Direct Marketing Association v. Brohl
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Finishing SALT: April State Focus & March Wrap-Up

A Grain of SALT: April State Focus – South Dakota

On April 17, the United States Supreme Court will hear oral argument in South Dakota’s case challenging the Court’s physical presence requirement for sales tax nexus. South Dakota v. Wayfair, Docket 17-494.

50 years ago, in National Bellas Hess v. Department of Revenue, 386 U.S. 753 (1967), the Supreme Court held that the Due Process and Commerce Clauses of the United States Constitution barred states from requiring remote retailers with no physical presence in a State to collect and remit sales tax. In 1992, the Court affirmed its prior ruling under the Commerce Clause. Quill v. North Dakota, 504 U.S. 298 (1992).

Quill has been at the center of state tax nexus controversy since the time of its issuance, as states have worked to restrict, and taxpayers have worked to expand the scope of the ruling. States and taxpayers have been continually tied up in disputes regarding the meaning of “physical presence” sufficient to trigger nexus. Concerned about the rapid growth of digital commerce, states have advanced increasingly aggressive theories of “physical presence” in an attempt to stem the loss of sales tax revenues from internet sales. Taxpayers, on the other hand, repeatedly have sought to apply the physical presence nexus standard to other types of taxes, principally income tax. Until South Dakota v. Wayfair, the Supreme Court declined to accept review of any case seeking further guidance with respect to the physical presence nexus standard. (more…)




Delaware’s Unclaimed Property Audit Program Dealt Blow

The judge in a case challenging Delaware’s use of sampling and extrapolation to determine unclaimed property liability denied the state’s motion to dismiss and in doing so, seriously questioned the State’s approach.  Temple-Inland v. Cook, U.S. Dist. Ct. (DE), Civ. No. 14-654-SLR (3/11/2015).  Temple-Inland brought a suit against the State following an unclaimed property audit of its accounts payable balances and before the audit of other property types was completed.  Delaware found Temple-Inland liable for unclaimed property going back to 1986 based on the use of sampling and extrapolation.  On March 11, 2015, Judge Robinson ruled on the Temple-Inland’s summary judgment motion and the State’s motion to dismiss for failure to state a claim.  While the State won one issue, Temple-Inland certainly came out ahead overall.

Let’s start with the bad news first: the one dark spot in the opinion for holders is that the judge decided that the U.S. Supreme Court’s priority rule cases (Texas v. Delaware and its progeny) only applied to disputes over custody between states, not between a private holder and a state.  This decision seems to conflict with a precedential Third Circuit case, Retail Merchants Ass’n v. Sidamon-Eristoff, 669 F.3d 375 (3rd Cir. 2012).  The judge also did not seem to take to heart the role of the U.S. Supreme Court.  The judge oddly stated that “finding that the Supreme Court’s holding in Delaware preempts the State’s valid exercise of regulatory power . . . would be contrary to the well-established principle that federal courts may not ordinarily displace state law.”  That is exactly what the U.S. Supreme Court is supposed to do (in fact, last week the Court ruled federal courts have just such authority in Direct Marketing Association v. Brohl).

With the bad news out of the way, the good news is that not only does the judge agree to move forward with all of Temple-Inland’s other claims, but expresses significant doubt as to the validity of the State’s position regarding the authority to use estimation prior to a 2010 statutory change.  The judge appears to be ready to move forward on hearing factual support for the following claims asserted by the plaintiff:  substantive due process, Ex Post Facto Clause, Takings Clause, Commerce Clause and Full Faith and Credit Clause.

The really good news for holders is that the judge seems to have backed the State into a corner.  In analyzing the due process and ex post facto claims, the judge noted that “[the] defendants are faced with a dilemma:  “If §1155 [the 2010 provision authorizing estimation] is not a penalty provision, it likely violates plaintiff’s rights to substantive due process.  If, on the other hand, § 1155 is a penalty provision, its retroactive application likely violates the Ex Post Facto Clause.  The court is unprepared, at this juncture to determine which scenario is most likely.”  With this opinion, Delaware may finally be feeling the walls closing in and a giant alien cephalopod reaching up [...]

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State and Local Tax Supreme Court Update: June 2014

On June 10, 2014, the Supreme Court of the United States distributed three state and local tax cases for a conference to be held on June 26, 2014: Equifax, Inc. v. Mississippi Department of Revenue, Direct Marketing Association v. Brohl, and Alabama Department of Revenue v. CSX Transportation, Inc.  The Supreme Court previously agreed to hear Comptroller of the Treasury v. Wynne and determine whether Maryland’s disallowance of a credit against its county income tax for taxes paid to other jurisdictions violated the Commerce Clause.  We are eager to see if the Court will opt to hear the remaining three cases, clarifying answers to questions in the world of state taxation.

The taxpayer in Equifax filed a petition for a writ of certiorari on February 19, 2014, appealing a decision by the Mississippi Supreme Court.  The state court upheld the Mississippi Department of Revenue’s application of market-based sourcing as an alternative apportionment formula instead of the statutory cost-of-performance sourcing for apportioning the income of Equifax, a credit reporting company.  In making this determination, the court required the Mississippi chancery courts to use a highly deferential standard of review.  The Institute for Professionals in Taxation, the Georgia Chamber of Commerce and the Council On State Taxation filed amicus curiae briefs.

The Direct Marketing Association filed a petition for a writ of certiorari on February 25, 2014.  The Direct Marketing Association seeks review of a decision by the U.S. Court of Appeals for the Tenth Circuit that held that the Tax Injunction Act barred federal court jurisdiction over the Direct Marketing Association’s challenge to a Colorado sales and use tax reporting law.  The law requires remote sellers that do not collect Colorado sales or use tax and have total annual gross sales in Colorado of $100,000 or more to inform the customer at the time of sale of the customer’s use tax obligation, to send annual notices to customers who purchased $500 or more in goods from the seller and to file a report with the state regarding a customer’s total purchases.  An amicus curiae brief was filed by the Council On State Taxation.  If the Supreme Court were to hear Direct Marketing Association v. Brohl, it would likely clarify the holding of Hibbs v. Winn to better clarify the scope of the TIA’s protection.

On October 30, 2013, the Alabama Department of Revenue filed a petition for a writ of certiorari in CSX Transportation.  The Alabama Department of Revenue is challenging the U.S. Court of Appeals for the Eleventh Circuit’s decision that Alabama’s sales tax on diesel fuel discriminates against rail carriers in violation of the Railroad Revitalization and Regulatory Reform Act of 1976 (4-R Act) because motor carriers and interstate water carriers are not required to pay the 4 percent sales tax.  The Supreme Court had previously issued a 2011 opinion stating that the taxpayer could challenge sales and use taxes under the 4-R Act, but the Supreme Court remanded the case to determine whether the tax was discriminatory.  Amicus [...]

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