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Banner year for state tax cases before the U.S. Supreme Court.

The U.S. Supreme Court has been unusually busy this year with state tax cases. The Court has already decided two cases and another seven state tax cases are pending. Issues to be considered in these cases include jurisdiction to tax, business/nonbusiness income classification, income tax base, discriminatory taxation and taxation of instruments of international commerce. Each of these cases will likely have a profound effect on future state and local tax assessments. Two cases (Barker v. Kansas and Quill Corporation v. North Dakota) have been recently decided. Most, if not all, of the others will be decided sometime before June 29, 1992 when the Court adjourns for the summer. Below is a brief discussion of the facts and issues presented in each case.

Jurisdiction to tax

Mail-order use tax collections: On May 26, 1992, the Court decided Quill Corporation v. North Dakota in favor of the The Court in Quill held that a state could not require an out-of-state mail-order seller to collect use taxes on sales made into the state if the seller has no physical presence in the state. In so holding, the Court refused to overrule National Bellas Hess, Inc., 386 US 753 (1967), in which it found that economic exploitation of the marketplace without physical presence is insufficient contact with a state in order to impose a duty to collect use taxes. The decision in Quill is based on the Commerce Clause rather than the Due Process Clause and hence Congress is free to legislate a Federal law that would require the out-of-state mail-order sellers to collect the tax.

PL 86-272: Oral arguments have been heard in Wisconsin Department of Revenue v. William Wrigley, Jr. Co. In Wrigley, the Court is reviewing a decision of the Wisconsin Supreme Court that adopted an extremely broad view of the activities encompassed in the term "solicitation" under PL 86-272. This Federal statute prohibits a state from imposing an income tax on an out-of-state seller of tangible personal property, if its only activities in the state are solicitation of orders and delivery from out-of-state. The statute does not define the term "solicitation"; since its enactment in 1959, there has been considerable debate over the proper scope of the term.

The oral arguments focused on the facts and circumstances of the case at hand, particularly customs of the chewing gum industry. Additionally, the Court considered whether de minimis activity within a state should be permissible without sacrificing a company's protection from taxation under PL 86-272.


income classification

The Court heard oral arguments on Mar. 4, 1992 in Allied-signal, Inc. v. Director, Division of Taxation. In Allied-Signal, the Court has been asked to decide whether income derived from the sale of a minority stock interest in another corporation is apportionable business income or allocable nonbusiness income. Oral arguments brought into question the continuing validity of ASARCO, Inc., 458 US 307 (1982), and F. W. Woolworth Co., 458 US 307 (1982). These two cases have been interpreted as requiring a unitary business relationship between parent and subsidiaries in order for a state to include income derived from the subsidiaries in the parent's apportionable tax base. The Court had rehearings on Apr. 22, 1992, to consider whether ASARCO and Woolworth should be overruled; whether a decision to overrule the two decisions should be applied retroactively; and what constitutional principles should govern state taxation of corporations doing business in several states if ASARCO and Woolworth were to be overruled.

Income tax base

The Court has heard oral arguments in Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance. In Kraft, the Court will decide whether a state may constitutionally include foreign subsidiary dividends in the corporate tax base while excluding domestic subsidiary dividends. The taxpayer contends that the differential treatment of foreign and domestic dividends is unconstitutionally discriminatory.

Discriminatory taxation

California's Proposition 13: On Feb. 25, 1992, the Court heard oral arguments in Nordlinger v. Tax Assessor of Los Angeles County, a case dealing with the constitutionality of California's real property acquisition value taxation system established by Proposition 13. During the oral arguments, the justices considered the equal protection standard, noting that the rationality test (i.e., whether the state's taxing scheme is rationally related to a legitimate state purpose) for this type of issue is very low.

Nuclear power plants: The U.S. Supreme Court has agreed to hear a case challenging a new property tax imposed by New Hampshire that falls disproportionately on the Seabrook nuclear power plant which, in turn, exports its power to neighboring states (Connecticut v. New Hampshire). Connecticut, Massachusetts and Rhode Island contend that the tax is impermissibly discriminatory. At issue is the New Hampshire legislation that increased property taxes for nuclear power plants located within the state (Seabrook is the only one), while eliminating a gross receipts tax on electric utilities.

Hazardous waste: On Jan. 27, 1992, the Court granted certiorari in an Alabama case, Chemical Waste Management, Inc. v. Guy Hunt. Taxpayers are challenging the state statutory scheme that limits the amount of out-of-state hazardous waste that can be disposed of in the state, and imposes both a "base fee" on all hazardous waste (regardless of origin) disposed of in the state and a significant "additional fee" on all waste and substances generated outside the state, but disposed of in the state. The U.S. Supreme Court will consider whether the "additional fee" is unconstitutionally discriminatory.

Military pensions: On Apr. 21, 1992, the Court handed down its decision in Barker v. Kansas. Under Kansas personal income tax law, Federal military pensions are taxed, but state and Federal civil service pensions are exempt. The Court decided that this taxation of Federal military pensions was prohibited under a Federal statute prohibiting discriminatory taxation of Federal employees. The Court followed the precedent established in Davis, 498 US 803 (1989), which held that Michigan could not exempt the pensions of its own state employees from taxation without granting the same exemption to Federal employee pensions.

Taxation of instruments

of international commerce

On Feb. 24, 1992, the U.S. Supreme Court agreed to decide whether the imposition of Tennessee sales tax on leased international cargo containers is permissible (Itel Containers International Corp. v. Tennessee Department of Revenue). The taxpayer contends that the Foreign Commerce Clause, Customs Convention on Containers and Import-export Clause preclude imposition of state sales tax on the lease of instruments of international traffic that enter the United States under Customs bond and are used exclusively in foreign commerce.
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Author:Mims-Velarde, Rebecca F.
Publication:The Tax Adviser
Date:Jun 1, 1992
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