KFC v. Iowa; Amicus Brief of Institute for Professionals in Taxation

8/6/2019 KFC v. Iowa; Amicus Brief of Institute for Professionals in Taxation

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TABLE OF CONTENTSPage

STATEMENT OF INTEREST OF AMICUS CURIAE ...................................................................... 1

SUMMARY OF ARGUMENT .................................... 4

ARGUMENT .............................................................. 7

The Proper Legal Standard for DeterminingSubstantial Nexus Under the CommerceClause for State Corporate Income TaxPurposes is an Important Question of FederalLaw Decided by the Court Below That HasNot Been, But Should Be, Settled by the Court ....... 7

The Decision Below Epitomizes theControversy .................................................... 11

Economic Nexus is Without Precedent inThis Court ...................................................... 12

Relative Tax Burdens Spawn fromUnwarranted Speculation ............................. 14

The Commerce Clause Demands aSingle Nexus Standard ................................. 17

Substantial Nexus is Not a Test of Contacts ......................................................... 18

The Practical Effect of Economic Nexus

Undermines Commerce Clause Principles ....................................................... 21

CONCLUSION ................... . 23


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TABLE OF AUTHORITIES

Page(s)

Constitutional Provisions

U.S. Const. amend. XIV ........................................ 6, 14, 18U.S. Const. art. 1, 8, cl. 3. .................................. passim

Statutes

Interstate Commerce Tax Act,Pub. L. No. 86-272 .........................................................9

Mich. Comp. Laws Ann. 208.1101, et seq. (2011) ............................................ 18

Ohio Rev. Code Ann. 5751.01, et seq. (2011) .............................................. 18

Tex. Tax Code Ann. 171.0001, et seq. (2011) ............................................ 18

Cases

Allied-Signal, Inc. v. Director, Div. of Taxn ,504 U.S. 768 (1992) ..................................................... 14

American Trucking Assns, Inc. v. Scheiner ,483 U.S. 266 (1987) ..................................................... 14

Armco Inc. v. Hardesty ,467 U.S. 638 (1984) ..................................................... 14

Camps Newfound/Owatonna, Inc. v. Town of

Harrison, 520 U.S. 564 (1997) ..................................................... 14

Capital One Bank v. Commr of Revenue ,899 N.E.2d 76 (Mass. 2009), cert. denied , 129 S.


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Ct. 2827 (2009) ............................................................. 19Commonwealth Edison Co. v. Montana,

453 U.S. 609 (1981) ............................................... 10, 11Complete Auto Transit, Inc. v. Brady ,

430 U.S. 274 (1977) ....................................... 4, 6, 17, 19Fulton Corp. v. Faulkner,

516 U.S. 325 (1996) ..................................................... 14Goldberg v. Sweet ,

488 U.S. 252 (1989) ..................................................... 14Intl Harvester Co. v. Dept of Treasury,

322 U.S. 340 (1944) ..................................................... 19 KFC Corp. v. Iowa Dep't of Revenue,

792 N.W. 2d 308 (Iowa 2010) ........................... 11, 12, 19 Kmart Properties, Inc. v. Tax. and Revenue Dept ,

131 P.3d 27, 35 (N.M. Ct. App. 2001), cert. quashedand revd on other grounds , 131 P.3d 22 (N.M.2005) ............................................................................... 15

Miller Bros. Co. v. Maryland ,347 U.S. 340 (1954) ..................................................... 14

Natl Geographic Socy v. California Bd. of Equalization ,430 U.S. 551 (1977) ..................................................... 16

Nat'l Bellas Hess v. Dep't of Revenue,386 U.S. 753 (1967) ......................................................... 12

Oklahoma Tax Commn v. Jefferson Lines, Inc. ,514 U.S. 175 (1995) ..................................................... 14

Quill Corp. v. North Dakota,504 U.S. 298 (1992) ............................................ passim

Tax Comm'r v. MBNA America Bank, N.A. ,640 S.E.2d 226 (W.Va. 2006), cert. den. sub nom.,FIA Card Services N.A. v. Tax Comm'r , 551 U.S.1141 (2007) .................................................................... 19

Trinova Corp. v. Michigan Dept of Treasury ,


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498 U.S. 358 (1991) ..................................................... 14Westinghouse Electric Corp. v. Tully ,

466 U.S. 388 (1984) ..................................................... 14

Other Authorities

Berger, Nexus and the Need for Clarification: The

Rise of Economic and Attributional Nexus , 26 J. of State Taxn 29 (2008) .................................................. 10Gaebler Ventures ,

http://www.gaebler.com/Franchise-Directory.htm(last visited, May 24, 2010) ..........................................3

Gall and Kulwicki, The Lawmakers Guide to Nexus Part I , 22 J. of State Tax'n (2004). ........................ 14

H.R. 1439, 112th Cong. (2011) ...................................... 11H.R. 1083, 111th Cong. (2009) ...................................... 11H.R. 2526, 107th Cong. (2001) ...................................... 12H.R. 3220, 108th Cong. (2003)

...................................... 11H.R. 4845, 109th Cong. (2005-06) ................................ 11H.R. 5267, 110th Cong. (2008) ...................................... 11Hellerstein and Hellerstein,

State Taxation ........................................................ 10, 11Maine Tax Alert, Vol. 18 No. 2 (Feb. 2008) ................ 25Or. Admin. R. 150-317.010(2) (2011) ........................... 25S. 1726, 110th Cong. (2007) ........................................... 11S. 2401, 106th Cong. (2000) ........................................... 12S. 2721 and H.R. 1956, 109th Cong. (2005-06) ......... 11S. 664, 107th Cong. (2001) ............................................. 12State and Local Jurisdictions Imposing Income,

Franchise and Gross Receipts Taxes on Businesses ,Ernst & Young, LLP, March 7, 2007


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http://tax.state.nm.us/oos/GrossReceiptsTaxFAW.pdf ....................................................................................19

Stombock, Economic Nexus and NonresidentCorporate Taxpayers: How Far Will it Go? , 61 TaxLaw. 1226 (2008) .......................................................... 10

The Economic Iimpact of Franchised Businesses: Volume III, Results for 2007(PriceWaterhouseCoopers)http://www.franchise.org/IndustrySecondary.aspx

?id=10152 .......................................................................... 3U.S. Sup. Ct. Rule 37.6 .....................................................1U.S.Census Bureau, 2007 Economic Census

Franchise Reporthttp://factfinder.census.gov/servlet/EconCoreStatServlet?ds_name=EC0700A1&_lang=en&_ts=302428479696. ...........................................................................2

VanLeuven, et al., Economic Nexus and theUncertainty of the Quill Physical Presence Test , 38Tax Adviser 322 (2007) ............................................... 10


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STATEMENT OF INTEREST OF AMICUSCURIAE

This brief amicus curiae in support of Petitioner,KFC Corporation (KFC), is filed by the Institute forProfessionals in Taxation (IPT). 1 IPT is a non-profit educational organization formed in 1976. Itspurposes include promoting uniform and equitableadministration of state income, ad valorem and salesand use taxes. IPT has more than 4,400 membersrepresenting over 1,400 businesses across the UnitedStates and in Canada, from small businesses to mostof the Fortune 500. These members span theindustry spectrum, including aerospace, agriculture,manufacturing, wholesale and retail, financial, oiland gas, communications, health care, hospitality,transportation and other sectors.

Many of these businesses utilize a franchisemodel. In 2010, the U.S. Census Bureau released itsfirst comprehensive report on this segment of theU.S. economy. The report 2 revealed that franchised

1Pursuant to Supreme Court Rule 37.6, IPT states that nocounsel for a party has written this brief in whole or in partand that no person or entity, other than amicus curiae , itsmembers, or counsel, has made a monetary contribution to thepreparation or submission of this brief. Counsel of record forall parties have received timely notice of IPTs intent to file thisbrief, and all parties have consented to the submission of this

brief in writings filed with the Clerk. 2 http://factfinder.census.gov/servlet/EconCoreStatServlet?ds_name=EC0700A1&_lang=en&_ts=302428479696. 2007 data wasused, as the most recent data then available.


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businesses with employees accounted for over $1.3trillion in sales, $153.7 billion in annual payroll andemployed a workforce of 7.9 million in the 295industries surveyed. 3 When supplemented withfranchised businesses having no employees, 4 franchised businesses operated over 828,000business establishments, providing more than 9.1million jobs, a payroll of $304 billion, $802 billion inproductive output and over $468 billion of gross

domestic product (GDP) ( i.e. , net value added tothe U.S. economy). 5

Franchised business directly accounted forroughly the same workforce as all domesticmanufacturers of durable goods, and provided more

jobs than each of these sectors: financial andinsurance; real estate and rental/leasing; wholesaletrade; transportation and warehousing; nondurablegoods manufacturing; and information (software andprint publishing, motion pictures and videos, radio

and television broadcasting, and telecommunicationscarriers and resellers). Franchised businesses sopervade all aspects of commerce that any attempt tocatalog them is necessarily incomplete. 6

3 This data included only businesses with paid employees;nonemployer businesses such as sole proprietors, self-employedindividuals, and independent contractors were not included. 4 See note 3, supra . 5 THE E CONOMIC IMPACT OF F RANCHISED BUSINESSES : V OLUMEIII, RESULTS FOR 2007, prepared by PricewaterhouseCoopers for

The International Franchise Association EducationFoundation, and available at:http://www.franchise.org/IndustrySecondary.aspx?id=10152. 6 Gaebler Ventures , http://www.gaebler.com/Franchise-Directory.htm (last visited, May 24, 2010) (offering The


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Many of the businesses represented within IPTsmembership earn income from franchisees in Iowaand other states in which the courts havedetermined that the state may constitutionallyimpose income tax upon businesses having nophysical presence in the state. These states apply arule of law that, merely by virtue of havingindependent in-state customers ( e.g. , franchisees) inthe state, such businesses have an economic

presence sufficient to satisfy the substantial nexusrequirement of this Courts dormant CommerceClause jurisprudence.

The proper rule of law to determine substantialnexus under the Commerce Clause for statecorporate income tax purposes is the most significantissue of the day for both the states and taxpayers.State courts have employed irreconcilableinterpretations of this Courts precedent inattempting to resolve this issue. For the states, the

issue delimits their authority to raise revenue inhard economic times. For taxpayers, the issue posessubstantial tax and compliance costs, in the billionsof dollars, as they struggle with the same profoundlydistressed marketplace. The matter is of specialconcern to small businesses because of thedisproportionate impact such additional taxliabilities occasion.

The constitutionality of the economic presencerule of law embraced by the court below has

languished since this Courts seminal decision inComplete Auto Transit, Inc. v. Brady , 430 U.S. 274

Worlds Largest List of Franchise Opportunities).


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(1977), nearly 35 years ago. Both the states andtaxpayers have incurred substantial litigation,administration and compliance costs in the vacuumof mutual deference between Congress and thisCourt. At a time when the need for certainty is at aparticular premium, IPT members businesses findthemselves in the untenable position that theCommerce Clause has a different meaning andoperation from state to state, with increasingly

diluted effect.IPT submits that there is a compelling need and

urgent imperative for this Court to step into the voidand answer this recurring question of state taxing

jurisdiction, and therefore earnestly supportsPetitioners request for review of the state courtsdecision below.

SUMMARY OF ARGUMENT

The Supreme Court of Iowa below decided animportant question of federal law that has not been,but should be, settled by this Court. The state courtdetermined that an out-of-state franchisor hadeconomic presence through receipts from in-statefranchisees sufficient to satisfy the substantialnexus requirement of the Commerce Clause. In sodoing, that court interpreted the Commerce Clausein a manner that conflicts with decisions of otherstate courts on this fundamental federal question.Resolution of that question is the province of thisCourt.

The controversy is not a mere misapplication of


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the proper rule of law, but a conflict over thefundamental reach of state taxing power. Thedispute is national in scope, the financial stakes forboth the states and taxpayers are substantial andthe prospects for resolution without this Courtsinvolvement are exceedingly remote. The Iowacourts decision in the context of the ubiquitousfranchise business model expands economic nexustheory to any out-of-state taxpayer that merely

receives income from an in-state customer, andpresents a compelling need for the Court to settlethis important federal question. 7

The adoption of an economic nexus standardunder the Commerce Clause is without precedentfrom this Court and fueled in large part byspeculation, without any evidentiary basis, over therelative burdens imposed by state sales and usetaxes as opposed to state corporate income taxes.IPT submits that, if there is to be a different

constitutional limitation imposed on a states powerto impose different taxes, that difference must berooted in a principled Commerce Clause analysis. InQuill Corp. v. North Dakota, 504 U.S. 298 (1992), theCourt adhered to a bright-line physical presencenexus standard, though artificial around the edges,because of the countervailing benefits of a clear rule.No less a clear rule is needed in this context.

7 The issue has particular significance in the growing number of states that like Iowa mandate the use of a single sales

factor apportionment formula. These states apportion acorporate taxpayers income based solely on a comparison of sales made in the state to sales made out-of-state, withoutregard to the location of capital investment ( i.e. , property) andlabor employed to generate that income.


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The Commerce Clause values which the Court inQuill found were served by the physical presencestandard apply with equal vigor to state corporateincome taxes. The Commerce Clause demands morethan a formalistic comparison of hypothetical typesof taxes. Rather, it looks to the practical effect of agiven state tax on the maintenance of an unfetterednational economy.

The substantial nexus requirement of Complete Auto Transit is the principal means of limiting state tax burdens that unduly interfere withthe free flow of interstate commerce. Giving thethreshold substantial nexus requirement differentmeanings on a tax-by-tax basis invites aproliferation of unwieldy and unprincipled standardsby state and local governments eager to expand theirtaxing reach and fill their coffers at the expense of out-of-state businesses. It would virtually assure theformulation of third, fourth and subsidiary

substantial nexus standards as state and localgovernments press newly-conceived rules of law to justify their levies. There are thousands of state andlocal jurisdictions in a position to do so, with everyincentive to find a means of exporting an augmentedtax burden. In such an environment, the logic,simplicity and fair-mindedness of the physicalpresence requirement would be replaced by ever-finer and illogical distinctions among different taxes.

The economic presence standard amounts to

nothing more than a restated Due Processminimum contacts test, confined to the frequencyand extent of contacts between a taxpayer and thetaxing jurisdiction. As this Court delineated in


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Quill , substantial nexus is concerned not with thesufficiency of such contacts but with the burdensimposed upon interstate commerce. Leftunrepudiated by this Court, economic nexuseffectively eradicates the substantial nexusrequirement outside of use taxes and fostersunbridled assertions of state taxing jurisdiction. If this Courts dormant Commerce Clause doctrine is tohave any continuing vitality, the Court should grant

the Petition and reverse the decision below.

ARGUMENT

The Proper Legal Standard forDetermining Substantial Nexus Underthe Commerce Clause for State CorporateIncome Tax Purposes is an ImportantQuestion of Federal Law Decided by the

Court Below That Has Not Been, ButShould Be, Settled by the Court.

In Quill , the Court left open the question of whether a balancing test or bright-line rule woulddetermine substantial nexus outside the limitedcontext of use tax collection. It is this lingeringquestion whether states may constitutionallyimpose other taxes on businesses not physicallypresent within their boundaries which compels ananswer from the Court.

It is difficult to overstate the significance of theissue. Businesses across the United States are atrisk of being subjected to billions of dollars in state


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corporate income taxes imposed by jurisdictions inwhich they are not physically present. Thecontroversy has for years spawned uncertainty forstate governments, the courts and taxpayers uncertainty which confounds compliance and fostersserial litigation in state after state, with ofteninconsistent results.

The states and business community share acommon need for certainty on this fundamentalissue of state corporate income tax jurisdiction. TheCourts observation in Quill justifying the adoptionof a bright-line physical presence nexus standard isequally apropos in this context:

Such a rule firmly establishes theboundaries of legitimate state authorityto impose a duty to collect sales and usetaxes and reduces litigation concerningthose taxes. This benefit is important,for as we have so frequently noted, ourlaw in this area is something of aquagmire and the application of constitutional principles to specificstate statutes leaves much room forcontroversy and confusion and little inthe way of precise guides to the Statesin the exercise of their indispensablepower of taxation.

504 U.S. at 315-16 (quoting Northwestern States Portland Cement Co. v. Minn. , 358 U.S. 450, 457-58(1959)).

The tension between the physical presence


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requirement in Quill for use tax purposes and theeconomic presence nexus theory enunciated byvarious state courts for corporate income taxpurposes has been the subject of innumerableanalyses and commentaries. 8 Professor WalterHellerstein devotes extensive discussion to thesubject in his leading treatise on state taxation, andrefers to the enormous outpouring of commentaryabout this topic. H ELLERSTEIN AND

HELLERSTEIN, S TATE T AXATION , 6.11 (3), n.234(3d ed. 2000).

Congress has not acted to resolve the dispute,despite ample opportunity to do so. 9 For the past 11years, bills have regularly been introduced inCongress to enact a state business activity tax nexusstandard under the Commerce Clause. 10 Yet,

8 See , e.g. , Stombock, Economic Nexus and NonresidentCorporate Taxpayers: How Far Will it Go? , 61 Tax Law. 1226(2008); Berger, Nexus and the Need for Clarification: The Riseof Economic and Attributional Nexus , 26 J. of State Taxn 29(2008); VanLeuven, et al., Economic Nexus and the Uncertaintyof the Quill Physical Presence Test , 38 Tax Adviser 322 (2007). 9 Congress has enacted limited legislation on state income tax

jurisdiction. The Interstate Commerce Tax Act, Public Law 86-272, is narrowly confined to solicitation for sales of tangiblepersonal property and does not address the many nexus issuesthat persist outside of that precise context. Public Law 86-272does not, for example, apply to the receipt of income fromlicensing intangible property to third parties, nor does it applyto the provision of services. H ELLERSTEIN , 6.17. This Courtsdormant Commerce Clause analysis must therefore fill in the

wide gaps left open by Public Law 86-272. 10 See e.g. , Business Activity Tax Simplification Act (BATSA) of 2011, H.R. 1439, 112th Cong. (2011); BATSA of 2009, H.R.1083, 111th Cong. (2009); BATSA of 2008, H.R. 5267, 110thCong. (2008); BATSA of 2007, S. 1726, 110th Cong. (2007);


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Congress has repeatedly failed to act. Thepossibility of Congressional action should not deterthe Court from deciding this pressing federalquestion. To the contrary, Congress continuingsilence calls for resolution by the Court.

In the void between Congressional inaction andthis Courts refusal to grant certiorari petitionsraising the issue over the past 18 years, 11 statecourts have struggled to divine the answer that onlythis Court can give. This Courts goal in reviewingCommerce Clause challenges to state taxes has beento establish a consistent and rational method of inquiry focusing on the practical effect of achallenged tax. Commonwealth Edison Co. v.Montana , 453 U.S. 609, 615 (1981)(quotationomitted). In the absence of direction from thisCourt, state courts have parochially employedconflicting rules of law under a single substantialnexus requirement, in disregard of the practical

effect that hodge-podge has on interstate commerce a result wholly antithetical to this CourtsCommerce Clause doctrine.

BATSA of 2005-2006, S. 2721 and H.R. 1956, 109th Cong.(2005-06); Innovation and Competitiveness Act, H.R. 4845,109th Cong. (2005-06); BATSA of 2003, H.R. 3220, 108th Cong.(2003); Internet Tax Fairness Act of 2001, H.R. 2526, 107th

Cong. (2001); New Economy Tax Fairness Act, S. 664, 107thCong. (2001); and New Economy Tax Simplification Act of 2000,S. 2401, 106th Cong. (2000).11 See , e.g ., the cases listed by the court below, 792 N.W.2d at320-22.


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The Decision Below Epitomizes theControversy

The decision of the court below is illustrative. Inthe absence of direct guidance from this Court, theIowa court attempted to predict how this Courtwould resolve the issue. 792 N.W.2d 308, 322-23(Iowa 2010). While acknowledging that certaineconomic nexus cases represent the frontier of state

assertions of nexus to tax out-of-state entities, id. at322, the Iowa court headed in precisely thatdirection. The Iowa court conceded that it might beargued that state supreme courts are inherentlymore sympathetic to robust taxing powers of statesthan is the United States Supreme Court, id. , andproceeded to embrace that sympathy. The frontierof state assertions of nexus and robust taxingpowers of states cannot be squared with the Courtspromise of a consistent and rational method of inquiry in Commonwealth Edison .

Perhaps most mystifying is the Iowa courtsthreshold determination that the use by in-statefranchisees of KFCs intangible property amountedto the functional equivalent of physical presenceunder Quill, 792 N.W.2d at 324, only to later rejectthe notion that physical presence is required at all,id. at 324-26. Without dwelling on the distinctlyKafkaesque nature of that pseudo-physicalpresence logic, it is difficult to reconcile that courts

conclusion with this Courts determination in Quill that an actual physical presence was insufficient asmerely a slightest presence. Id. at 315, n.8.


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The unfortunate reality is that, much like therampant anti- Bellas Hess legislation 12 thatprecipitated the Courts reaffirmation of BellasHess 13 in Quill , some states now pay little heed tothis Courts dormant Commerce Clause authority.The Iowa courts observation that, if states becomeoverly aggressive in their tax policy, Congress hasthe express authority to intervene under theCommerce Clause, 792 N.W.2d at 325 (emphasis

supplied), is telling: the Iowa court did not view thisCourt as any impediment to overly aggressive statetax policy. If, in fact, the Iowa court was correct inreading Quill to suggest a desire on the part of theSupreme Court to defer to Congress on most nexusissues, id. at 327, the Court can explicitly say so,rather than leave the states and taxpayers tointractable disputes over the substantial nexusrequirement.

Economic Nexus is Without Precedent in

This Court

As a natural consequence of the guessing gamewhich the Courts silence has engendered, statecourts have employed irreconcilably conflicting rulesof law interpreting the substantial nexusrequirement. The Petition thoroughly details thoseconflicts. The decisions declining to apply thephysical presence test rest principally upon theabsence of any explicit statement from this Courtthat substantial nexus requires it. They thus

12 See Gall and Kulwicki, The Lawmakers Guide to Nexus Part I , 22 J. of State Taxn 4, 6 (2004).

13 Natl Bellas Hess v. Dept of Revenue , 386 U.S. 753 (1967).


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reflect no principled or affirmative rationale forusing one Commerce Clause standard for use taxesand a diminished Commerce Clause standard forincome taxes, but reflect, instead, opportunismfacilitated by what is, at most, a negative implicationfrom this Courts silence.

This approach turns what the Court has not saidinto a new, and variable, constitutional principlethat dramatically expands the states jurisdiction totax. It ignores the fact that there are two thingsthat the Court has not explicitly said: it has notexpressly said that physical presence is required as a

jurisdictional prerequisite to the imposition of astate income tax, and it has not said that states maylevy such taxes in the absence of the taxpayersphysical presence. At best, the Court simply has notruled upon the question, one way or the other.

What is undisputable, however, is that all of the

state tax cases in which this Court has found thatsubstantial nexus exists, whether entailing sales,income, franchise or other taxes, have involvedphysical presence by the affected taxpayer. This is amatter of which the Court, itself, took note in Quill ,504 U.S. at 310. The observation, which implies asingle Commerce Clause standard for all state taxes,is one which the Iowa court and like-minded statecourts have entirely disregarded.

In the same vein, the decisions applying the

economic nexus theory for state income taxationcite no instance in which the Court applied differentCommerce Clause standards (or other constitutionalsafeguards for that matter) on a tax-by-tax basis.


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There are numerous examples to the contrary, inwhich the Court has applied the same constitutionalprotections across tax types. The Due ProcessClause requirement of minimum contacts, forexample, has been applied to various types of statelevies. See , e.g. , Miller Bros. Co. v. Maryland , 347U.S. 340 (1954) (use tax); Allied-Signal, Inc. v.

Director, Div. of Taxn , 504 U.S. 768 (1992) (incometax); and Trinova Corp. v. Michigan Dept of

Treasury , 498 U.S. 358 (1991) (Michigan SingleBusiness Tax, a value-added tax). Similarly, thesame Commerce Clause prohibition againstdiscriminatory taxation of interstate commerce hasbeen applied to: property taxes, CampsNewfound/Owatonna, Inc. v. Town of Harrison, 520U.S. 564 (1997); vehicle flat taxes, AmericanTrucking Assns, Inc. v. Scheiner , 483 U.S. 266(1987); gross receipts taxes, Armco Inc. v. Hardesty ,467 U.S. 638 (1984); telecommunications excisetaxes, Goldberg v. Sweet , 488 U.S. 252 (1989); salestax, Oklahoma Tax Commn v. Jefferson Lines, Inc. ,514 U.S. 175 (1995); intangibles taxes, Fulton Corp.v. Faulkner, 516 U.S. 325 (1996); and income taxes,Westinghouse Electric Corp. v. Tully , 466 U.S. 388(1984), among others.

Relative Tax Burdens Spawn fromUnwarranted Speculation

If the underlying rationale for applying differentconstitutional standards to different taxes is that anincome tax imposes a lesser burden than collection of use tax, that premise is sheer speculation. Kmart

Properties, Inc. v. Tax. and Revenue Dept , 131 P.3d


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27, 35 (N.M. Ct. App. 2001), cert. quashed and revdon other grounds , 131 P.3d 22 (N.M. 2005). While in

Kmart the intermediate appellate court postulatedabout the relative burdens created by the two taxes,speculation is not fact. The court posits that stateincome taxes are usually payable once a year(ignoring requirements for periodic reporting andpayment of estimated tax), at a single rate (ignoringthe multiplicity of rates, tax base adjustments,

credits and the like), to one jurisdiction, therebysuggesting such taxes reflect a lesser burden thanthe use taxes described by this Court in Quill .

There is no indication, however, that the courtbased its speculation upon any actual evidencecomparing the burdens imposed by sales and usetaxes with the burdens imposed by state and localincome taxes. The Quill decision reflects no findingsor judgment regarding sales and use tax burdens,and IPT is aware of no court decision in which afactual record was made to support a conclusionregarding these relative tax burdens.

Moreover, even if it were appropriate to weighthese burdens based simply on the characteristics of a tax, then a compelling case can be made that stateand local income taxes are at least as, if not more,burdensome than sales and use taxes. There is theobvious and very real difference that the taxpayer,itself, is the obligor for income tax, not simply anagent collecting and remitting sales or use tax froma customer. Comparing the burdens between thetwo taxes, this fact alone argues forcefully againstthe conclusion that the obligation to collect use tax


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creates the heavier burden. See , e.g. , NatlGeographic Socy v. California Bd. of Equalization ,430 U.S. 551, 557-58 (1977) (distinguishing burdensimposed by direct taxes such as income taxes anduse tax collection responsibilities).

Nor is it clear that sales and use taxes arenecessarily imposed by more taxing jurisdictions.One 2007 survey documented approximately 3,300state and local tax jurisdictions that levy income,franchise and gross receipts taxes. 14 In those

jurisdictions, taxpayers must contend with amultitude of unique laws and requirements whichvary widely in such matters as types of returns,types of entities subject to tax (including limitedliability companies, partnerships, S corporations andother pass-through entities), filing and paymentrequirements and the like. These taxing

jurisdictions mandate different additions to andsubtractions from adjusted gross federal income to

build locally-specific tax bases that vary both fromfederal taxable income and from one another. Thestates also employ unique formulas to claim theirrespective shares of multistate income and applydistinct rules for calculating the factors used toapportion such income.

The abandonment of the physical presencestandard would subject businesses to these andthousands of additional complexities, to say nothingof the attendant audits, protests, appeals and

14 State and Local Jurisdictions Imposing Income, Franchiseand Gross Receipts Taxes on Businesses , Ernst & Young, LLP,March 7, 2007.


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of additional jurisdictional standards for other taxes.The rationale by which an alternative standard isadopted for state income taxation would invite morerigorous or relaxed thresholds for other types of taxes, predicated upon asserted differences betweenthe nature and quantum of burdens they impose.The proliferation of such alternative formulations,with a third substantial nexus test for sundry flattaxes, a fourth for a Texas Margins Tax, T EXAS T AX

CODE A NNOTATED section 171.0001 et seq. , anotherfor an Ohio Commercial Activity Tax, O HIO REVISEDCODE A NNOTATED section 5751.01 et seq. , another forthe Michigan Business Tax, M ICHIGAN COMPILEDL AWS A NNOTATED section 208.1101 et seq. , and thelike, is a virtually certain offspring of that first stepaway from the single bright-line test thus fararticulated. The Court should grant the Petition andtake this opportunity to say what it has not madeexplicit to this pointthat the same salutarypurposes which are served by using the physicalpresence standard for sales and use taxes arepresent when delimiting the power of state and localgovernments to impose income and other taxes.

Substantial Nexus is Not a Test of Contacts

The economic presence test mistakenly focuseson the contacts between the subject business and thestate, rather than on the burdens imposed uponinterstate commerce. The substantial nexusrequirement, however, is not a test of contacts; thesufficiency of such contacts is the concern of the DueProcess Clause. But the economic presence


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standard merely duplicates the due process inquiryand goes no further. 17 It also effectively reduces thesubstantial nexus prong of Complete Auto Transit to a rehash of the fourth prong ( i.e. , whether the taxis fairly related to services provided by the state).E.g. , KFC , 792 N.W.2d at 328 (We hold that, bylicensing franchises within Iowa, KFC has receivedthe benefit of an orderly society within the state and,as a result, is subject to the payment of income taxes

that otherwise meet the requirements of thedormant Commerce Clause).

Rather than merely repeating due processprotections, the Court has made clear thatsubstantial nexus is a means for limiting stateburdens on interstate commerce . Quill 504 U.S. at313 (emphasis added). The economic presenceanalysis of the West Virginia court in Tax Commr v.MBNA America Bank, N.A. , 640 S.E.2d 226 (W.Va.2006), cert. denied sub nom., FIA Card Services N.A.

v. Tax Commr , 551 U.S. 1141 (2007), also reflectedby the Massachusetts court in Capital One Bank v.Commr of Revenue , 899 N.E.2d 76 (Mass. 2009),cert. denied , 129 S. Ct. 2827 (2009) and the Iowacourt below, is fundamentally flawed because itforsakes any inquiry into the burden that the leviedtax imposes upon the national economy:

17 As Just ice Rutledge observed in Intl Harvester Co. v. Dept of Treasury, 322 U.S. 340, 353 (1944): There may be more than

sufficient factual connections, with economic and legal effects,between the transaction and the taxing state to sustain the taxas against due process objections. Yet it may fall because of itsburdening effect upon the commerce. (quoted in Quill , 504U.S. at 305-06).
http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032http://www.westlaw.com/Find/Default.wl?rs=dfa1.0&vr=2.0&DB=708&FindType=Y&ReferencePositionType=S&SerialNum=1944115699&ReferencePosition=1032


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Under the Articles of Confederation,state taxes and duties hindered andsuppressed interstate commerce; theFramers intended the CommerceClause as a cure for these structuralills. See generally THE F EDERALIST Nos.7, 11 (A. Hamilton). It is in this lightthat we have interpreted the negativeimplication of the Commerce Clause.

Quill , 504 U.S. at 312. The economic nexus principleentirely disregards such structural concerns andignores the resulting burdens imposed on interstatecommerce.

As this Court recognized in Quill , physicalpresence is a bright-line rule [that] furthers theends of the dormant Commerce Clause. 504 U.S. at314. The test is equitable, simple for a business of any size to comprehend and predict, and easy toenforce. Importantly, the test also favors economicgrowth. It allows a taxpayer to report and pay taxesin fewer states, which means less money spentcomplying with tax laws and in litigation and moremoney to invest in labor and capital. Further, itpermits a business to determine with confidence,before entering a jurisdiction, whether it will besubject to taxation and the costs associated withdoing business there. The test thus accommodatesthe concerns of substantial nexus for the healthand integrity of a national economy.


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The Practical Effect of Economic NexusUndermines Commerce Clause Principles

In contrast, as a practical matter, the so-calledeconomic presence test is no test at all. Thestandard adopted by the court below is particularlyamorphous and would allow states to impose incometaxes upon out-of-state taxpayers that merely earnreceipts from customers in a state. The resulting

burdens upon interstate commerce will only increaseas more states see the potential to expand their taxbases by adopting some variety of economicpresence as the only limit on their taxing authority.See e.g. , M AINE T AX A LERT , Vol. 18, No. 2, (Feb.2008) ([Maine Revenue Services] considerstaxpayers with economic nexus alone to be subject toMaines income tax laws); Or. Admin. R. 150-317.010(2) (2011) (Substantial nexus exists wherea taxpayer regularly takes advantage of Oregonseconomy to produce income for the taxpayer and maybe established through the significant economicpresence of a taxpayer in the state) The effects onsmall businesses would be particularly severe.

Supporters of an economic presence standardargue that businesses benefit from the existence of aviable economic market in the states in which theyhave customers, and thus should be expected to payincome taxes there. This argument illustrates thateconomic presence seeks nothing more than toexact a toll for making individual state economiespart of the national marketplace for goods andservices.


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CONCLUSION

For the foregoing reasons, this Court shouldgrant the Petition and reverse the decision below.

Respectfully submitted,

CASS D. VICKERS MARK E. HOLCOMBDEPUTY EXECUTIVE Counsel of RecordDIRECTOR AND STATE DEBORAH A. LACOMBETAX COUNSEL MADSEN GOLDMAN &INSTITUTE FOR HOLCOMB, LLPPROFESSIONALS IN 1705 Metropolitan Blvd.TAXATION Suite 1011200 Abernathy Road NE

Building 600, Ste. L-2

Tallahassee, FL 32308

(850) 523-0400 Atlanta, GA 30328(404) 240-2300

[email protected]

[email protected]

May 31, 2011

Counsel for Amicus Curiae

Documents

KFC v. Iowa; Amicus Brief of Institute for Professionals in Taxation