On September 23, 2013, several organizations and companies filed briefs as amici curiae in support of the petitions for a writ of certiorari filed by Overstock.Com, Inc., Amazon.com., Inc., and Amazon Services, LLC, requesting review by the United States Supreme Court of the New York Court of Appeals decision in Overstock.com, Inc. v. New York Department of Taxation and Finance, 20 N.Y.3d 586, 987 N.E.2d 621 (2013). Among the briefs filed was the Brief of Newegg, Inc. and the Direct Marketing Association, Inc. (the "DMA") as Amici Curiae in Support of the Petitioners. In their brief, Newegg and the DMA argue that the New York “click through affiliate nexus” statute, N.Y. Tax Law sec. 1101(b)(8)(vi), through an improper legislative presumption, narrows the zone of protected interstate advertising activity for out-of-state retailers under the Commerce Clause by shifting onto the retailers the burden of disproving “substantial nexus” with the state, in violation of the due process rights of retailers. Newegg and the DMA argue that the Constitution’s Due Process Clause prohibits states from using presumptions to interfere with matters that are removed from their authority by the Constitution, such as the regulation of interstate commerce. Brann & Isaacson partners Martin I. Eisenstein, George S. Isaacson, and Matthew P. Schaefer prepared the brief of amici on behalf of Newegg and the DMA.
Among the other organizations filing briefs were the Tax Foundation and the National Taxpayers Union, the American Legislative Exchange Council, the American Association of Attorney-Certified Public Accountants, and Scrapbook.com, Assisted Living Store, Inc., et al.
Showing posts with label Supreme Court. Show all posts
Showing posts with label Supreme Court. Show all posts
Tuesday, September 24, 2013
Friday, September 13, 2013
Amazon.com and Overstock.com Petition U.S. Supreme Court over New York Affiliate Nexus Law
We’ve written frequently about developments in Amazon.com and Overstock.com’s challenges to the New York State affiliate nexus law (a law which has inspired similar laws in many other states). Last spring, the New York Court of Appeals, the State’s highest court, upheld the law, stating that, in regards to the parties’ Commerce Clause claims, the “statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as ‘demonstrably more than a ‘slightest presence’’” under the Tax Appeals Tribunal’s 1995 ruling in the Orvis case. The Court continued by saying that “The bottom line is that if a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden.” The Court rejected the parties’ due process claims, as well.
Late last month, both Amazon.com and Overstock.com took their challenge to the United States Supreme Court, each filing a petition for a writ of certiorari, seeking review of the New York affiliate nexus law and of the New York Court of Appeals Decision (see status of the petitions here and here). New York has until October 23 to file a response in each case. However, as the Supreme Court’s review is discretionary, it is unclear whether the matter will be actually be heard by or decided by the Supreme Court. If not, the New York decision will stand, and other states’ versions of the affiliate nexus law will not be impacted. Meanwhile, the Marketplace Fairness Act, which could, in theory, make challenges such as these moot, remains in committee in the House of Representatives.
We will continue to track developments and keep our readers posted.
Late last month, both Amazon.com and Overstock.com took their challenge to the United States Supreme Court, each filing a petition for a writ of certiorari, seeking review of the New York affiliate nexus law and of the New York Court of Appeals Decision (see status of the petitions here and here). New York has until October 23 to file a response in each case. However, as the Supreme Court’s review is discretionary, it is unclear whether the matter will be actually be heard by or decided by the Supreme Court. If not, the New York decision will stand, and other states’ versions of the affiliate nexus law will not be impacted. Meanwhile, the Marketplace Fairness Act, which could, in theory, make challenges such as these moot, remains in committee in the House of Representatives.
We will continue to track developments and keep our readers posted.
Friday, March 9, 2012
More Cautionary Tales of State Tax Laws With Retroactive Effects
We have written before about retroactive tax laws, but there is reason for concern that the phenomenon of states resorting to retroactivity may be on the rise. In the most recent case to wind its way to the end of the state appeal process, the Michigan Court of Appeals upheld a statute that amended Michigan’s use tax code with an effective date 5 years prior to its enactment. General Motors Corp. v. Department of Treasury, 290 Mich. App. 355 (2010), appeal denied, 489 Mich. 991 (2011), and cert. denied, 132 S.Ct. 1143 (2012). The Michigan Supreme Court denied review in the case last year, and the U.S. Supreme Court refused to review the decision a few weeks ago, in late January 2012. The decision by the GM Court, which cited the Kentucky case discussed in our earlier blog post, Miller v. Johnson Controls, 296 S.W.3d 392 (Ky. 2009), rehearing denied (2009), and cert. denied, 130 S.Ct. 3324 (2010), suggests that the legal standard a state must satisfy to amend its tax law retroactively is, in many instances, not very exacting.
GM concerned a statute passed by the Michigan legislature to block the giant automaker (and potentially other companies) from obtaining a refund of use tax paid on “demonstration” vehicles driven temporarily by GM employees, but expressly held by GM in inventory for resale, and later sold to consumers. Over the years, GM had paid tens of millions of dollars in use tax based on the Michigan Department of Treasury’s enforcement position, asserted in audits of the company, that GM was required to self-assess and pay Michigan use tax as a result of its employees’ temporary use of the vehicles in the state.
However, in 2006, the Michigan Court of Appeals held (in a case involving auto dealerships) that such demonstration vehicles acquired and held for resale were not subject to use tax, and that interim employee use did not result in conversion of the autos’ use to a taxable use, as the Department argued. The Michigan Supreme Court affirmed the relevant portion of the Betten decision in 2007. Betten Auto Center, Inc. v. Department of Treasury, 272 Mich.App. 14, 20-22 (2006), aff’d in pertinent part, 478 Mich. 874 (2007).
GM promptly filed refund claims for prior years seeking more than $115 million in overpaid use tax. On top of that, the Michigan Department of Treasury estimated that, for all potential claimants, the total refund exposure to the state was in excess of $250 million.
To prevent the risk of a substantial loss in (erroneously) collected revenue, the Michigan Legislature also took swift action. In October 2007, the legislature enacted a law that preserved the Betten decision as to the specific taxpayers in that case (the auto dealerships), but retroactively amended the use tax to codify the Department’s “conversion to a taxable use” approach, effective as of September 30, 2002. The law made clear that the Legislature’s intent was to deny any claim for a resale exemption by another taxpayer based on the Betten decision. The Department thereafter denied GM’s refund claims, and the company sued, asserting multiple constitutional violations, including a deprivation of its due process rights.
Although GM prevailed before the lower court, the Court of Appeals rejected GM’s claims for refund. The Court agreed with GM that the change in the use tax law did not merely clarify the existing tax code, but in fact effected a substantive change. However, the Court stressed that, under applicable Supreme Court precedent, including United States v. Carlton, 512 U.S. 26 (1994), taxpayers have no vested right in the continuance of any tax law (and generally no claim for an unconstitutional taking of property under the tax code, except where laws are so arbitrary as to be confiscatory). As a result, the court found tax laws are generally subject to the relatively lenient standards of “procedural” due process (as opposed to the more stringent standards of “substantive” due process applicable to vested or fundamental rights).
Under the procedural due process standard, the law’s retroactive application must merely be “rationally related to a legitimate legislative purpose.” The Court noted that Carlton and other Supreme Court decisions establish that the goal of preventing a “significant and unexpected revenue loss” has been repeatedly upheld a legitimate purpose, to which a change in the tax code is rationally related. The Michigan Court also rejected the claim that a five year period of retroactivity was excessive, holding that there is no fixed limit on the period of retroactivity, and that such determinations must be made on a case-by-case basis.
It remains to be seen how far states will push the concept of retroactivity. As a matter of enforcement practice, the New Jersey Division of Taxation announced in early 2011 that it intended to apply the principles of “economic nexus” to require payment of the New Jersey Corporation Business Tax by out-of-state service providers with customers in the state, effective for all periods after January 1, 2002 ― a retroactive look back period of 9 years. In Connecticut last year, the legislature adopted an “affiliate nexus law” with a future effective date. Then, after Amazon.com terminated its Connecticut affiliates, the legislature amended the law to give it a retroactive effective date, prior to the date Amazon sent its termination letters. (There have been no reports that the Connecticut Department of Revenue Services has sought to enforce the law retroactively, however.)
Many state legislators and tax officials likely recognize the policy concerns raised by amending tax laws retroactively, but in tough economic times, the Supreme Court’s recent refusal to review the GM case may further embolden state legislatures and revenue departments seeking retroactive enforcement of tax law changes. Remote sellers and Internet retailers should be watchful and aware of the risks of such efforts.
GM concerned a statute passed by the Michigan legislature to block the giant automaker (and potentially other companies) from obtaining a refund of use tax paid on “demonstration” vehicles driven temporarily by GM employees, but expressly held by GM in inventory for resale, and later sold to consumers. Over the years, GM had paid tens of millions of dollars in use tax based on the Michigan Department of Treasury’s enforcement position, asserted in audits of the company, that GM was required to self-assess and pay Michigan use tax as a result of its employees’ temporary use of the vehicles in the state.
However, in 2006, the Michigan Court of Appeals held (in a case involving auto dealerships) that such demonstration vehicles acquired and held for resale were not subject to use tax, and that interim employee use did not result in conversion of the autos’ use to a taxable use, as the Department argued. The Michigan Supreme Court affirmed the relevant portion of the Betten decision in 2007. Betten Auto Center, Inc. v. Department of Treasury, 272 Mich.App. 14, 20-22 (2006), aff’d in pertinent part, 478 Mich. 874 (2007).
GM promptly filed refund claims for prior years seeking more than $115 million in overpaid use tax. On top of that, the Michigan Department of Treasury estimated that, for all potential claimants, the total refund exposure to the state was in excess of $250 million.
To prevent the risk of a substantial loss in (erroneously) collected revenue, the Michigan Legislature also took swift action. In October 2007, the legislature enacted a law that preserved the Betten decision as to the specific taxpayers in that case (the auto dealerships), but retroactively amended the use tax to codify the Department’s “conversion to a taxable use” approach, effective as of September 30, 2002. The law made clear that the Legislature’s intent was to deny any claim for a resale exemption by another taxpayer based on the Betten decision. The Department thereafter denied GM’s refund claims, and the company sued, asserting multiple constitutional violations, including a deprivation of its due process rights.
Although GM prevailed before the lower court, the Court of Appeals rejected GM’s claims for refund. The Court agreed with GM that the change in the use tax law did not merely clarify the existing tax code, but in fact effected a substantive change. However, the Court stressed that, under applicable Supreme Court precedent, including United States v. Carlton, 512 U.S. 26 (1994), taxpayers have no vested right in the continuance of any tax law (and generally no claim for an unconstitutional taking of property under the tax code, except where laws are so arbitrary as to be confiscatory). As a result, the court found tax laws are generally subject to the relatively lenient standards of “procedural” due process (as opposed to the more stringent standards of “substantive” due process applicable to vested or fundamental rights).
Under the procedural due process standard, the law’s retroactive application must merely be “rationally related to a legitimate legislative purpose.” The Court noted that Carlton and other Supreme Court decisions establish that the goal of preventing a “significant and unexpected revenue loss” has been repeatedly upheld a legitimate purpose, to which a change in the tax code is rationally related. The Michigan Court also rejected the claim that a five year period of retroactivity was excessive, holding that there is no fixed limit on the period of retroactivity, and that such determinations must be made on a case-by-case basis.
It remains to be seen how far states will push the concept of retroactivity. As a matter of enforcement practice, the New Jersey Division of Taxation announced in early 2011 that it intended to apply the principles of “economic nexus” to require payment of the New Jersey Corporation Business Tax by out-of-state service providers with customers in the state, effective for all periods after January 1, 2002 ― a retroactive look back period of 9 years. In Connecticut last year, the legislature adopted an “affiliate nexus law” with a future effective date. Then, after Amazon.com terminated its Connecticut affiliates, the legislature amended the law to give it a retroactive effective date, prior to the date Amazon sent its termination letters. (There have been no reports that the Connecticut Department of Revenue Services has sought to enforce the law retroactively, however.)
Many state legislators and tax officials likely recognize the policy concerns raised by amending tax laws retroactively, but in tough economic times, the Supreme Court’s recent refusal to review the GM case may further embolden state legislatures and revenue departments seeking retroactive enforcement of tax law changes. Remote sellers and Internet retailers should be watchful and aware of the risks of such efforts.
Monday, January 31, 2011
A Reminder About The State Tax Implications of Passive Partnership Interests: U.S. Supreme Court Declines To Review State Court Ruling That Mere Partnership Interest Creates Income Tax Nexus
E-commerce companies that have affiliates doing business as (or even just investment interests in) partnerships or other pass-through entities in states in which the e-commerce company has no direct presence should be aware that such partnership interests may be deemed to create income tax nexus for the company. A number of state laws and regulations provide that ownership in a pass-through entity establishes nexus for the owner. See, e.g., 34 TAC Sec. 3.586(c)(13) [Texas]; 830 CMR 63.39.1(8) [Massachusetts]. To date, state tax tribunals have agreed. See, e.g., Shell Gas Gathering Corp. #2, N.Y. Tax Appeals Tribunal, DTA Nos. 821569 and 921570 (Sept. 23, 2010).
Furthermore, on January 25, 2011, the United States Supreme Court declined a petition asking the Court to review a Kentucky Appeals Court decision that an out-of-state corporation was properly required to pay Kentucky state income tax, despite the fact that its only connection to Kentucky was its interest in a partnership that was engaged in business in the state. Asworth, LLC v. Kentucky Department of Revenue, 2009 WL 3877518 (Ky. App. Ct. Feb. 10, 2010), review denied (Ky. 2010) and cert denied, U.S. Supreme Court Dkt. 10-662 (Jan. 25, 2011). While mere passive ownership in a partnership that generates revenue from activities in a state would not, by itself, be enough to subject the partner-owner to nexus for sales and use tax purposes, the Supreme Court’s refusal to review the Kentucky decision leaves undisturbed the position taken by many states that owners of an interest in a pass-though entity can be compelled to report state income tax.
Furthermore, on January 25, 2011, the United States Supreme Court declined a petition asking the Court to review a Kentucky Appeals Court decision that an out-of-state corporation was properly required to pay Kentucky state income tax, despite the fact that its only connection to Kentucky was its interest in a partnership that was engaged in business in the state. Asworth, LLC v. Kentucky Department of Revenue, 2009 WL 3877518 (Ky. App. Ct. Feb. 10, 2010), review denied (Ky. 2010) and cert denied, U.S. Supreme Court Dkt. 10-662 (Jan. 25, 2011). While mere passive ownership in a partnership that generates revenue from activities in a state would not, by itself, be enough to subject the partner-owner to nexus for sales and use tax purposes, the Supreme Court’s refusal to review the Kentucky decision leaves undisturbed the position taken by many states that owners of an interest in a pass-though entity can be compelled to report state income tax.
Monday, September 13, 2010
Oklahoma Adopts a Gross Receipts Tax Providing for “Economic Presence” Nexus
Oklahoma has been in the news recently because of its enactment of a controversial sales tax statute, similar to the Colorado statute, that requires companies which do not collect and remit the Oklahoma sales and use tax because of their lack of physical presence to provide notification to Oklahoma purchasers of the purchasers’ obligation to remit sales and use tax. (See our related blog posts of June 24, July 1, and July 9.) In addition, Oklahoma has recently adopted a Business Activity Tax, which is in lieu of the franchise tax, and which requires any company with sales greater than $500,000 to Oklahoma destinations, regardless of the company’s physical presence in Oklahoma, to pay a tax of 1% of its gross sales revenue to Oklahoma residents. The Business Activity Tax legislation, like the sales tax legislation, ignores the Quill physical presence test, and bases nexus on the “economic presence” of an out-of-state company; i.e., greater than $500,000 of gross receipts from an Oklahoma source. The Business Activity Tax, insofar as the tax on gross receipts, does not go into effect until calendar year 2013.
As we wrote in our prior blog posts with regard to other state statutes based on an economic presence, the Oklahoma statute raises significant constitutional concerns. There is good U.S. Supreme Court precedent that stands for the proposition that the Quill/Bellas Hess physical presence standard of nexus applies to gross receipts taxes. See Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810 (1987); Commonwealth Edison Company v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981).
As we wrote in our prior blog posts with regard to other state statutes based on an economic presence, the Oklahoma statute raises significant constitutional concerns. There is good U.S. Supreme Court precedent that stands for the proposition that the Quill/Bellas Hess physical presence standard of nexus applies to gross receipts taxes. See Tyler Pipe Industries, Inc. v. Washington Department of Revenue, 483 U.S. 232, 107 S.Ct. 2810 (1987); Commonwealth Edison Company v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946 (1981).
Monday, June 28, 2010
Supreme Court Hands Down Decision in Bilski
After many months of waiting, the Supreme Court has finally issued its decision in Bilski v. Kappos. The decision addresses the patentability of “business methods.” Read more about the decision and its impact on retailers at our sister blog, Eyes on IP.
UPDATE: Our friends have moved -- you can now visit our sister blog at IP Wise.
UPDATE: Our friends have moved -- you can now visit our sister blog at IP Wise.
Monday, June 14, 2010
The Incredible Shrinking Jurisdiction?
On June 1, 2010, the United States Supreme Court in Levin v. Commerce Energy, Inc., 560 U.S. __ (2010), issued as close as it gets these days to a unanimous decision. Though fractured into four separate opinions, all of the Justices reached the same conclusion: that the United States District Court for the Southern District of Ohio correctly dismissed a state tax-related case. But, the distinction between the majority opinion and a concurrence by the Court’s most conservative Justices reveals that the door to federal court involvement in state tax matters remains open.
For direct marketers, access to federal courts for challenges to the constitutionality of state and local taxes and related enforcement efforts by the states is especially important. Not only are federal courts often more experienced in regards to federal constitutional issues, including Commerce Clause disputes, but they offer at least the appearance of a more neutral playing field since the federal courts are not funded by state tax revenue and are often called upon to play the role of arbiter in jurisdictional battles between the states. Thus, any decision that appears to restrict access to federal courts needs to be reviewed very closely.
Background. Under Ohio law, certain sellers of natural gas enjoy tax exemptions, while others do not. Mindful of the Tax Injunction Act, and its broad limitation on the federal courts entertaining suits seeking to arrest the collection of state tax (or to reduce the amount of tax so collected), the plaintiffs came up with a clever approach that convinced the United States Court of Appeals for the Sixth Circuit to reinstate the case previously dismissed by the District Court. In crafting their complaint, the plaintiffs sought not to reduce their own tax obligations or in any way arrest the collection of taxes. Rather, the relief they sought was to deny their competitors certain tax exemptions, the net result of which, if successful, would be to increase state tax revenues. Because the plaintiffs did not seek to arrest collection of tax, the Sixth Circuit agreed that they had avoided falling under the Tax Injunction Act’s restrictions.
In addition to the Tax Injunction Act, the doctrine of “comity” may also keep tax cases out of federal court. Comity is the doctrine under which a court can stay its hand in hearing a case that lies within its jurisdiction to hear, and to do so out of respect for the power of other courts--perhaps better suited--to resolve the matter. In tax cases like this one, a rationale for dismissal of a case on the basis of comity could include deference to state courts to resolve matters that impact on their governmental revenue-raising prerogatives and powers.
The plaintiffs in Levin argued, and the Sixth Circuit found, relying mainly upon a footnote from Hibbs v. Winn, 542 U.S. 88 (2004), that comity likewise did not bar the suit. In Hibbs, the Supreme Court explained in a footnote that principles of comity only preclude federal court jurisdiction “when plaintiffs have sough district-court aid in order to arrest or countermand state tax collection.” Hibbs, 542 U.S. at 107 n. 9. It made sense. After all, the plaintiffs expressly disclaimed any interest in having their own taxes reduced or inhibiting in any way the collection of taxes by the State of Ohio.
The Supreme Court Reverses. But, the Supreme Court ran away as fast as it could from the footnote in Hibbs. In its majority opinion, the Court held that the plaintiffs were not free to elect a form of relief that would sidestep the Tax Injunction Act or comity. Whether to strike down the exemptions (as the plaintiffs had requested) or to apply the exemptions to all natural gas sellers (including the plaintiffs) was the prerogative of the State of Ohio, the Court explained, and not the federal courts or the plaintiffs. The Court noted that it has, as a matter of practice, abstained from determining remedial choices, allowing states the flexibility to respond as they see fit once provided a finding that a state tax statute is constitutionally infirm. See. e.g., McKesson Corp. v. Fla. Dep’t of Business Regulation, 496 U.S. 18, 49-40 (1990).
The Court also distinguished Hibbs on the grounds that the plaintiffs in the Hibbs case were, effectively, strangers to the underlying tax controversy arising out of tax credits allowed for payments that subsidized parochial school scholarships. “It was essentially,” the majority in Levin observed, “an attack on the allocation of state resources for allegedly unconstitutional purposes” by “outsiders to the tax expenditure.” Thus, “[u]nlike the Hibbs plaintiffs, respondents do object to their own tax situation, measured by the allegedly more favorable treatment accorded [their competitors].” In Hibbs, the majority also noted, the only remedy was the invalidation of the tax credit—and, as a result, the case did not result in the intrusion of the federal courts into state remedial choices. Notably, in a concurring opinion, the more conservative Justices found that both comity and the Tax Injunction Act barred federal court adjudication of the case and supported their decision to reinstate the District Court’s dismissal.
Implications. The conservative members of the Court signaled the likely impact of the Levin case when they bemoaned the Court’s reliance on comity (a “prudential ground”) rather than the Tax Injunction Act (a "jurisdictional ground"). This is an important distinction—because the federal courts have it within their discretion to refrain from hearing a case where principles of comity, alone, are concerned. Such a discretionary decision ordinarily would be given considerable respect on appeal. In contrast, federal courts have no discretion to hear a case that is prohibited by the Tax Injunction Act. The Act reflects an absolute limitation on the courts' power to hear the matter. Justice Thomas pointedly identified the majority's holding as creating a loophole “to leave the door [of the federal courts] open to doing in future cases what it did in Hibbs, namely, retain federal court jurisdiction over constitutional claims that the Court simply does not believe Congress should have entrusted to state judges under the Act, see 542 U.S., at 113-28 (Kennedy, J., dissenting).”
For direct marketers, access to federal courts for challenges to the constitutionality of state and local taxes and related enforcement efforts by the states is especially important. Not only are federal courts often more experienced in regards to federal constitutional issues, including Commerce Clause disputes, but they offer at least the appearance of a more neutral playing field since the federal courts are not funded by state tax revenue and are often called upon to play the role of arbiter in jurisdictional battles between the states. Thus, any decision that appears to restrict access to federal courts needs to be reviewed very closely.
Background. Under Ohio law, certain sellers of natural gas enjoy tax exemptions, while others do not. Mindful of the Tax Injunction Act, and its broad limitation on the federal courts entertaining suits seeking to arrest the collection of state tax (or to reduce the amount of tax so collected), the plaintiffs came up with a clever approach that convinced the United States Court of Appeals for the Sixth Circuit to reinstate the case previously dismissed by the District Court. In crafting their complaint, the plaintiffs sought not to reduce their own tax obligations or in any way arrest the collection of taxes. Rather, the relief they sought was to deny their competitors certain tax exemptions, the net result of which, if successful, would be to increase state tax revenues. Because the plaintiffs did not seek to arrest collection of tax, the Sixth Circuit agreed that they had avoided falling under the Tax Injunction Act’s restrictions.
In addition to the Tax Injunction Act, the doctrine of “comity” may also keep tax cases out of federal court. Comity is the doctrine under which a court can stay its hand in hearing a case that lies within its jurisdiction to hear, and to do so out of respect for the power of other courts--perhaps better suited--to resolve the matter. In tax cases like this one, a rationale for dismissal of a case on the basis of comity could include deference to state courts to resolve matters that impact on their governmental revenue-raising prerogatives and powers.
The plaintiffs in Levin argued, and the Sixth Circuit found, relying mainly upon a footnote from Hibbs v. Winn, 542 U.S. 88 (2004), that comity likewise did not bar the suit. In Hibbs, the Supreme Court explained in a footnote that principles of comity only preclude federal court jurisdiction “when plaintiffs have sough district-court aid in order to arrest or countermand state tax collection.” Hibbs, 542 U.S. at 107 n. 9. It made sense. After all, the plaintiffs expressly disclaimed any interest in having their own taxes reduced or inhibiting in any way the collection of taxes by the State of Ohio.
The Supreme Court Reverses. But, the Supreme Court ran away as fast as it could from the footnote in Hibbs. In its majority opinion, the Court held that the plaintiffs were not free to elect a form of relief that would sidestep the Tax Injunction Act or comity. Whether to strike down the exemptions (as the plaintiffs had requested) or to apply the exemptions to all natural gas sellers (including the plaintiffs) was the prerogative of the State of Ohio, the Court explained, and not the federal courts or the plaintiffs. The Court noted that it has, as a matter of practice, abstained from determining remedial choices, allowing states the flexibility to respond as they see fit once provided a finding that a state tax statute is constitutionally infirm. See. e.g., McKesson Corp. v. Fla. Dep’t of Business Regulation, 496 U.S. 18, 49-40 (1990).
The Court also distinguished Hibbs on the grounds that the plaintiffs in the Hibbs case were, effectively, strangers to the underlying tax controversy arising out of tax credits allowed for payments that subsidized parochial school scholarships. “It was essentially,” the majority in Levin observed, “an attack on the allocation of state resources for allegedly unconstitutional purposes” by “outsiders to the tax expenditure.” Thus, “[u]nlike the Hibbs plaintiffs, respondents do object to their own tax situation, measured by the allegedly more favorable treatment accorded [their competitors].” In Hibbs, the majority also noted, the only remedy was the invalidation of the tax credit—and, as a result, the case did not result in the intrusion of the federal courts into state remedial choices. Notably, in a concurring opinion, the more conservative Justices found that both comity and the Tax Injunction Act barred federal court adjudication of the case and supported their decision to reinstate the District Court’s dismissal.
Implications. The conservative members of the Court signaled the likely impact of the Levin case when they bemoaned the Court’s reliance on comity (a “prudential ground”) rather than the Tax Injunction Act (a "jurisdictional ground"). This is an important distinction—because the federal courts have it within their discretion to refrain from hearing a case where principles of comity, alone, are concerned. Such a discretionary decision ordinarily would be given considerable respect on appeal. In contrast, federal courts have no discretion to hear a case that is prohibited by the Tax Injunction Act. The Act reflects an absolute limitation on the courts' power to hear the matter. Justice Thomas pointedly identified the majority's holding as creating a loophole “to leave the door [of the federal courts] open to doing in future cases what it did in Hibbs, namely, retain federal court jurisdiction over constitutional claims that the Court simply does not believe Congress should have entrusted to state judges under the Act, see 542 U.S., at 113-28 (Kennedy, J., dissenting).”
Thursday, May 27, 2010
Supreme Court Declines To Review Retroactive Ban On Refund Claims
So you think a state cannot change its tax laws after the fact to validate an erroneous legal interpretation by its revenue department that caused massive over-reporting of tax? Think again. Indeed, we were reminded earlier this week that, at least in some circumstances, states can retroactively adjust the rules to foreclose even pending claims for tax relief.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
In 1996, the Kentucky legislature formally abolished the filing of unitary returns for tax years after 1994. Then, in 2000, with the pending refund claims for earlier years creating the prospect of a massive drain on the state treasury, the legislature passed a law prohibiting the filing of refund claims for any tax year before 1995, based on the submission of an amended, unitary return filed after December 22, 1994. As a result, even those taxpayers who had successfully challenged the 1988 policy in court and had pending refund claims were retroactively precluded from obtaining refunds of excess tax paid.
In response to a challenge to the retroactive effect of the 2000 statute, the Kentucky Supreme Court, citing United States v. Carlton, 512 U.S. 26 (1994), held last year that the law satisfied the requirements of due process because it was rationally related to the legitimate governmental purpose of raising and controlling revenue. The Court found that the taxpayers could have no settled expectation of obtaining the refunds, given the legislature’s action in 1996 to reverse the effect of the Court’s 1994 decision for subsequent years. The Court further held that the new, retroactive tax statute infringed no fundamental constitutional right of the taxpayers and thus resulted in no violation of equal protection.
The taxpayers asked the United States Supreme Court to review the decision, but the Court on Monday turned down the request. Johnson Controls v. Miller, U.S. Supreme Court, Dkt 09-981, petition for cert. denied (May 24, 2010). In light of the existing jurisprudence on taxpayer due process embodied by Carlton, the Kentucky case perhaps breaks no new constitutional ground, but it may expand the limits (not yet fully defined) on how far a state may go to foreclose tax relief in order to protect state coffers.
The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).
Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.
In 1996, the Kentucky legislature formally abolished the filing of unitary returns for tax years after 1994. Then, in 2000, with the pending refund claims for earlier years creating the prospect of a massive drain on the state treasury, the legislature passed a law prohibiting the filing of refund claims for any tax year before 1995, based on the submission of an amended, unitary return filed after December 22, 1994. As a result, even those taxpayers who had successfully challenged the 1988 policy in court and had pending refund claims were retroactively precluded from obtaining refunds of excess tax paid.
In response to a challenge to the retroactive effect of the 2000 statute, the Kentucky Supreme Court, citing United States v. Carlton, 512 U.S. 26 (1994), held last year that the law satisfied the requirements of due process because it was rationally related to the legitimate governmental purpose of raising and controlling revenue. The Court found that the taxpayers could have no settled expectation of obtaining the refunds, given the legislature’s action in 1996 to reverse the effect of the Court’s 1994 decision for subsequent years. The Court further held that the new, retroactive tax statute infringed no fundamental constitutional right of the taxpayers and thus resulted in no violation of equal protection.
The taxpayers asked the United States Supreme Court to review the decision, but the Court on Monday turned down the request. Johnson Controls v. Miller, U.S. Supreme Court, Dkt 09-981, petition for cert. denied (May 24, 2010). In light of the existing jurisprudence on taxpayer due process embodied by Carlton, the Kentucky case perhaps breaks no new constitutional ground, but it may expand the limits (not yet fully defined) on how far a state may go to foreclose tax relief in order to protect state coffers.
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