This morning, the United States Supreme Court declined to review court decisions out of Iowa in KFC Corp. v. Iowa Dept. of Revenue and out of Washington in Lamtec v. Dept. of Rev. of Washington. These two decisions were appeals of corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. assessments on companies with no property or employees in the state. We had filed a brief urging the Court to hear Lamtec, and had intended to file merits briefs in both cases had the Court accepted them.
In Quill Corp. v. North Dakota (1992), the U.S. Supreme Court held that the Commerce Clause requires a physical presence in a state before the state may impose sales or use taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on an out-of-state business. States in recent years have increasingly sought to bypass the constraints of Quill by limiting the ruling to sales and use taxes and assessing income taxes on out-of-state businesses that have sales but no physical presence in the taxing state. Massachusetts is one such state.
It is unfortunate that the Court declined to hear the case, as states undermine predictability and disrupt the national economy when they are permitted to reach beyond their borders to tax businesses with no property or payroll in their state. As occurred after the U.S. Supreme Court declined to hear a similar case in 2007 (FIA Card Services fka MBNA America v. West Virginia Tax Commissioner), such state efforts will probably continue. The Tax Foundation’s Center for Legal Reform will continue educational efforts emphasizing the value of the physical presence standard for interstate business taxation.
Of course, that the Supreme Court declined to hear the case is no comment on the merits of the case one way or the other, as the Court has written many times. The Court declines to hear nearly 99% of the cases appealed to it. Further, the law of the land (Quill, and its predecessor National Bellas Hess) still apply, and the principles of those cases apply to all forms of taxation.
State courts and legislators are unfortunately enacting aggressive, differing, and vague nexus standards, making it difficult for business taxpayers to understand when and where they are constitutionally subject to a tax other than sales and use tax. Barring action from Congress or Supreme Court to enshrine the physical presence rule from state attack, the resulting heavy burdens on interstate commerce and disincentives for interstate economic activity will continue to worsen. States will continue to have the incentive to maximize its revenues regardless of the potential double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. that results from having a hodge-podge of constitutional standards.
Information on the pending congressional bill is available at www.batcoalition.org. A past Tax Foundation paper on the physical presence rule is here.
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