In mid-January, 2014, the Supreme Court of the United States ruled Daimler AG v. Bauman. In Daimler, a German company partaking in activities in Argentina, gave rise to a lawsuit by a group of Argentine plaintiffs. The twist on the case occurred when the plaintiffs brought suit in California, based on the German company having a subsidiary in California. At issue in the Supreme Court was whether the California court had jurisdiction (the power to hear the case) over the German company due to services performed by its California subsidiary. The Supreme Court ruled in favor of the German company and stated that due process prevents such a result. So, you’re asking – what does this have to do with state and local tax?
In its most recent sales tax decision, the Supreme Court heard a case called Quill v. North Dakota, in 1992. Quill expanded on this concept of what must occur to give a state the power to tax a company. Essentially, the Court stated that there are two prongs that must be met under the United States Constitution. If either prong is not met, then a state cannot force a company to charge, collect, and remit tax to it. This has been extremely important for online retailers, such as Amazon, in determining whether they are subject to a state’s tax collection laws.
One prong finds its routes in the Commerce Clause of the Constitution. Under the Commerce Clause, only Congress has the power to regulate “interstate commerce.” If a state creates a tax or a collection of tax requirement that impedes on interstate commerce, then the tax is unconstitutional. Since Quill, this has been the avenue companies have generally taken to fight the overly aggressive states’ crusade to force everyone to collect tax for a particular state. While the results are all over the board, the Supreme Court has elected to punt the issue to Congress and it is yet to hear a case since 1992. Most recently, the Supreme Court elected not to hear Amazon’s challenge to New York’s state tax law that requires many online retailers to charge, collect, and remit tax to New York based on affiliates within New York.
The second prong of the Quill test has recently become a prominent challenge to burdensome state tax laws. Under the Due Process Clause of the Constitution, a person or company must have some “minimum connection” to a state or it must “purposely avail” itself to the market of a state in order for a court to have the power to rule against that person or company. The recent Supreme Court decision in Daimler teaches us that Due Process prevents a state from exercising its wrath over a company because the company merely has a subsidiary (or perhaps affiliate) in a state.
In my view, the Daimler case is incredibly important in the state and local tax world. Practitioners should keep this in mind when challenging nexus assertions by the states. For years, state and local tax attorneys have been fighting nexus assertions under traditional nexus and Commerce Clause type arguments. However, the better approach may be to argue a state does not have jurisdiction over a particular taxpayer under a Due Process analysis. Perhaps Due Process is the route to get a state and local tax case in front of the Supreme Court? It will be interesting to see whether states apply such an analysis to state and local tax cases, but given the shift in the law, it certainly doesn’t hurt to try.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful