Source: http://taxexecutive.org/practical-application-of-constitutional-limitations-a-road-map-to-future-success/
Timestamp: 2019-04-19 02:54:34+00:00

Document:
In the wake of the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc., taxpayers have sought practical approaches to challenges under the significant remaining constitutional limitations on the authority of states to tax interstate commerce. In Wayfair, the U.S. Supreme Court put two large stakes in the ground. First, it held that the U.S. Constitution does not require a physical presence in a taxing state as a prerequisite to the state’s imposition of a sales and use tax collection obligation on an out-of-state seller.1 Second, the Court reaffirmed each of the constitutional limitations on the authority of states to tax interstate commerce under the Due Process Clause and the Commerce Clause.2 This article examines these limits and provides practical considerations with respect to state and local tax controversy and litigation.
Question: What constitutional challenges remain for taxpayers to battle overreaching state taxing schemes post-Wayfair?
In addressing the constitutional limitations on state taxation, the Wayfair Court reaffirmed the “now-accepted framework for state taxation” that the Court previously explained in Complete Auto Transit, Inc. v. Brady.3 Under the Complete Auto framework, a state tax will be sustained only if “the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.”4 These four independent constitutional requirements provide the goalposts for taxpayers seeking to challenge a state’s taxing scheme on constitutional grounds.
Therefore, the substantial nexus requirement will not be satisfied when an out-of-state person simply targets the U.S. economic market generally or when it is merely foreseeable that the person’s goods will end up in the state seeking to impose the tax. Instead, the U.S. Constitution requires that the out-of-state person’s activities be specifically targeted to the state seeking to impose the tax.
The Court has also explained that a state may assert jurisdiction over an out-of-state person based only on that person’s “own affiliation with the State” and not based on “‘random, fortuitous, or attenuated’ contacts he makes by interacting with other persons affiliated with the State.”8 Under that standard, the substantial nexus requirement will not be satisfied when an out-of-state person’s only connection with a state seeking to assert jurisdiction is its interactions with third parties who have connections with the state. Rather, only the activities of the out-of-state person itself may create a substantial nexus with the state seeking to impose the tax.
By overruling only the bright-line physical presence rule, Wayfair did not eliminate the substantial nexus requirement, but instead endorsed an approach that considers the specific facts and circumstances in each case. Under this approach, state overreach in connection with state attempts to assert jurisdiction to tax out-of-state persons remains a ripe area for constitutional challenges.
The Wayfair Court remanded the case to the lower courts inasmuch as “[t]he question remains whether some other principle in the Court’s Commerce Clause doctrine might invalidate the [South Dakota law].”12 Therefore, the Court made clear that the other constitutional limitations in the Complete Auto framework still apply and still can provide the basis for a successful constitutional challenge to a state’s tax scheme.
Each of these other constitutional limitations is unaffected by the Court’s Wayfair decision, and state tax schemes that do not adhere to these additional limitations are likewise ripe for constitutional challenges.
Next, does the subsidiary satisfy the substantial nexus standard as articulated in Wayfair? Although the subsidiary has narrowly exceeded the safe-harbor threshold amounts, has the subsidiary purposefully availed itself of the benefits of doing business in State A? Further, assume that the subsidiary is a non-U.S. entity that maintains a website outside the United States and ships tangible property from overseas to purchasers in the United States. Has that subsidiary actually targeted the United States with its activities at all and, if so, has the subsidiary specifically targeted customers in State A? Does the potential imposition of sales and use tax collection obligations by “[o]ver 10,000 jurisdictions [in the U.S.],”24 each with its own unique sales and use tax rules, arguably prevent the federal government from “speaking with one voice” with respect to regulating commerce with foreign governments in violation of the Foreign Commerce Clause?
If the substantial nexus prong of the Complete Auto framework is satisfied and State A has jurisdiction under the U.S. Constitution to impose the tax or the tax collection obligation, are the other prongs of the Complete Auto framework satisfied? Although every prong of the Complete Auto framework is not implicated in this example, different taxes and different tax schemes will implicate different prongs and be susceptible to different types of constitutional challenges.
The U.S. Supreme Court’s decision in Complete Auto rejected formalism in favor of a more practical case-by-case approach for determining the constitutionality of a state taxing scheme. Since Complete Auto was decided, state taxation has steadily progressed away from formalism and toward the principles articulated in Complete Auto. The Court’s Wayfair decision is the most recent case in this steady progression. However, the Court has continuously made clear that its rejection of formalism is not a rejection of meaningful constitutional limitations on the authority of states to tax. Unfair state overreach and economic protectionism will continue to be struck down under the Complete Auto framework. It is up to taxpayers to raise all arguments and make their cases.
Craig B. Fields and Mitchell A. Newmark are partners, and Eugene J. Gibilaro is an associate with Morrison & Foerster LLP.
138 S. Ct. 2080, 2099 (2018).
138 S. Ct. at 2092-94 (citation omitted).
Id. at 2099 (alteration in original) (emphasis added) (quoting Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 11 (2009)).
J. McIntyre Mach., Ltd. v. Nicastro, 564 U.S. 873, 882-84 (2011).
Walden v. Fiore, 571 U.S. 277, 286 (2014) (citation omitted).
Nat’l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551, 556 (1977).
Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778 (1992).
Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 451 (1979).
138 S. Ct. at 2099.
Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 185 (1995), superseded by statute on other grounds, ICC Termination Act of 1995, Pub. L. No. 104-88, 109 Stat. 803.
Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123, 135 (1931); Norfolk & W. Ry. Co. v. Mo. State Tax Comm’n, 390 U.S. 317, 329 (1968).
Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality, 511 U.S. 93, 99 (1994).
Id. (quoting Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970)).
138 S. Ct. at 2099-2100.
United States v. Carlton, 512 U.S. 26, 32-33 (1994).
Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940).
Standard Pressed Steel Co. v. Dep’t of Revenue, 419 U.S. 560 (1975).
Scripto, Inc. v. Carson, 362 U.S. 207 (1960).
N.M. Taxation & Revenue Dep’t v. Barnesandnoble.com LLC, 303 P.3d 824 (N.M. 2013).
Wayfair, 138 S. Ct. at 2103 (Roberts, J., dissenting).

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