Important State Court Rulings on Tax Incentives and Nexus

May 12, 2006

Two important state court rulings were made this week in tax-related cases:

In North Carolina, a local court judge ruled against a group of taxpayers that were challenging a tax incentive package that North Carolina lawmakers offered to Dell Corporation in exchange for opening a new plant. The taxpayers claimed that the tax incentives violated the state and federal constitutions—specifically the equal protection clause of the North Carolina Constitution and the Commerce Clause of the Federal Constitution.

Dell countered that the claims were without merit, and that the taxpayers lacked standing to bring the suit. A local judge this week agreed with Dell, and the case will likely be appealed. The Dell case is closely related to the Cuno case, in which we filed two amicus briefs in the U.S. Supreme Court last year.

In Alabama, a local court judge recently ruled (registration req’d) that Alabama could not impose its corporate income tax on the Union Tank Car Company merely because it leased its railroad cars to customers that used them periodically in Alabama. The judge reasoned that Union did not have any offices or equipment in Alabama and had only one Alabama-based customer in the period at issue.

This case is another example of a state court wrestling with the idea of nexus, i.e. when does a taxpayer have to pay tax to a state? Courts in different states continue to reach different answers on this issue—which we highlighted in Background Paper No. 49—which leads many to support federal legislation to impose uniform nexus standards for state corporate tax purposes. Our analysis is that corporate taxation is only justified if a business has a physical presence in a state.


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