slides- State Tax Administration (General) Notice of Deficiency Period to Appeal Final Assessment Challenge in court o Some states have tax courts Slides- Legislation Tax disputes can often be resolved through lobbying More effective/available at the state level Summary Slides- Tax Distribution Progressive Tax o Upper-income families pay a larger share of their incomes in tax than do those with lower incomes Regressive Tax o Requires the poor and middle-income to pay a larger share of their incomes in taxes than the rich o Consumes higher percentage of income of someone in lower income tax bracket Proportional Tax o Takes the same percentage of income from everyone, regardless of how much or how little they earn ITEP Report o Comparing types of taxes: averages for all states by tax o Income taxes are progressive tax (income increase = tax increase) o Federal offset of progressive tax amounts make a progressive tax amount look higher than it actually is (federal deductions for state/local tax payments- result is a reduction in the net out of pocket cost) o Effect of public assistance dollars If the money goes through the tax code, it will be reflected in the ITEP numbers STATE & LOCAL TAXATION SPRING 2016 o Shouldn’t assume that the state system is regressive, because when the federal tax system and the state tax system are combined, the resulting impact is a progressive system o Volatility Some argue that heavy reliance on a progressive income tax results in economic volatility Questions to Consider: What is a progressive tax? A regressive tax? What state taxes are generally progressive or regressive? The first two readings come from groups with very different political leanings. How do they differ in evaluating tax fairness? Do they necessarily disagree w/ the underlying data? o Note that the Tax Foundation Report takes into account the federal tax burden. Is that the correct way to evaluate this type of issue? What are the costs and benefits of doing so? How is the Nebraska tax burden allocated? What are the potential impacts of raising or lowering the state’s reliance on the personal income tax? 1.15.16 Class Three Chapter 2: Jurisdiction to Tax Quill Corporation v. North Dakota- constitutional limits on state taxing jurisdiction (sales & use tax) Facts: ND filed action to force Quill Co. (out of state mail-order office equipment retailer) to charge a ND use tax on Quill merchandise to be used within the state. State court ruled in favor of Quill, basing its decision on Bellas Hess (which held an IL statute was in violation of both federal DP Clause of the 14 Am and the Commerce Clause). ND Supreme Court reversed, basing decision on a rejection of Bellas Hess in light of the “tremendous social, economic, commercial and legal innovations” since the Bellas Hess decision. Note: This is the last time the Supreme Court has addressed taxing jurisdiction; many things in the world have obviously changed since then Prior to 1992, there was some existing law (Bellas Hess 1967) Bellas Hess: o A seller whose only connection w/ customers in the State is by common carrier or the US mail lacked requisite minimum contacts with the state (thus no taxing jurisdiction) Physical presence standard- must have more than mail presence o Constitutional provisions: Due Process Clause Dormant Commerce Clause Quill: o Statute clearly required a physical place of business in the state in order to collect tax from the consumer and ultimately remit it to the state o Trial court held for Quill, but ND supreme court held in favor of the state tax commission (shocking) ND court cites 3 main reasons for ruling against Quill: Increase in volume of mail orders Technology ∆ in legal landscape DPC ∆s Court says that these things, taken together, mean that the physical presence standard should no longer be relied on o Holding: Physical presence rule still applies for purpose of the dormant commerce clause (DPC has different standard); Court affirmed Bellas Hess o Section II: Two constitutional provisions at play (DP, CC); BH squished these provisions/clauses together (unclear) This segues into III and IV STATE & LOCAL TAXATION SPRING 2016 o Section III: DP discussion DP requires minimum contacts (Int’l Shoe), physical presence is no longer required under DP “No question that Quill has purposefully directed its activities at ND residents, that the magnitude of those contacts are more than sufficient for DP purposes, and that the use tax is related to the benefits Quill receives from access to the State.” DPC doesn’t bar enforcement of that State’s use tax against Quill Court barely discussed the use tax relating to the benefits received by Quill, so how does the court even come to this conclusion? Majority opinion doesn’t give us any guidance here; this leaves the Prong 2 analysis/answer might be somewhat open-ended. How does this apply to the Internet age? o Ask what the state is actually providing to an out of state retailer that justifies the opposition of the tax o Section IV DCC discussion “While contemporary CC jurisprudence might not dictate the same result were the issue to arise for the first time today, BH is not inconsistent with Complete Auto and our recent cases.” Complete Auto 4 Prong Test: o 1. Substantial nexus requirement o 2. Fairly apportioned o 3. Doesn’t discriminate against interstate commerce o 4. Fairly related to the services provided by the state Seems to resemble prong 2 of the DP test Why do we care about Complete Auto? o Because the state is arguing that Complete Auto decision undercut the Bellas Hess rule State’s argued timeline: Bellas Hess Complete Auto Quill (and thus Complete Auto undercuts BH) o Supreme Court, however, notes that different issues are involved. Says that Complete Auto got rid of some formalism regarding the tests used in these types of cases, but didn’t completely get rid of/void the BH rule. Court says that Complete Auto didn’t call BH into question. Rather, the focus is on the change in DP jurisprudence. Just b/c DP jurisprudence has changed doesn’t mean DCC jurisprudence has changed. FN 6: The ND use tax illustrates how a state tax might unduly burden interstate commerce On its face, the law imposes a collection duty on every vendor who advertises in the state three times in a single year. Thus, absent a Bellas Hess rule, a publisher who included a subscription card in 3 issues of its magazine, a vendor whose radio advertisements were head in ND on 3 occasions, and a corporation whose telephone sales force made three calls into the state, all would be subject to the collection duty. Theoretically, every state could impose obligations like this. In theory, the tax burden of buying something from a remote vendor, if they don’t collect the tax, the consumer has a tax obligation of its own to pay the use tax (theoretically) A remote vendor/company could potentially be subject to 10,000+ local/state taxing jurisdictions. This would be a logistical nightmare. DP nexus analysis- requires court to ask whether an individual’s connections with a state are substantial enough to legitimate the state’s exercise of power over him “Notice” or “fair warning” are the main premises of the DP clause (physical presence is no longer valid) Worried about the TP and subjecting them to taxing jurisdiction of a state STATE & LOCAL TAXATION SPRING 2016 CC nexus analysis- concerned w/ effects of state regulation on the national economy; prohibits discrimination against interstate commerce and bars state regulations that unduly burden interstate commerce Purpose of DCC is to limit state interference with national commerce Complete Auto focuses on this analysis NOTE: A tax may be consistent w/ DP and yet unduly burden interstate commerce! Deference to Congress (power and qualifications to deal with this) MAIN POINTS: DP is about fairness DCC, on the other hand, is a broader concern about our national economy o Complete Auto reflects these DCC concerns: Prongs 2 and 3 require fair apportionment and non- discrimination Prongs 1 and 4 require a substantial nexus and a relationship b/t the tax and state-provided services, limit the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce What does this mean practically? o Easier to meet the minimum contacts test o The practical effect of this is a divorce b/t the tests, meaning you could meet one requirement and not the other o Court favors a bright line test (even after denouncing formal tests), which is the physical presence test Bright line rule is more predictable, easier to rely on; stays with stare decisis However, court concedes that the rule is “artificial on its edges”, meaning what exactly? In reality, having a physical presence or not doesn’t really burden the national economy. The physical presence test creates a clear rule with boundaries. Easier to advise clients (“If you touch the state, you pay tax. If you stay out, you don’t have to pay tax.”) Court doesn’t seem too stoked about its physical presence rule. Needed a test and this probably isn’t the best one, but it’s the one in play right now and if Congress doesn’t like it, they should change it. Supreme Court maintains that BH is good law; disagrees with the ND supreme court’s conclusion that the time has come to renounce the bright-line test from BH o Concurrence (Scalia, Kennedy, Thomas) Court should have just relied on stare decisis instead of examining prior cases at such length o Concurrence/dissent (White) BH deserves to be buried; Court should’ve the part of BH that justifies its holding under the CC Fraud protection No similar protection in place for competitors (mail order sellers have a tax shelter) Calls out the majority for keeping the rule out of convenience, and not doing any analysis of benefits and burdens Additional Points/Recap: o Due Process: Minimum contacts/purposeful availment/civil procedure No physical presence standard o Dormant Commerce Clause: STATE & LOCAL TAXATION SPRING 2016 Complete Auto Test 1. Substantial nexus b/t TP and taxing state (deal with other prongs later) o Substantial nexus requires a physical presence, at least for purposes of sales tax (at least as recently as 1992) Tyler Pipe Industries Inc. v. Washington State Department of Revenue (1987)- substantial nexus Question: Can somebody else (an agent) create the physical presence for nexus purposes, or do you have to walk across state lines and be physically present yourself Facts: Company has an independent contractor in Seattle that works specifically on one K for Tyler Pipe. The company had no office, employees, anything in the state. The independent contractor did work that was “important” to the company and their business. Arguments: o Tyler Pipe (company) arguing no physical presence: Cite to 1960s Scripto case- held that a company can’t disown the employee Applied: The fact that this is an independent contractor instead of an employee is not of constitutional significance (look at facts) o WA argument: Ask whether the 3 party (agent) is significantly associated with the TP’s ability to establish and maintain a market in the state for the sales Standard satisfied if the company’s sales reps perform any local activities necessary for maintenance of the company’s market and protection of its interests Amazon/Overstock v. New York State Dep’t of Taxation and Finance Overview: Amazon is challenging the constitutionality of NY’s new “Amazon law”, designed to force out-of-state Internet retailers like Amazon to collect NY use tax on their sales to NY residents Statute: o If you are in an agreement with a resident of the state, under which the resident (for a commission/consideration) directly or indirectly refers other customers to the seller via link if your accumulative receipts exceed a certain amount, you are deemed to be doing business in the state Subsequent memos issued by NY showed how a party could rebut the presumption o This highlights the reality of tax implementation Difference b/t soliciting and advertising o Soliciting involves more of a bilateral relationship b/t the agent and the company (not simply passively posting an ad) Cite to Complete Auto o Used 4 prong test; only prong at issue is whether the statute fits the substantial nexus standard Changing nature of the marketplace o Internet companies can easily get to remote areas w/o having any physical presence. However here, this statute is limited to those companies that are compensating agents to solicit on behalf of the company. o The agents meet the physical presence test and thus the NY statute is not unconstitutional Legal realism “moment” o Court reminds that the money isn’t even coming out of pocket; the tax just has to be collected from somewhere o The “tax” is not out of their (Amazon’s) pocket Impact of Amazon: o Companies set up different arraignments to avoid having a physical presence LB 1087 (2016) 1.27.16 ABSENT (SICK) Class Six Assignment: p. 50-51, Marketplace Fairness Act of 2015, questions STATE & LOCAL TAXATION SPRING 2016 1.28.16 Class Seven Assignment: p. 51-65 (through Note A); skim excerpt from The Illusory Promise of Economic Nexus (get an idea of where the concept of economic nexus is among the states; don’t need to learn/memorize states’ particular formulations) Tax Commissioner of WV v. MBNA America Bank Facts: MBNA, nationally chartered bank, maintained no employees or property in WV during the tax years at issue. Issue: Whether state (WV) can impose corporate income, franchise tax on an out-of-state retailer that has no physical presence in the state Discussion: o Court has to address whether/why Quill is dispositive of this case o State court decided that Quill did not apply for purposes of the income tax (Quill not binding in this case) o Think back to Quill… At the time of Quill, the court noted that its decision was based primarily on stare decisis (however valid that was given the times/circumstances). Heavy reliance on the mail order industry also played a role in the outcome. o Court addressed whether the DCC of the Constitution prohibits the (state) from imposing its business franchise or corporation net income taxes on a corporation w/o physical presence in the state. Holding: The physical presence requirement of Quill was limited to sales and use taxes and did NOT extend to (state’s) business taxes. o Four rationales: 1. Court felt that the primary reason for Quill’s re-affirmance of the physical presence standard (from Bellas Hess) was primarily driven by stare decisis rather than the Court’s strong agreement w/ the PP standard 2. Court found that its holding in Quill applied to sales and use taxes only 3. The application of the PP requirement makes particular sense in the sales and use tax context b/c of the administrative complexity of complying w/ the sales and use tax regulations in multiple regulations. Thus, the PP requirement in this context prevents an undue burden on interstate commerce, b/c the corporation net income tax and the business franchise tax are collected annually directly from the corporation, rather than (like sales and use taxes) monthly (usually on a pass-through basis). Relied on dicta from Nat Geo case 4. The PP requirement is unworkable in the current economy. When BH was decided in late 60’s, it was difficult for a corporation to do business in a state w/o maintaining an office of an employee in state. o So, what approach should be taken? Significant Economic Presence Test- Nobody actually knows what this standard requires. In this case, they met the standard b/c of the income the corporation gained from WV consumers ($10 million) Based on the facts of this case, court had no trouble concluding that the corporation’s systematic and continuous business activity in the state produced significant gross receipts attributable to (state) customers, indicating a significant economic presence that satisfies the requirements of the Commerce Clause. o MBNA (counter) Arguments: 1. 2. Not applying the PP rule is to only apply the DP analysis, which is improper b/c the two standards/tests are mutually exclusive as determined by Quill Dissent: o Argues that there is NOTHING to support the court’s decision o The DCC is arguably intended to protect against undue burdens STATE & LOCAL TAXATION SPRING 2016 o Basically angry about many things o Why would you bring up Complete Auto if you already mentioned/said that Quill was sales and use tax (and thus not applicable) o Arguably merging the DP and interstate commerce clause tests “The Illusory Promise of Economic Nexus” Even though there is a standard (economic nexus), there is no clear formulation as to what that standard is Question: Is it right to conclude that Quill is limited to sales and use taxes? Thoughts: SCOTUS continues to deny cert for Quill-like cases, but Kennedy has taken up sales and use tax cases What does the court do to replace the physical presence rule? If you’re the SC and want to go the MBNA route, does there have to be something more than significant economic presence? o Thimmesch: Unless you can come up with a concrete replacement for the physical presence rule, it will be difficult to scrap it. West Virginia Tax Commissioner v. ConAgra Brands, Inc. Legal Landscape: States had a number of victories in this realm, but ConAgra case was a win for the company. Procedure: Circuit court held that ConAgra’s licensing transactions didn’t constitute doing business in WV and that the assessments (of corporation net income tax and business franchise tax) failed to meet the requirements of the DP and Commerce Clauses. o WV Court of Appeals (this action)- affirmed circuit court (which set aside the decision of the WV Office of Tax Appeals) Facts: ConAgra Foods owns ConAgra Brands, which deals with all of their trademarks and trade names (primarily food brands). CA Brands doesn’t have any real connection to CA Foods (manufacturing, products, etc.). Money flows from the store that sells the food to CA Brands (paying to use the CA license), which pays CA Foods. o Given these facts alone, we would say that CA Brands has no physical presence in WV. Discussion: o “In the current matter, CA Brands did not engage in the solicitation noted in MBNA.” o CA Brands argument: We just deal with licenses. We have no idea where the stuff is sold. “The licensees, rather than CA Brands, sold or distributed the products bearing the trademarks and trade names to wholesalers and retailers located in WV, and the licensees provided services in WV to those clients and customers.” o Cases cited: Geoffrey, Inc. v. South Carolina Tax Commission: Supreme Court of SC held that a tax on a foreign corporation’s apportioned income from royalty payments violated neither the DPC nor the CC. Although Geoffrey, Inc. (a DE company) had no physical presence in SC, the Toys R Us company expanded into SC and engaged in business there. In upholding the tax on the royalty payments received by Geoffrey, Inc., the SC in SC found purposeful direction by Geoffrey and minimum contacts for DP purposes and substantial nexus (as required under Complete Auto) for purposes of the CC KFC v. Iowa Department of Revenue: Supreme Court of IA rejected a challenge under the CC to an income tax assessment against KFC (DE corporation) KFC’s primary business was licensing its KFC trademark “and related system” to independent franchisees, including franchisees operating restaurants in IA. Issue: Whether Iowa can tax the franchisor (main KFC) even if they don’t have a plant, store, etc., in the state? Court said yes (the franchisees were “firmly anchored within the state”) KFC Franchise = economic nexus o Back to ConAgra… STATE & LOCAL TAXATION SPRING 2016 “As recognized in Quill, a corporation may have the minimum contacts with a taxing state required by the DPC but lack the substantial nexus with that state required under the CC Court held that “assessments against a foreign licensor for WC corporation net income and business franchise tax, on royalties earned from the nation-wide licensing of food industry TMs and trade names, satisfied NEITHER purposeful direction under the DPC nor significant economic presence under the CC, where the foreign licensor, w/ no physical presence in this State, did not sell or distribute food- related products/provide services in WV…(continued)” Public Law 86-272 Main effect: To deny the states the power to impose taxes on or measured by net income derived within the state from interstate commerce if the “only business activities carried on within the State” are the solicitation of orders for sales of tangible personal property, where the orders are sent outside the state for approval or rejection and are filled by shipment or delivery from a point outside the state. When does it apply? o Is it an income tax? o Is it the sale of tangible personal property? o Is there solicitation? Related to independent contractors: o If IC is making the sale in the state, still protected by the PL (but can still be subject to sales and use taxes) o If the agent has to send the deal/K to the “boss” at headquarters, then not immune Wrigley Opinion- What is solicitation? Note C- Multistate Tax Commission o Issue guidelines that states can implement o List of things not protected by PL 86-272 Nexus Overview (chart on 103) STATE & LOCAL TAXATION SPRING 2016 CHAPTER 3: REGULATION OF INTERSTATE & FOREIGN COMMERCE To this point, we’ve covered the substantial nexus portion of the commerce clause issues. Complete Auto Prongs: Prong 1: Substantial Nexus Prong 2: Fair Apportionment Prong 3: Non-discriminatory Prong 4: Fairly related to benefits afforded to TP by the state Norfolk and Western Railway Company v. Missouri Tax Commission Facts: NW leased property primarily in MO. A majority of the track and rolling stock were in VA, WV, and KY, some in MO. Relatively more of the track was in MO than the rolling stock. Statute gives formula for how to assess the rolling stock. o Mileage Formula: Total value ($500M) x 47% = $250M x 8% (total amount of track owned by company) = $20M Issue: Whether the tax assessment imposed on NW Railway is constitutional Holding: The tax assessment imposed by the state violates the DPC and CC Court: o This is not a minimum contacts issue. o DPC arguments Issue over the taxation of property that is outside the state, which inherently violates DP Enhanced value theory- w/o the ability to pass b/t states, your value is not as high; multi-state enterprises contain assets that sort of enhance the value of the other assets. Thus, because of this greater value, the state isn’t limited to just taxing the value of the (stuff) physically in the state. The stuff in the state is worth more, and thus should be able to be taxed more. Court cites its own Pullman Co. v. Richardson, which upheld the taxation of enhanced value o Multiple formulas allowed Rule: Any formula used must bear a rational relationship, both on its face and in its application, to property values connected with the taxing State. Facial or as applied challenges to formulas are allowed Assessing “rational relationship”, company is required to show a gross overreach o Railway’s Arguments: The total amount of rolling stock owned by the company (as a % of all rolling stock owned) in MO was actually 2.7%, not 8% Lease information- NW leased the track, etc. from Wabash. The previous year, the property was assessed at $9M. This is clearly much less than the $20M it got assessed at this year (“a grossly distorted” amount) o State Arguments: Enhanced Value Theory RR Counter: The density on the MO tracks was only 54% of the density of their tracks as a whole RR Counter: The RR’s primary business is coal, which takes place in states other than MO. The enhanced value theory doesn’t hold much weight in light of this; also, the specialized equipment required for coal mining never entered MO; also, the stuff in MO is the stuff that NW leased from Wabash (which was clearly stuck in MO and not traveling elsewhere) o There is still some enhanced value, but the enhanced value is not really related to what is going on in MO. o Note: Court pointed out how rare it is for a company to meet to burden of showing a gross overreach of the state’s taxing power o Thimmesch: STATE & LOCAL TAXATION SPRING 2016 Easy for a state to measure tangible property/equipment/etc. In the modern world, fair apportion cases are much more difficult to figure out. How do you measure the flow of data and information across state lines? How do you apportion Google’s income it derives from its operations on everybody’s computer? Complete Auto Prongs: Prong 1: Substantial Nexus Prong 2: Fair Apportionment Prong 3: Non-discriminatory Prong 4: Fairly related to benefits afforded to TP by the state Camps Newfound/Owatonna, Inc. v. Town of Harrison Facts: Camp is a ME nonprofit corporation that operates a summer camp for the benefit of children of the Christian Science faith. About 95% of the campers are not residents of ME. It finances its operations through a $400/per camper weekly tuition charge. ME’s tax scheme exempts charitable institutions incorporated in the state, and provides a more limited tax benefit for institutions which principally benefit non-ME residents so long as their weekly service charge doesn’t exceed $30/person. The camp was ineligible for any exemptions, and challenged the constitutionality of ME’s tax exemption statute. Procedure: US Supreme Court granted cert following a reversal of a favorable ME Supreme Court ruling Issue: Whether a generally applicable state property tax violates the Commerce Clause because its exemption for property owned by charitable institutions excludes organizations operated principally for the benefit of nonresidents Court: Yes. The statute/tax violated the DCC since it selectively awarded greater tax benefits to those institutions which served mostly state residents, while penalizing institutions that conducted mostly interstate business. Discussion: o By imposing such selective benefits on a commercial activity in which it did not directly participate, the tax was an unconstitutional form of economic protectionism favoring local consumers and business providers. o Section II: History of DCC This issue hasn’t been considered by the court before o Section III: TP’s want this activity to be interstate commerce, and the state does not want it to be interstate commerce Court: Unpersuaded by Town’s argument that the DCC is inapplicable here, either b/c campers are not “articles of commerce,” or more generally b/c the camp’s “product is delivered and ‘consumed’ entirely within Maine.” The services that the camp provides to its principally out-of-state campers clearly have a substantial effect on commerce, as do state restrictions on making those services available to nonresidents. Applied Heart of Atlanta case (“Even when business activities are not purely local, if it is interstate commerce that feels the pinch, it does not matter how local the operation which applies the squeeze”) TP Argument- The DCC in inapplicable b/c a real estate tax is at issue Court: Disagrees. A tax on real estate, like any other tax, may impermissibly burden interstate commerce. o DCC stems from the existence of the CC. Town argue that Congress couldn’t have imposed a local real estate tax under the CC (affirmative CC). Court doesn’t want to get into this distinction. The label of the tax doesn’t matter; either way, there is a potential burden on interstate commerce here. In sum… STATE & LOCAL TAXATION SPRING 2016 The exclusion from the real estate tax for charities not benefiting ME residents is part of interstate commerce This is subject to the DCC o Section IV: Court: Were this statute targeted at profit-making entities, it would violate the DCC. The ME statute clearly distinguishes b/t entities that serve a principally interstate clientele and those that primarily serve an interstate market, singling out camps that serve most in-staters for beneficial tax treatment, and penalizing those camps that do a principally interstate business. Statute provides a strong incentive for affected entities not to do business w/ nonresidents if they are able to so avoid the discriminatory tax (which ultimately affects interstate commerce) Tax Incidence Analysis Tax effect trickles down; under the law, look at who is paying the tax and who is actually bearing the burden of the tax (who is “paying” and who is actually paying) Town didn’t try to make a per se argument. To do so, it would’ve had to demonstrate that it (the law) “advances a legitimate local purpose that can’t be adequately served by reasonable nondiscriminatory alternatives.” If the camp were a profit-making entity, the discriminatory tax exemption would be impermissible Putting a burden on a company that serves out of state residents, and placing that burden solely b/c they are serving out of state residents, creates a situation that is most clearly discriminatory o Section V: City has to think of ways the tax statute can get out of the constitutional analysis Just because this is a non-profit does not mean that the business is outside the scope of the DCC or CC o Section VI: A direct subsidy would have been fine. The town argues that this tax exemption has the same impact. Court points out distinction from Walz case (subsidies are treated differently than exemptions; note- a church can get an exemption, but not a subsidy) Market Participant Doctrine: A state can act as if it is operating in a market (not as a sovereign government) and thus not subject to DCC restrictions Court says this does not apply here for two reasons: o 1. No proprietary interest State wasn’t operating the camp or buying camping services Cuno v. Daimlerchrysthr, Inc. Overview: 6 Circuit examined the validity of tax incentive programs which encourage businesses to remain in, expand in, or move to a particular state. Facts: o DC agreed to build a new vehicle-assembly plant in an economically depressed area of Toledo which represented an investment of $1.2 billion and the creation of thousands of new jobs. In exchange, the state, city and some school districts provided DC with a tax incentive package that included a 13.5% franchise tax credit against the business’s state franchise tax liability and a 10-year, 100% personal property tax exemption for equipment and machinery bought for use at the new facility. The total value of the tax incentive package was estimated at $280M. o A group of individual TPs and small business owners sued, claiming that the tax credit and exemption violated interstate commerce and the OH EPC o Investment Tax Credit- Grants a TP a non-refundable credit against the state’s corporate franchise tax if the TP “purchases new manufacturing machinery and equipment during the qualifying STATE & LOCAL TAXATION SPRING 2016 period, provided that the new manufacturing machinery and equipment are installed in OH.” Gave corporation a tax credit against its state corporate franchise tax liability o Personal property tax exemption Issue: Whether OH’s method for encouraging new economic investment- conferring investment tax incentives and property tax exemptions- discriminates against interstate commerce Holding: Court struck down the investment tax credit Court: o Cite to Boston Stock Exch. v. State Tax Commissioner Held that the federal CC “limits the manner in which states may legitimately compete for interstate trade” o Cite to Maryland v. Louisiana o Cite to Westinghouse Electric Corp. v. Tully Court invalidated a NY franchise tax that gave corporations an income tax credit based on the portion of their exports shipped from NY Giving an incentive to one and not the other is effectively bad (benefitting one and effectively harming the other) o Investment tax credit is discriminatory because it disadvantages out of state businesses o Personal property tax exemption is not unconstitutionally discriminatory Why? The exemptions don’t raise issues if the conditions on getting the exemption are related to the use/location of the property Have to buy property and place it in service in the right area in order to get taxed on it (obviously) Court makes distinction…wouldn’t have had the tax at all w/o purchasing/servicing the property. Buying the property in another state would obviously not result in an OH tax. o The exemption offsets a brand new tax liability Notes: o Economic equivalency sometimes controls, while formal approaches control in other situations depending on the circumstances Complete Auto Prongs: Prong 1: Substantial Nexus Prong 2: Fair Apportionment Prong 3: Non-discriminatory Prong 4: Fairly related to benefits afforded to TP by the state Commonwealth Edison Co. v. Montana Facts: Severance tax on coal (taxed when the natural resource is severed from the earth) o Tax schedule is based on the value, energy content, and method of extraction o The MT coal producers and utility companies are unhappy about this Issue: Whether the tax MT levies on each ton of coal mined in the state violates the Commerce and Supremacy Clauses Holding: The MT severance tax does not violate the Commerce Clause or the Supremacy Clause Discussion: o This is interstate commerce because it relates to the sale of coal outside of the state Even though the activity is purely intrastate activity, it still implicates the national economy and thus the DCC and CC are implicated o TPs base their claim (unconstitutional) on the fact that the burden of the tax is borne on people out of state (and thus violates CC) o Court recognizes that the activity here is peculiar… Did the legislature intend to avoid classifying this as an income tax rather than a severance tax b/c it knew the severance tax would be borne but out of state TPs? Nothing in the statute favors in-state vs. out-of-state commerce STATE & LOCAL TAXATION SPRING 2016 So, no discrimination o Fair Relation Prong: This is a fairly weak prong, but there are some valid underlying rationales (at least the court speculates so) TP is arguing that the tax is not related to the benefit. In other words, the tax is greater than the benefits provided by the state (Tax > Benefit) This seems like a rationale argument, but the court rejects it: o When MT imposed this tax, they were trying to get compensation for the services they were provided to the TP (intent of the MT severance tax) o Even if MT tax wasn’t intended to have this effect, the constitution requires that the tax must be compensation for the services provided (the court rejects this) Court accepts the MT Supreme Court’s holding that the severance tax is “imposed for the general support of the gov’t” There is a difference b/t a fee or user charge and a tax; the $ here went to a general fund Court rejects comparing the exact benefit received from the tax paid; instead, looks at this on a more general level Not actually comparing the relationship b/t the tax imposed and the benefits/services provided. So, what is the test then? Is the measure of the tax reasonable related to the extent of the contact? o Here, the tax on the severance of coal is fairly related Hints at fair apportionment prong/issue Why does the court go with this rule? o Doesn’t want to calculate exact numbers o This is a matter better handled by commerce Concurrence (White): o Same quote from Quill- Congress is the appropriate body to be handling these issues Notes: th o As nexus decreases, brings into question whether the 4 prong will be rejuvenated/protect taxpayers The Complete Auto Test- Commerce Clause Goldberg v. Sweet Statute: Telecommunications Excise Tax Act imposes a 5% tax on the gross charge of interstate telecommunications (1) originated or terminated in IL and (2) charged to an IL service address, regardless where the telephone call is billed or paid o What matters is whether the call began or ended in IL. If it does, and it is charged to an IL address, the tax is imposed. There is an identical 5% tax imposed on intrastate calls (within IL) o Act provides a credit to any TP upon proof that the TP has paid a tax in another state on the same phone call which triggered the IL tax Can’t be charged twice for the same call; if you can prove that you’ve been taxed twice (taxed by both IL and another state), you get a credit Prong 1: No nexus challenge. Why? o Both parties agree that IL has substantial nexus over the calls b/c the calls are in the state o Not protected by the Public Law; no tangible item Prong 2: Fair apportionment o TP argue that the tax is not fairly apportioned b/c IL taxes the gross charge of each phone call o To be apportioned, would have to tax all of what amount was charged (no effort to split the tax among the jurisdictions where the income was actually earned) o Here, if there is no apportionment, how can there be a fair apportionment? Personal income taxes are often not apportioned (tax everything we earn) One way to get some element of apportionment is the tax credit If every state had IL taxing structure, would it procure the same result? STATE & LOCAL TAXATION SPRING 2016 Under internal consistency, a hypothetical tax structure is created to give every state the exact same tax structure, and if under this structure the tax would be imposed multiple times, then it doesn’t fly (every interstate phone call would be taxed multiple times and would thus violate interstate commerce) o Taking our tax statute and comparing to other states o A mechanical inquiry Does the court care if there is actual double taxation? o Not really; weird that the court even mentions it/creates a test if they don’t care about it o If the state is looked at in isolation, ask if the tax is internally consistent (if every state did what you’re doing, would there be double taxation?) o The result of this doesn’t necessarily make sense; hypothetical double taxation can be unconstitutional under fair apportionment, BUT actual double taxation is fine (this is a mess). o Constitutionality depends on what other states do, which troubles the court (b/c then the court doesn’t know that what it alone is doing is fine, but in comparison with other states, what it’s doing is wrong) Each individual state could pass internal consistency, but it would result in double taxation (again, a weird result) o External Consistency Test (second test inside the Fair Apportionment Prong) Asks whether the state has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed. Examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity A practical look at what is going on in the state and whether the apportionment method is being achieved A more vague approach Credit Component Even if two states tax the activity, IL is going to get its tax $, then pay back to the TP the double charges TP receives from the other state(s) Because IL allows the credit, court isn’t concerned with the double taxation issue Here, there is no problem under the External Consistency sub-prong Applied to RR case: Would say that the tax wasn’t fairly apportioned b/c on its face the tax was fine, but the measure of the tax was not reasonably related to the activity being taxed. Court made a practical inquiry (wouldn’t have met External Consistency) Prong 3: Discrimination o Prohibits a state from imposing a discriminatory tax on interstate commerce o Cite to Scheiner case: Court held that “in its guarantee of a free trade area among the states, the CC has a deeper meaning that may be implicated even though state provisions do not allocate tax burdens b/t insiders and outsiders in a manner that is facially discriminatory.” Held that PA’s flat taxes on the operation of all trucks on PA highways imposed on a disproportionate burden on interstate trucks, as compared with intrastate trucks, b/c the interstate trucks traveled fewer miles per year on PA highways. BUT- DCC does protect in-state residents (protects interstate commerce, regardless of whether the harmed party in from inside the state) o Here, an out-of-state party is being affected- the other state’s business; the out-of-state buyers of NE services are being discriminated against o Second point: the exact path of thousands of electronic signals can’t be traced/recorded This seems to fit more with fair apportionment STATE & LOCAL TAXATION SPRING 2016 o Outcome: The tax doesn’t discriminate in favor of intrastate commerce at the expense of interstate commerce No favoring in state or out of state businesses or consumers Prong 4: Fairly Related o Purpose is to ensure that a state’s tax burden is not placed upon persons who do not benefit from services provided by the state o Cite to Commonwealth Edison: Not looking at the specifics; look at the general benefits from society Test: Is the measure of the tax reasonably related to the activity occurring in the tax (similar to External Consistency) This prong focuses on the wide range of benefits provided to the TP, not just the precise activity connected to the interstate activity at issue Main Points: o Rehash of the Complete Auto Test o Introduces (Prong 2) Internal/external consistency tests o Reality- there aren’t really clear boundaries; the tests aren’t super clear (just judicially created doctrine) STATE & LOCAL TAXATION SPRING 2016 CHAPTER 4: THE CONSTITUTIONAL REQUIREMENTS OF EQUALITY AND UNIFORMITY A. State Constitutional Uniformity and Equality Clauses a. Introduction b. Scope of State Uniformity and Equality Provisions Class Notes: Neb. Const. Art. VIII, § 1 Ensuring that like-properties are being valued in like-ways Special rules for personal property, motor vehicles, livestock, agricultural land (taxed at 75% of its value) Equal Protection Analysis: Means Ends Rational Basis Test I. Rationally Related Any legitimate state interest Intermediate Scrutiny Test II. Substantially Related Important governmental objective Strict Scrutiny Test III. Necessary- Least Restrictive Compelling state interest Means- Narrowly Tailored Constructors Inc. v. Cass County Board of Equalization TPs, whose properties were assessed at a higher value b/c of mineral interests lying beneath their land, sought review of county board of equalization’s decision affirming increased assessments. Holding: The valuation scheme which created differential tax treatment b/t farmland controlled by mining companies and similar farmland not controlled by mining companies violated uniformity clause How these property taxes work: o Local appraiser goes in and evaluates (local assessor sets valuation) o Can challenge to a review board. Here, the review board affirmed the county’s decision (not shocking). o VERY deferential to the review board (presumption that the review board has not acted arbitrarily and capriciously Uniformity does NOT require mathematical precision/exactness. Instead, must have a reasonable attempt (reasonable allocation of the values) There can be differences if they rest on reasons of public policy. If public policy or some natural circumstances that suggest the property should be treated differently, then the differential treatment might be ok. Fitzgerald v. Racing Association of Central Iowa Facts: Group of racetracks (Prairie Meadows Racetrack and Casino) that earn revenue from gambling sued Iowa, claiming that the state’s tax on racetrack gambling at a higher rate than riverboat gambling violated the EPC. Group asserted that gambling at racetracks and riverboat casinos is not substantially different, and that the state should tax them the same. Procedure: District court sided w/ the state (said important differences exist); Iowa Supreme Court reversed. Issue: Whether different tax rates levied against racetrack and casino gambling violate the EPC Court: No- the differential tax rate (which distinguishes b/t adjusted revenues from slot machines at racetracks and revenues from riverboat slot machines) does not violate the EPC. o Rational basis review Class Notes: o Alleged lack of distinction b/t racetracks and riverboats Riverboats taxed at 20%, racetracks taxed at 36% o Not protected classes, so under rational basis review. Here, the legitimate gov’t interest is helping racetracks in a time of economic need (allowing them to have the slot machines was supposed to help them, regardless of the tax rate they were subjected to) o Possible legitimate state interests: Might want to encourage economic development of river communities or to promote riverboat history STATE & LOCAL TAXATION SPRING 2016 Might want to protect the reliance interests of riverboat operators, whose adjusted slot machine revenue had previously been taxed at the 20% rate o On the flip side, the racetracks argued that the purpose/interest of the gov’t was to help them (which is what the IA Supreme Court went along with). Asked why the law was passed (here, passed to get the slot machines). So if the state interest was to get slot machines at racetracks, then the purpose of the law hasn’t been fulfilled and thus no rational basis for the tax differ
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