State and Local Tax

Course Overview
1. Constitution
2. State and Local Tax provisions (income, sales, property tax)
3. Procedural/Remedial Aspects of State and Local Tax

Constitution Provisions: Art.1 8,

Class 1 Monday Aug 28th: Reading Introduction (1-22), Constitutional Foundations; Due Process and interstate commerce (23-55).

INTRODUCTION
A. Sales and Use Taxes
Use Tax: Tax on storage, use or other consumption in the state of tangible personal property.
- Assessed upon tax free personal property purchased by a resident of the assessing state for use, storage, or consumption of goods in that
state regardless of where the purchase took place
- The use tax is typically assessed at the same rate as the sales tax that would have been owed (if any) had the same goods been purchased in the
state of residence.
o Typical "tax free" purchases that require payment of use tax include those done while traveling (for things carried or sent
home), through mail order, or purchases via telephone or internet

CHAPTER 2: JURISDICTION TO TAX

A. CONSTITUTIONAL LIMITS ON STATE TAXING JURISDICTION
- Remember that A State may not (consistent with Due process and the 14th amendment) assert personal jurisdiction unless that person has minimum
contacts with that state International Shoe dealing with salespersons and an attempt to collect unemployment taxes on commissions paid by out of
state corporations to its salespersons instate
o systematic and continuous activities that resulted in a large volume of interstate businessmade it reasonably just, according to our
traditional conception of fair play and substantial justice, to permit the state to enforce the obligations
- Due Process as a Restraint on State Taxation
o Minimum contacts, purposeful availment, and NO requirement of physical presence, fairness notion/ notice, cant offend traditional notions of
fair play, Minimum connection between state and person/property/or transaction to tax
- Commerce Clause as a Restraint on State Taxation
o How is this analysis different from the DP analysis? The main issue is whether it is unduly burdensome to interstate commerce
o Is it burdensome to require out of state vendor to collect tax (i.e. in Quill)?
Must have substantial nexus
It could be extremely burdensome, because all sorts of small vendors would have many tax laws to sift through in order to sell goods
in another state.

Quill Corporation v. North Dakota

- Facts:
o Quill Corp. is an office supply retailer.
They had no physical presence in ND (neither a sales force, nor a retail outlet) but ND customers used Quills catalogue, flyer,
magazine, and floppy disk.
o North Dakota sent a notice to Quill Corp. that it owed use tax (a companion tax to the sales tax) payments for purchases that North Dakota
residents had made through Quill Corp.s catalogue.
Statute: Each retailer maintaining a place of business in the state, to collect tax on consumers, retailer is defined to include every
person who engages in solicitation of consumer market, regular or systematic solicitation 3+ advertisements in 12 months
o Quill responded that it did not have nexus in North Dakota because it had no physical operations or employees and hence did not have to
collect North Dakota use tax on sales made to North Dakota customers.
o The state court ruled in favor of Quill, grounding its decision on Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753:
it was held in Bellas that a business whose only contacts with the taxing state are by mail or by common carrier (mail, phone, radio,
t.v. federally regulated entities that can only post a schedule of prices) lacks the "substantial nexus" required under the Dormant
Commerce Clause.
A physical presence was deemed to be required for the vendors to collect sales tax.
In this 1967 case, the United States Supreme court found a similar Illinois statute to be in violation of both the Due Process Clause
of the Fourteenth Amendment and the Commerce Clause of the United States Constitution.
o The North Dakota Supreme Court reversed, basing its decision on a rejection of Bellas Hess in light of the "tremendous social, economic,
commercial, and legal innovations" since it had been decided.
The North Dakota Supreme Court ruled that Quill had sufficient economic nexus with the state, and that the company had sufficiently
availed itself of the services and benefits of the state by virtue of its business relationship with North Dakota customers.
The court said that an honest reading of the courts own precedent shows that Bellas was decided much before all of the tax cases
that happened since: Bellas is still good law. But only on the commerce side, not the tax side.
- Issue: (1) Had Bellas Hess become obsolete? (2) Was North Dakota's imposition of a use tax upon the merchandise of the Quill Corporation in compliance
with the Due Process Clause and the Commerce Clause?
- Holding(SCC):
o No and No. In the Court admitted that, over time, subsequent cases have allowed for more flexibility than Bellas Hess.
Nevertheless, the Court maintained that this evolution does not suggest a rejection of Bellas Hess.
 o The U.S. Supreme Court reversed the lower court's ruling, indicating that while Quill had met the minimum connection standard of the Due
Process clause via the economic nexus, it had NOT met the sufficient nexus standard of the Commerce clause.
The Court upheld its earlier ruling in National Bellas Hess, where it affirmed that substantial nexus exists only where there is a non-
trivial physical presence in the state.
The U.S. Supreme Court ruled that physical presence is not required for Due Process Clause "minimum contacts" analysis, but
retained the Bellas Hess bright-line rule requiring physical presence for Commerce Clause purposes based on the value of certainty
and stare decisis in fostering business investment.
The Quill court implicitly questioned whether the physical presence test is in fact the right test, and explicitly invited
Congress to overrule its holding if it deemed it desirable.
o The Court determined that Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), did not limit or undo the Bellas Hess rule.
Complete Auto came up with a 4-prong test to determine if tax was constitutional under the Commerce Clause
Substantial nexus - connection between a state and a potential taxpayer clear enough to impose a tax
Nondiscrimination - interstate and intrastate taxes should not favor one over the other.
Fair apportionment - taxation of only the apportionment of activity that transpires within the taxing jurisdiction
Fair relationship to services provided by the state - company enjoys services such as police protection while in a state.
A corporation, the court ruled, may have the minimum contacts required by the due process clause and still fall short of the
substantial nexus required by the Dormant Commerce Clause.
The court noted that the bright-line rule of National Bellas Hess "furthers the ends" of the Dormant Commerce Clause.
The Court thus reversed the decision of the North Dakota Supreme Court that required Quill to collect and remit "use" taxes on
purchases made by customers from that state.
o The Court also determined that North Dakota's imposition of the use tax did not constitute a breach of the Due Process Clause because the
Quill Corporation had sufficient contact with the state's residents and benefited from the state's tax revenue.
However, it found the use tax to be unconstitutional because it interfered with interstate commerce, rendering it a violation of the
Commerce Clause.
o Consequently, the Court reversed the North Dakota Supreme Court's decision by ruling in favor of the Quill Corp.
- Significance: This Supreme Court ruling is significant because many states are passing legislation that contradicts the Quill ruling that a company must
have substantial nexus before being required to file.
o It provides a real dilemma for taxpayers when a state's legislature passes a law that provides a bright line threshold for nexus creation.
o For example, several states have enacted statutes that state that if a seller has a specific dollar amount of sales into the state, then nexus has
been created and the company has a sales tax collection responsibility.
o Such legislation is contrary to the Supreme Court ruling in Quill and is therefore unconstitutional.
o So, a taxpayer can disagree on principal but lose in practice until challenges against the legislation work their way through the courts where it
may ultimately be deemed unconstitutional.
- Concludes with: Disruptive to apply physical presence for due process but not punt to congress.

B. THE PHYSICAL PRESENCE STANDARD AND THE TAXATION OF E-COMMERCE

Overstock.com, Inc. v. New York State Department
- Facts:
o Under New York law, 'vendors' are required to collect sales and use tax. In 2008, New York amended the definition of the term 'vendor' to
create a rebuttable presumption that an out-of-state retailer is a 'vendor' if the retailer: (1) enters into an agreement with a New York resident
for which the New York resident is paid a commission; (2) the New York resident links to the retailer's website; and (3) the cumulative gross
receipts from such New York resident referrals exceeds $10,000 over the prior four quarterly periods.
When this amendment was enacted, it was widely understood that it targeted Amazon, an out-of-state retailer that was not
collecting New York sales and use tax and that was contracting with New York residents who operated webpages that linked to the
amazon.com website.
o It might be asked why the statutory amendment did not simply require that all out-of-state retailers collect New York sales and use tax.
The answer is that such a statute would be unconstitutional under United States Supreme Court precedent.
Quil, the Court held that an out-of-state retailer cannot be forced to collect sales or use tax in a state unless the retailer has a
'physical presence' (employees or property) in the state. Other United States Supreme Court opinions make clear that a
salesperson's 'physical presence' in a state can be attributed to an out-of-state retailer.
From this case law, two principles emerge:
o First, a retailer cannot ordinarily be forced to collect sales/use tax if it has no physical presence in a state.
o Second, a retailer can be forced to collect sales/use tax in a state if it has a sales representative working for it
in that state.
o New York's Amazon Law was designed with these two principles in mind.
Its point is to create a presumption that New York resident website operators linking to retailer websites for a commission are
functioning like salespeople.
That presumption can be rebutted by showing that such individuals are not performing any active solicitation activities in New York
on behalf of the out-of-state retailers from which they receive commissions.
o Shortly after the Amazon Law was enacted both Amazon and Overstock filed complaints in New York Supreme Court challenging the facial
constitutionality of the law.
The complaints argue that: (1) the Amazon Law is inconsistent with United States Supreme Court case law holding that a retailer
cannot be forced to collect a sales/use tax in a state unless it has a physical presence in that state; and (2) the presumption created
by the Amazon Law is effectively irrebuttable and thereby produces a Due Process Clause violation.
o These arguments were unsuccessful at the New York Supreme Court and Appellate Division levels. Accordingly, Amazon and Overstock
appealed to New York's highest court.
- Issue: Whether a business that has no employees or operations in a state is deemed to be physically present, and therefore subject to the states taxing
power, merely by entering into contractual relationships with residents of the state who are not its legal agents.
 - Holding: The New York Court of Appeals (the state's highest court) held that New York's 'Amazon Law' I facially constitutional.
o The law creates a presumption that a retailer is doing business in New York and must collect New York sales and use tax if the retailer contracts
with New York residents who link to the retailer's website.
- The judgment appealed from and the order of the Appellate Division brought up for review were affirmed.
o In its decision, the New York Court of Appeals first noted that legislative enactments enjoy a strong presumption of constitutionality.
The burden was therefore on Amazon and Overstock to show either that there was 'no set of circumstances' under which the Amazon
Law would be valid or to show that the Amazon Law lacked a 'legitimate sweep.'
o The court noted that it had previously considered whether a mail order retailer could be forced to collect New York sales and use tax due to
having a salesperson that solicited sales on its behalf in New York.
In that case, the court concluded that the mail order retailer could be required to collect New York sales and use tax, because the
'slightest presence' in New York was enough to give rise to a sales/use tax collection responsibility, including the presence of a
salesperson.
o In accordance with that prior decision, the Amazon Law was ruled constitutional.
'Essentially, through these types of affiliation agreements [with in-state residents], a [retailer] is deemed to have established an in-
state sales factor.
Viewed in this manner the statute plainly satisfies the...nexus requirement...The bottom line is that if a [retailer] is paying New York
residents to actively solicit business in this State, there is no reason why that [retailer] should not shoulder the appropriate tax
burden.
We will not strain to invalidate this statute...'With respect to the Due Process Clause challenge to the presumption, the
court wrote that it was 'rational' to presume that residents paid a commission for referrals would actively solicit
customers.
o In the court's view, New Yorkers paid a commission for generating sales by linking to a website possessed an economic incentive to drive their
friends and colleagues to the website; accordingly, it was rational for the Amazon Law to presume that they would function like salespeople.
That presumption, according to the court, was not irrebuttable.

Class 2: Wednesday Aug 30: Reading 55-89

Review:
- Quil establishes basic constitutional limitation on jurisdiction tax (1) Commerce Clause (2) Due Process
o Substantial Nexus is the same test for both
o Quil But the substantial nexus meaning is different
Eliminated due process component of Bellas Hess, Congress is free to decide states may burden other states in respects to use
taxes
Last 2 paragraphs court invites political resolution
- Overstock even though the internet is at least as remote, it is ok to collect tax

Now:
- What is the type of tax in Quil and Overstock?
o Sales or Use Tax.
A lot easier to tax. Because someone by remote control is using common carriers but otherwise doesnt contact your state
o Overstock if you are in a different state, you can always argue the states interpretation even though it maximizes

C. CONSTITUTIONAL PARAMETERS OF STATE INCOME TAX JURISDICTION

Tax Commissioner v. MBNA America Bank
- Facts:
o MBNA America Bank N.A. (MBNA), a Delaware-based bank, had no real or tangible personal property or employees located in West Virginia.
MBNAs principal business was issuing and servicing VISA and MASTERCARD credit cards, and promoting its business in West
Virginia via mail and telephone solicitation only.
MBNA did have numerous customers in West Virginia who held MBNA credit cards and it drew over $10 million in gross receipts per
year from its West Virginia customers.
o MBNA filed returns and paid West Virginia Business Franchise Tax and Corporation Net Income Tax and subsequently filed refund claims with
the State Tax Commissioner, claiming that the Commerce Clause required a physical presence (which it did not have) before West Virginia could
require it to pay tax.
The Commissioner denied the refunds.
o MBNA appealed and the Office of Tax Appeals (OTA) ruled in favor of MBNA and authorized refunds of the taxes.
The OTA reasoned that substantial nexus is required for taxation of an out-of-state corporation under the Commerce Clause, and
that standard required a finding of physical presence.
o The Comissioner appealed and the Circuit Court of Kanawha County reversed the OTAs ruling holding that physical presence was not a
necessary predicate to establishing substantial nexus for income tax purposes and that MBNAs business activity in the state was sufficient to
meet the Commerce Clause substantial nexus standard.
MBNA appealed to the Supreme Court of Appeals of West Virgina

- Issue: Whether application of West Virginias franchise and net income taxes to MBNA, a business with no physical presence in the state, violated the
Commerce Clause of the U.S. Constitution

- Holding: The court held that the U.S. Supreme Courts decision in Quill (i.e., an entitys physical presence in a state is required to meet the substantial
nexus prong of the dormant Commerce Clause) applies only to state sales and use taxes, and not to corporate franchise and net income taxes.
o The Court noted that the Due Process Clause merely requires some definite link, some minimum contacts, between a state and the person,
property, or transaction it seeks to tax.
 Minimum contacts are satisfied when the business is engaged in continuous and widespread solicitation within a state giving the
business fair warning that it may be subject to the jurisdiction of the foreign state.
o The West Virginia court conceded that the nexus requirement under the Commerce Clause is, by contrast, concerned with the effects of state
regulation on the national economy, and the substantial nexus requirement serves to limit state burdens on interstate commerce;
nevertheless, it rejected the application of a bright-line physical presence requirement outside the context of sales and use taxes, on four
distinct grounds:
1. Stare Decisis Limits Impact of Quill: The court found that a close reading [bullshit law prof commentary on Mail Orders] of Quill indicates
that its reaffirmation of the Bellas Hess physical-presence standard was based primarily on stare decisis (i.e., the principle of following
prior rulings on the same legal issue in the absence of changed facts or other substantial justification).
a. The benefits of reliance interests and the stability of jurisprudence associated with consistent application of physical presence
to sales and use taxes was viewed by the court as not applicable to franchise and corporate net income taxes.
2. Quill Limited by Its Own Language: The court found that the U.S. Supreme Court expressly limited Quills scope to sales and use taxes
[Chen says this is a stupid reading of Quil]
a. However, the U.S. Supreme Court language relied on by the MBNA court merely noted (in language not central to its holding)
that it had not required a physical presence concerning other types of taxes.
i. Thus, the MBNA court found the U.S. Supreme Courts Quill decision clearly implies that physical presence nexus
is limited to sales and use taxes.
3. Differential Burdens Imposed by Income/Franchise Taxes: The court found that the application of the physical presence test in Bellas
Hess and Quill turned on the substantial compliance burdens associated with collecting and remitting use taxes on behalf of numerous
state and local jurisdictions (over 2,300 localities at the time of Bellas Hess and over 6,000 at the time of Quill) at varying tax rates
demanded knowledge of a multitude of administrative regulations, deductions, and tax rates.
a. In contrast, the West Virgina court found that the franchise and income taxes do not impose the same administrative and
compliance burdens on taxpayers (e.g., income and franchise taxes are remitted less frequently, through annual returns and
quarterly estimated payments).
i. Many corporate income and franchise taxpayers will disagree with the MBNA courts observation that the franchise
and income taxes at issue in this case do not appear to cause the same degree of compliance burdens as sales
and use taxes.
1. Not Really Burdensome because businesses would rather pay a sales tax vs. income tax as it can be
transferred on the consumer
4. New Facts Make New Law: The court found that the Bellas Hess/Quill physical presence nexus standard makes little sense in todays
world, where the electronic commerce allows an entity to have significant economic presence in a state without having any physical
presence.
o The court prefaced its articulation of a new Commerce Clause substantial nexus standard with the statement that the mechanical application
of a physical-presence standard to franchise and income taxes is a poor measuring stick of an entitys true nexus with a state.
The court announced that a taxpayers significant economic presence would demonstrate Commerce Clause substantial nexus
for purposes of income and franchise taxes.
This test incorporates the Due Process notion of purposeful direction of economic activity toward a state, but also requires
examination of the degree to which a company has in fact exploited a local market by reference to the frequency, quantity and
systematic nature of a taxpayers economic contacts with a state.
In other words, the significant economic presence test involves an examination of both the quality and quantity of the companys
economic presence.
Pursuant to this standard, the court found MBNAs systematic and continuous business activity with West Virginia
produced significant gross receipts and therefore, established the significant economic presence required for the state to
constitutionally impose its business franchise and corporation net income taxes.

Geoffrey, Inc. v. South Carolina Tax Commission

- Almost the same case as MBNA but Geoffrey has a completely different business model
- Facts:
o Toys R Us, formed Geoffrey, Inc in Delaware in 1984 and transferred ownership of all its trademarks, trade names, and service marks to
Georffrey.
Geoffrey does not own or operate any Toys R Us retail stores. Rather, its sole business is to license, in exchange for royalty
payments, its intangible property to other Toys R Us subsidiaries.
Geoffrey does not have any employees, agents, offices, real property, or even licensing activities anywhere in the commonwealth of
Massachusetts
o Toys R Us-Mass, Inc. and Baby Superstore, Inc., both Toys R Us subsidiaries and Massachusetts corporations, license trademarks from
Geoffrey.
Pursuant to their licensing agreements Geoffreys trademarks are used on signs and displays in affiliated retail stores throughout the
commonwealth.
o Geoffrey refused to pay income tax in Massachusetts. It argued that the imposition of such tax under Section 39 is unconstitutional as
Commerce Clauses substantial nexus requirement mandates, under Quill, physical presence of the taxed entity in the taxing state.
- Holding:
o In a relatively short opinion, the court first held under Capital One v. Commissioner, a case decided on the same day as Geoffrey, that the
question of whether Massachusetts imposition of income tax on a foreign entity is consistent with the Commerce Clause is not determined by
the physical presence test articulated in [Quill], but by the substantial nexus test articulated in [Complete Auto].
SCOTUS is making it clear that Complete Autos 4 prong test does not offset Quills Physical Presence Test, which is not extended to
anything beyond sales and use tax.
o Geoffrey pronounced that substantial nexus can be established where a taxpayer domiciled in one State [for example, Delaware] carries on
business in another State [for example, Massachusetts] through the licensing of its intangible property that generates income for the taxpayer.
 o The court then concluded that the imposition of Massachusetts corporate excise on Geoffrey who lacked physical presence in the
commonwealth does not violate the Commerce Clause because Geoffrey had the requisite substantial nexus with the commonwealth under
Complete Auto and that the fact that Geoffrey lacked tangible property or employees in the state was irrelevant.
These ways have become known as "economic nexus."
First, Geoffrey regularly exploited South Carolina's market by deriving income from using intangible property in the state.
Second, South Carolina protected Geoffrey's activities within the state.
Third, Geoffrey's activities in South Carolina entitled it to some state benefits.
Geoffrey encouraged Massachusetts consumers to shop at Toys R Us, Kids R Us, and Babies R Us through an implicit
promise, manifested by the trademarks, that the products at those stores would be of good quality and value; Geoffrey relied on
employees at [Toys R Us-Mass] to maintain a positive retail environment, including store cleanliness and proper merchandise
display; and Geoffrey reviewed licensed products and materials that would be sold in the Commonwealth to ensure high standards
and to maintain its positive reputation with Massachusetts consumers, thereby generating continued business and substantial
profits.
o Problem: at least MBNA made a conscious to be present in WV, here the argument is that Geoffrey didnt at all.

Griffith v. ConAgra Brand [License of Trademarks to different brands]

- Facts:
o ConAgra Brands (CB), a Nebraska corporation, is a wholly owned subsidiary of ConAgra Foods (CF).
CB owned various trademarks and trade names, such as Healthy Choice, Kid Cuisine, and Morton.
CB had licensing agreements with both CF-affiliated and third-party licensees.
CB had no physical property, employees, or agents in West Virginia.
CB did not manufacture or sell products.
o Products with CB trademarks and trade names were manufactured by licensees outside of West Virginia and sold to West Virginia wholesalers
and retailers.
Licensees did not operate any retail stores in West Virginia.
CB did not provide services to any sellers or impose product distribution requirements on licensees.
CB incurred costs to protect its intangibles and promote them nationally.
CB obtained substantial royalties related to product sales in West Virginia.
o The state argued that income tax nexus existed because CB purposefully directed its intangibles toward the state and that part of its royalty
income was rationally related to benefits provided by the state.
- Issue: Whether ConAgra Brands Inc. established nexus based on the receipt of royalties related to the use of trademarks and trade names?
- Holding:
o The court found that CB did not engage in the solicitation noted in MBNA.
The court also found it important that CB did not provide services to licensees in West Virginia and CB did not direct or dictate how
the licensees distributed the products bearing the trademarks and trade names (emphasis in the original).
In addition, CBs business activities related to the licenses took place outside of the state, and legal protection of those
assets fell under federal law.
o Neither did the court find that a stream of commerce argument justified due process nexus.
The court noted the confusion that exists with this theory as to whether knowing that your actions could lead to activity in the state is
enough to show purposeful direction.
The court found that CBs facts were not similar to MBNA
o The court also distinguished CBs facts from those in the Geoffrey and KFC cases.
CB had arrangements with both unrelated and related entities, and the relationship between CB and its licensees was not the same
as in KFC.
o It is important to note that the court did not find that either Due Process or Commerce Clause nexus requirements were met.
CB had not purposefully directed activity toward West Virginia and did not have a significant economic presence in the state.
Basically, the court did not find any of the prior economic-nexus theories and fact patterns present in this case.
As a result, ConAgra Brands was not subject to West Virginia corporation net income tax or business franchise tax on its
West Virginia-apportioned royalty income and capital.
- Rule: if you engage in full metal franchising, you are not acting in remote control, you have established a substantial nexus
o But NOT if all you do is just license the trademark
- Significance:
o ConAgra Brands is a reminder that merely having a manifestation of a companys intangibles in the state is not enough for a finding of income
tax nexus.
o It is also a reminder that while recent cases have focused on the substantial-nexus requirement for a Commerce Clause analysis, the Due
Process Clause is still relevant.
That is, a taxpayer must have purposefully tried to make a market in the state as evidenced by its activities or relationships.
o ConAgra Brands is also a reminder of the many challenges of the economic-nexus approach.

Class 3: Wednesday Sept 8th: Congressional Power of State Tax Jurisdiction [Reading 214-221, 89-113]
Today:
- Source vs. Domicile/ Residence
- Congressional Role in State and Local Tax
- Public Law 86-272
- Wrigley

Conagra: Moving From Sales and Use taxes (Bellas Hess, Quill), to net income taxes (Geoffrey and ConAgra )
Source v. Domicile may be subject to Double Tax:
- (1) Source Taxing Jurisdiction [wherever you are performing the work] & (2) Personal Resident/ Corporate Domicile
o Ex. Taxing Lady Gaga when she comes to play in AA
Public policy reasons as why not to.

D. The Rule of Congress in Regulating Interstate/Foreign Commerce [214-221]

Congressional Power:
Stare Decisis:
- Weakest in Constitutional Cases, Common Law, Strongest in Statutory Cases
- But in state and local tax Quil is proof that SCC invites Congress to Overrule it.

Congress May take away a Commerce Clause Right BUT Cannot take away a Due Process Right

E. Federal Statutory Limitations on State Tax Jurisdictions: Public Law 86-272 [89-113]

Public Law 86-272

- Legislative History:
o Northwest States v. Minnesota (same time as MBNA- MBNA Credit Cards (was more of a service) but charging interest and fees):
Cement Plant was in Iowa, but sent Drummers out to Minneapolis, rented a hotel room, made a pitch, and sale
SCC Minnesota can collect income tax (rejected due process defense and commerce clause defense).
There is no Due Process Claim!
o Brown Forman and International Shoe all the company did was send a sales agent, refused to disturb Northwest States v. Minnesota Holding.
- 86-272 is passed in direct response to Northwest States travelling salesmen cases

Public Law 86-272 [Commerce Clause Legislation]

(a) MINIMUM STANDARDS No State, or political subdivision thereof, shall have power to impose, for any taxable year ending after September 14, 1959, a net income tax
on the income derived within such State by any person from interstate commerce if the only business activities within such State by or on behalf of such person during
such taxable year are either, or both, of the following:
(1) the solicitation of orders by such person, or his representative, in such State for sales of tangible personal property, which orders are sent outside the
State for approval or rejection, and, if approved, are filled by shipment or delivery from a point outside the State; and
- Not Covered (State Can Tax):
o Gross Receipts
o Intangibles Geoffrey
o Selling on the spot
o Delivering things

(2) the solicitation of orders by such person, or his representative, in such State in the name of or for the benefit of a prospective customer of such person,
if orders by such customer to such person to enable such customer to fill orders resulting from such solicitation are orders described in paragraph (1).
o Indirect Product Sales The kinds of items that are restricted by law to solicitation
o Ex. Liquor & Pharmaceuticals

(b)DOMESTIC CORPORATIONS; PERSONS DOMICILED IN OR RESIDENTS OF A STATE The provisions of subsection (a) shall not apply to the imposition of a net income tax by any State,
or political subdivision thereof, with respect to
(1) any corporation which is incorporated under the laws of such State; or
(2) any individual who, under the laws of such State, is domiciled in, or a resident of, such State

(c)SALES OR SOLICITATION OF ORDERS FOR SALES BY INDEPENDENT CONTRACTORS

For purposes of subsection (a), a person shall not be considered to have engaged in business activities within a State during any taxable year merely by reason of
sales in such State, or the solicitation of orders for sales in such State, of tangible personal property on behalf of such person by one or more independent
contractors, or by reason of the maintenance, of an office in such State by one or more independent contractors whose activities on behalf of such person in such
State consist solely of making sales, or soliciting orders for sales, or tangible personal property.
- Truly independent contractors can maintain an office without subjecting seller to income tax immunity
o Wrigley says this instantly availing yourself to tax in that state

(d)DEFINITIONS For purposes of this section

(1) the term independent contractor means a commission agent, broker, or other independent contractor who is engaged in selling, or soliciting orders
for the sale of, tangible personal property for more than one principal and who holds himself out as such in the regular course of his business activities;
and
o Must identify as independent contractor and let customers know they represent all of them
o Must represent more than one principle
(2) the term representative does not include an independent contractor.

Class 4: Monday Sept 11th: Complete Auto Transit; substantial nexus and fair apportionment. [Reading 115-43]

No Class: Sept 25,26 & Oct 9, 11

Today:
A. PL 86-272: Wrigley
o Portland Northwest Cement Case: Traveling salesmen was enough for state to tax
B. DCC Complete Auto Transit (overarching Freeman & Spector)
a. Heublien (Cited in Wrigley)
C. 1. Nexus Tyler Pipe
D. Fair Appointment N__ & W____

Wisconsin Department of Revenue v. William Wrigley Jr.

Facts:
- In 1980, the Wisconsin Department of Revenue (WDR) decided that the in-state activities of the Wm. Wrigley Jr. Company in selling and
supplying retailers with chewing gum exceeded limits defined by Congress in 1961 that exempted foreign corporations from franchise and income taxes in
a state as long as their activities were limited to soliciting customers.
o Wrigley, based in Chicago, neither owned nor leased any real property in the state.
Its employees were limited to a regional sales manager, who worked out of his house and drove over to Wisconsin, who charged for
new gum in a display stand and replaced old gum for free.
and made district sales representatives who dealt directly with retailers.
o The company provided the representatives with cars and reimbursed some of their expenses.
o Nevertheless, WDR believed that since the sales reps also stored gum and personally resupplied retailers, including replacement of stale gum
stocks at no cost, the company did more than just solicit customers in Wisconsin.
- Wrigley felt that it was exempt from Wisconsin taxation under the Interstate Income Act of 1959 (15 U.S.C. 381 et seq.), which provides that "states
cannot impose a 'net income tax' on 'any person' if the only contact with a state is limited to the solicitation of orders for sales of tangible personal
property"
o A "legal person" can be an individual or a corporate body
- Wisconsin believed that the presence of Wrigley in the state was enough to call for a franchise tax.
o The state believed that Wrigley was not afforded protection under Public Law 86-272, because it violated solicitation by the following practices:
Recruitment, training, and evaluation of sales employees by regional manager
Intervention in credit disputes by regional manager
Use of hotel rooms and homes for sales meetings
Replacement of stale gum at no cost to retailer
"Agency stock checks" billing of retailer for gum supplied from in-state inventory to fill display racks
Storage of gum in sales representatives' homes or in rented space
Arguments:
- The state argued for the narrowest possible view: that any activity beyond asking the customer to purchase the product removed the protection of P.L.86-
272.
o It also argued that activities leading up to the sale may be protected, but any activities taking place after the sale are more than solicitation.
- Wrigley argued for a broad interpretation: that solicitation should encompass all ordinary business activities that generally accompany the solicitation
process.
o According to Wrigley, all activities normally assigned to sales reps should be considered solicitation.
Holding:
- The Court found that Wrigleys activities in Wisconsin exceeded the provisions of the state code and allowed the imposition of the tax.
o The Court ruled that the replacement of stale gum, "agency stock checks", and maintenance of inventory for those purposes were not
protected, and the Court sided with the Wisconsin Department of Revenue.
Notes:
- 86-272 is a loophole statute: Underlying purpose of the statute
o if nothing else from the facts of Portland Northwest Cement Case & International Shoe (selling tangible goods, income tax, and only within
scope of solicitation)
What is the scope of solicitation? Is renting a room solicitation?
o Truly independent contractors (more than one person and holds him or herself as independent) can maintain an office without subjecting seller
to income tax immunity
o Expressio Unis Argument: if we went out of our way to protect independent contractors, we definitely did not mean to protect employees who
have office.
- Policy behind 86-272: Travelling salesmen should not be subject to tax, but anyone with a sales office should be able to.
o But what about repairs? no longer solicitation, not tangible personal property (therefore not covered by the statute) Or credit plans?
o Court uses the term truly ancillary activities: activities no independent business function
In Portland: Salesmen needed hotel to go to business meeting ancillary
In Wrigley: If you offer repairs, financing, selling gum has its own independent business function
If they were just replacing the gum for free?
o But they charged for the gum
- Wisconsin originally sided with the taxpayer, but it was Scalia who read the statute correctly

Commerce Clause History

- Gibbons v. Ogden: Court struck down NY legislation granting steamboat monopoly to Robert Rulton.
o Marshall NY, by attempting to regulate navigation between its shores and that of other states, was encroaching on a power given to Congress.
o Commerce clause included an implicit restriction on the ability of states to regulate interstate commerce.
Dormant Commerce Clause came out of this even this was a Commerce clause case with a federal regulation in place
This was a regulation case but applies to tax
- Freeman: Trust residing in Indiana holds financial property in NY. Indian wanted to tax. Court said no.
-
Complete Auto Transit v. Brady
- Facts:
o Mississippi assessed a franchise tax on businesses, calculated as a percentage of gross receipts, for the privilege of doing business within the
state. [assessed as an income tax, tax as a sales tax]
General Motors shipped vehicles from other states to Mississippi (Stipulated to be interstate commerce because of where the cars
originated)
o Complete Auto Transit, Inc. (plaintiff) served as a contractor for General Motors, transporting vehicles within Mississippi to car dealers.
Mississippis privilege tax was applied to Complete Autos gross income.

- Issue: Whether Mississippi runs afoul of the Commerce Clause when it applies the tax it imposes on the privilege doing business within the State to
appellants activity in interstate commerce.

- Holding: PAGE 124 ** MOST IMPORTANT HOLDING IN THE BOOK***

o Consider practical effect of statute, States must have the following to sustain a tax against Commerce Clause challenge when the tax is applied
to an activity
o In Complete Auto Transit v. Brady, the Supreme Court articulated a four-part test to determine if a state tax violates the Commerce Clause:
Nexus: there must be a sufficient connection between the taxpayer and the state to warrant the imposition of state tax authority
Fair Apportionment: the state must not tax more than its fair share of the income of a taxpayer
No discrimination: the state must not treat out-of-state taxpayers differently than in-state taxpayers
Related to services: the tax must be fairly related to services provided to the taxpayer by the state
o The Complete Auto test serves to protect the free flow of commerce from undue state regulation, including taxes that operate like tariffs to
impede interstate commerce. Without the Commerce Clause, states would be free to use their tax powers to benefit in-state businesses by
burdening their out-of-state competitors.
- Note:
o EXAM: Must Cite Complete Auto Transit for any Dormant Commerce Clause Claim

First Prong: Substantial Nexus

Tyler Pipe v. Washington

- Facts:
o Washington had a Business and occupation tax on operation of engaging in in-state business activity (Complete Auto Transit)
Measure of tax is based on gross proceeds
Key is to look into the effect of the tax.
o Tyler Pipe had agents, who they deemed independent contractors, in Washington doing various tasks.
Here, the sales representatives acted on behalf of Tyler Pipe in calling on its customers and soliciting orders, often establishing
relationships with Tyler Pipe's customers.
No office, no property, and no employees
Solicitations by out of state directors
If this was an income tax versus of a franchise tax PL 86-272 would not allow the tax to stand
o Likewise, the representatives provided Tyler Pipe with much of their information regarding the Washington market, including: product
performance; competing products; pricing, market conditions and trends; existing and upcoming construction products; customer financial
liability; and other critical information of a local nature concerning Tyler Pipe's Washington market.
- Issue:
- Holding: Substantial Nexus exists whether or not you use employees or independent contractors to draw up contracts in that state.
o Therefore, the court felt the activity of the agents was substantial, and contributed to maintaining a market for Tyler Pipe in Washington.
o Because this was a gross recipt tax, taxpayer gets no relief from statute, and do not qualify for CC claim because of independent contractor
-
- Note: An out-of-state seller will have nexus by attribution of a third party's in-state activities when:
o The third party is acting "on behalf of" the out-of-state seller, and
o The third party's activities are "significantly associated with the taxpayer's ability to establish and maintain a market in this state for the
sales."
o A company who doesnt have a physical presence in a state may still be found to have a substantial nexus if its connection with an in-state third
party meets the requirements.

TO DO:

How to Split up the cases[Quill, MBNA, Conagra,/Geoffrey, overstock/amazon, NW Portland, Wrigley, CAT, tylerpiper, SCRIPTS):
- What Nature of the Claim
- What the Nature of the Tax
- Whats the Nature of the Property
- Whats the Nature of the Relationship

** Make EXCEL CHART

Strongest Case for State Revenue Complete Auto Transit
Strongest Case for Commissioner Overstock/Amazon (
For Wednesday: 142-176

Class 5: Wednesday: Nondiscrimination. 143-76 (S). Note: Because Wynne (2015) is a major development in the law of state and local taxation,
this unit may span two classes

Review:
- Quill broke apart DCC issue with Due Process Issue (confined to Bellas Hess)
o NW Portland was a bit of both 86-272[Congress fixed CC problem-thus probably not Due Process], Wrigley
- DCC Complete Auto Transit: Most important paragraph lists the test: No state can withstand a Commerce Clause without satisfying all of the four
o (1) Substantial Nexus
Tyler Pipe
Similar to Wrigley (Tyler Pipe - not subject to 86-272 because it was a business and occupation tax vs. a franchise tax in
Wrigley)
o (2) Apportionment
Norfolk and Western
o (3) Non-Discrimination [very dense]
Camps Newfound/Owatonna
Cuno v. Daimler Chrysler
Maryland v. Wynne
o (4) Fair Relation
Commonwealth Edison v. Montana

Second Prong: Fair Apportionment

- How to divide the tax base among 2+ jurisdiction that have a legitimate claim to a portion of that base

Norfolk and Western Railway Company v. Missouri State Tax Commission

- Facts:
o NWRC leased property from Wabash. Had two types of property
Rolling stock (personal property) vs. Railroad track (fixed property)
o Missouri taxed the railroad track through mileage
Not a perfect accounting principle doesnt cost the same per mile to build a railroad
Why wasnt this questioned?
Clear nexus with physical property (in Tyler pipe all it took was an independent contractor to satisfy this)
Wasnt questioned because this was plausible and admit easy
o For the railroad rolling stock
Missouri used the same mileage method to figure out how much rolling stock was in Missouri
Used the fixed track across NWRC, Missouri is 10% of the track, so 10% of the stock should be in Missouri
Assessed $12million when NWRC
Problem: None of their cars were in Missouri during the calendar year
- Court:
o Not going to let a mathematically convenient result blind reality
If you are taxing without some grounding in reality
- Note:
o Can also be a Due Process Claim
But the railroads never set foot in Missouri
Quill No physical presence required for Due process, but required for CC

Third Prong: Nondiscrimination

- Nondiscrimination is the big issue under the commerce clause analysis

o Due process DOES NOT HAVE A nondiscrimination component even though minimum contacts
- History
o Primary source of income before constitution was import tariffs and what states would do is tax on imports going through their states

Camps Newfound/Owatonna, Inc v. Town of Harrison

- Facts:
o Camps Newfound/Owatonna Inc. (Camps) operates a children's church camp in Maine and finances its operations through a $400 per camper
weekly tuition charge.
The majority of its campers are out of state children.
o Maine's tax scheme exempts charitable institutions incorporated in the state, and provides a more limited tax benefit for institutions which
principally benefit non-Maine residents so long as their weekly service charge does not exceed $30 per person.
Ineligible for any exemptions, Camps challenged the constitutionality of Maine's tax exemption statute.
 The U.S. Supreme Court granted certiorari following a reversal of a favorable Superior Court ruling by the Supreme Court of Maine.
- Issue: Did Maine's tax exemption statute violate the Commerce Clause?
- Holding:
o The Court held that Maine's tax exemption statute violated the dormant commerce clause since it selectively awarded greater tax benefits to
those institutions which served mostly state residents, while penalizing institutions that conducted mostly interstate business.
o By imposing such selective benefits on a commercial activity in which it did not directly participate, the Court found Maine's governmental tax
regulations to be an unconstitutional form of economic protectionism favoring local consumers and business providers.
- Note:
o How is Camps a part of Commerce
(1) Heart of Atlanta Motel limiting access, (2) Wikard v. Filburn, Parez Aggregation principle (takes away from interstate supply)
95% of students were out of state
o How was Property taxed?
% of total value of property
But charitable organizations get exempt from this
However, Maine required 51% of residents to be from Maine to get exemption
Discrimination
Taxation on Imports are banned by CC
Taxation on Exports are ok (cant export fish because need to save our population)

Monday Sept 18th Class 6: Fair relation; Complete Auto Transit revisited. 176-202

Continue of Camps:
- Conceptually, the courts are able to review state power to tax only to the extent congress could write a 86-272 or similar statute

Bacus Imports v. Diaz

- Facts:
o In 1939 Hawaii imposed a tax on liquor to pay for police and other governmental services that the Hawaii legislature concluded had been
increased due to the consumption of liquor.
o At its inception the tax did not exempt local liquor, but subsequently the legislature wanted to encourage development of the Hawaiian liquor
industry so it enacted exemptions for several liquors produced locally.
o Liquor wholesalers that paid the 20% excise tax sued to recover all the taxes paid, arguing that the Hawaii liquor tax was in violation of both the
Import-Export Clause and the Commerce Clause of the United States Constitution.
o They requested a refund of approximately $45 million.
- Issue: There were two issues: (1) Did Hawaii Liquor Tax exemption violate the Commerce Clause because it had the purpose and effect of discriminating in
favor of local products? (2) Could the Twenty-First Amendment save the statute?
- Held. (Justice White)
o The tax exemptions did violate the Commerce Clause and the Twenty-First Amendment could not save them. The judgment of the Supreme
Court of Hawaii was reversed and the case was remanded for further proceedings.
The tax exemption clearly discriminated on its face against interstate commerce by bestowing a commercial advantage to local products. The
purpose of the tax was undisputedly aimed at aiding the Hawaiian industry, and the discriminatory effect was obvious.
o The Twenty-First Amendment did not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause. The
central purpose could not have been to allow States to favor local liquor industries by erecting barriers to competition. The State does not seek
to justify its tax by arguing that it was designed to carry out any purpose of the Twenty-First Amendment, but instead acknowledges that the
purpose was to promote the local industry.
- Dissent. Justice Stevens, Rehnquist and OConnor.
o The Twenty-First Amendment squarely foreclosed the wholesalers Commerce Clause claim. The Amendment authorized states to place a
burden on intoxicating liquors that were imported into the state and to not impose a tax on liquors that were produced locally. Youngs Market,
a case that was decided in 1936, upheld a California statute imposing a similar tax and noted that the statue would have been unconstitutional
prior to the Twenty-First Amendment.
Hawaii may constitutionally prohibit the importation of all intoxicating liquors. It could do so without prohibiting the sale of local liquor. If the
State has the constitutional power to create a total local monopoly, it may also engage in a less extreme form of discrimination by merely
providing a special benefit in the form of a subsidy or tax exemption for locally produced alcoholic beverages.
The majority is taking a completely novel approach by saying that state laws favoring local liquor industries are not entitled to the same
deference as laws enacted to combat the perceived evils of unrestricted traffic in liquor.
- Synopsis of Rule of Law: No State may impose a tax which discriminates against interstate commerce by providing a direct commercial advantage to local
business.
o The Twenty-First Amendment does not entirely remove state regulation of alcoholic beverages from the ambit of the Commerce Clause.
- Discussion. The strongest basis for challenging a tax that would impact interstate commerce is the Commerce Clause.
o When evaluating such a tax, it is important to determine how much the legislature is discriminating against interstate commerce with its tax,
and whether the legislature could gain similar revenue in a less discriminatory manner.

- Facially Discrimination?
o If facially discriminatory strict scrutiny
o If not - can show some offsetting balance
Ex. Huges v. OKC banning baitfish: Facially discriminatory
 In Camps Facially Neutral
In Bacus Facially Neutral (fruits in question are indirectly made in Hawaii)
- Now Where are in excuses for Facial Discrimination
o Subsidies vs. Tax Exemptions
Market Participant Theory if you are participating directly in the market, you can discriminate if you are a buyer or seller
Huges v. Alexandria Scrap Corp
Facts:
o Maryland created a program that, (1) purchased junked cars, (2) paid a bounty for those with Maryland license
plates and, (3) imposed more stringent documentation requirements on out-of-state processors, in an effort to
reduce the number of abandoned cars in Maryland.
Issue:
o whether such a program violates the Dormant Commerce Clauseessentially, whether Maryland could
Constitutionally discriminate or burden interstate commerce by imposing more stringent documentation
requirements on out-of-state processors or favoring in-state car dealerships when they purchase junk cars.
Holding:
o Unlike previous Dormant Commerce Clause cases, Maryland was acting like a market participant (as opposed
to a state regulator). In such instances, the Court determined that a state actor can favor its own citizens over
the foreign citizens.
o This case created the "market participant" exception to the general restrictions on states imposed by the
Dormant Commerce Clause.
- West LynnCase Milk case
o Tax on milk across the board is ok
o Subsidy benefitting dairy farmers is ok
Combining both is not!

Cuno v. Daimler Chrysler, Inc.

- Facts:
o As part of Ohio's economic development plan, DaimlerChrysler agreed to expand its operations in Toledo in exchange for (1) investment tax
credits and (2) personal property tax exemptions worth roughly $280 million.
Charlotte Cuno and others challenged the deal, however, arguing that Ohio had violated the Commerce Clause of the U.S.
Constitution by offering the tax incentives.
o A federal district court disagreed, ruling for DaimlerChrysler, but on appeal a panel of the Sixth Circuit Court of Appeals reversed.
o The panel found that the tax incentives coerced businesses to expand in Ohio at the expense of other states, and were therefore
unconstitutional manipulations of interstate commerce.
- Issue:
o Did Ohio violate the Commerce Clause of the U.S. Constitution by giving businesses tax incentives to expand their manufacturing operations
inside Ohio?
- Holding:
o The Supreme Court did not reach the central question presented (property tax), finding instead that Cuno and the other plaintiffs did not have
standing to bring the suit.
Chief Justice John Roberts, for the unanimous Court, wrote that simply alleging standing based on their status as taxpayers in Ohio
and Michigan did not give them a sufficiently strong interest in the case.
The citizens from Ohio could not definitively show that the tax incentives had decreased the amount of money available to the state
treasury (and thus increased their tax burden or decreased the services available to them) because the point of the incentive was to
increase long-term tax revenue.
The citizens from Michigan, meanwhile, could not show that any tax revenue increase in Michigan that could have resulted from
DaimlerChrysler expanding there instead of in Ohio would have actually benefited them directly, because it might have been used for
programs that they did not benefit from. Without any clear injury, they had no standing to sue.
- Note:

Two Principles that could be internally consistent:

1) Isolate a single domicile for each individual taxpayer taxing only their own residence
2) Taxed only where income is sourced.

Wednesday Sept 20th Class 7: Fair relation; Complete Auto Transit revisited. 176-202

Read: Maryland v. Wynne [SUPPLEMENT]

http://www.jonesday.com/comptroller-of-the-treasury-of-imaryland-v-wynnei-what-are-the-potential-consequences-08-31-2015/
- Facts:
o The dispute in Wynne arose when Maryland, in accordance with its tax code, refused to give a resident couple a credit against their county tax
for income taxes they had paid to other states.
Dr. Brian and Karen Wynne had earned income (2.67 million) in thirty-nine states as a result of Brians partial ownership of an S
corporation, a structure in which income passes through the corporate entity, untaxed, directly to its owners.
o Maryland had invoked a state tax and a county tax
If Maryland residents earn income somewhere else there is a state tax credit but not a county tax.
 o The Maryland Comptrollers Office determined that the Wynnes could not take a credit on the county tax for the taxes they paid to other states,
and so ordered the Wynnes to pay additional taxes.
o The Wynnes argued that Marylands failure to provide a credit for income earned out of state violated the dormant commerce clause. The
Maryland Tax Court rejected their argument, but the Maryland Circuit Court agreed with the Wynnes.
o Marylands personal income tax scheme, which taxes income that its residents earn both within and outside the state but does not provide
residents with a full credit against the income taxes that they pay to other states, violates the dormant Commerce Clause.
- Holding:
o Like those invalidated corporate taxes, Marylands personal-income tax not only taxed income earned by non-residents within its borders, but
also taxed income earned by Maryland residents in other states, while refusing to give them a credit for the income taxes they paid in those
other states.
The Court held that this tax scheme violated the dormant Commerce Clause because it had the potential to result in discriminatory
double taxation of income earned out of state and created a powerful incentive to engage in intrastate rather than interstate
economic activity.
In deciding the case on the ground that Marylands income tax was inherently discriminatory, the Court avoided directly addressing
an additional part of the fair apportionment inquiry. The Court thus left open the following question: when a resident earns income
out of state, how much of that income can her state of residence tax (and how much must it apportion to the state where she earned
the income)?
o Internal-consistency test: Whether interstate and intrastate commerce would be taxed equally if every state were to adopt the precise tax
scheme at issue (would it result in double tax)
- Notes:
o Wealthy couple, live in MD, that have business in 39 other states
o Argument for Wynnes:
MD has three taxes for MD residents:
MD Resident Tax
County Tax
Tax on Out of State Activities
But MD has only two taxes for out of staters (Colleague who commutes in from VA):
MD State Tax
Nonresident Tax
Notice that they cannot tax out of state income
Thus, MD residents they Wynnes are at a disadvantage
o This argument doesnt win the day because court says this is not a subsidy (distinguished from Limbach and Cuno, along with Alexandria Scrap)
This is different chose to tax in-state residents more heavily than out of states on out of state activities
o The Court held that this tax scheme violated the dormant Commerce Clause because it had the potential to result in discriminatory double
taxation of income earned out of state and created a powerful incentive to engage in intrastate rather than interstate economic activity.
o THIS ISNT DISCRIMINATION OF INTERSTATE COMMERCE, but DISCRIMINATION IN BETWEEN MDers
Does this look like Owatanna?
Statute said, for the benefit for Maine residents
Milk tax case?
Only taxable on funds
What about Bacuz?
This is the closest analogy (benefitting those who cultivate native plants in hiawai, and forcing everyone in hiawaii to
subsidize those people)
This is a signal to high income individuals that
o Chickasaw Nation Case: As a matter of due process, nothing wrong with taxing both source and residence
But this is only as long as you live there
o Court talks about three cases in each they are residents of one state but operate out of state and in each out of state gross receipts are
reached by their states:
JD Adams
Gwin v. Henneford
Greyhound Lines
All the expenses are in state because the business is out-of state:

o There may still be a gross receipts distinction:

All expenses are concentrated at the home office even though our business is all out of state

o Complete Auto Transit:

Substantial Nexus Tyler Pipe
Fair Apportionment Norfolk
Non-discrimination Camps, Cuno
Fair Relation Commonwealth Edison

o Argument Against:
This is more like railroad cases, where you are discriminating interstate commerce.
o Argument For:
You live there, you should pay your tax

o Court then Applied Internal Consistency Principle

 Internal Inconsistency - looks to the structure of the tax at issue to see whether its identical application by every State in the Union
would place interstate commerce at a disadvantage as compared with commerce intrastate
Allows courts to distinguish between (1) tax schemes that inherently discriminate against interstate commerce without
regard to the tax policies of other States, and (2) tax schemes that create disparate incentives to engage in interstate
commerce (and sometimes result in double taxation) only as a result of the interaction of two different but
nondiscriminatory and internally consistent schemes. The first category of taxes is typically unconstitutional; the second
is not.
[A]ny cross-border tax disadvantage that remains after application of the [test] cannot be due to tax disparities but is
instead attributable to the taxing States discriminatory policies alone.

o Applying Internally Inconsistent Principle

Anyone who lives in one states but makes money in 39 other states is discriminated
If this is applied in every other state, Wynnes would get killed in tax kills interstate commerce
o How could you cure this?
Give them a credit for any double tax
Taxing only residence

4th Prong: Fair Relations

Commonwealth Edison v Montana

- Facts:
o In 1975, concerned that Montana was a "stereotypical colonial state" with little economic development whose natural resources would be
extracted and the state left with severe environmental degradation, the Montana State Legislature enacted a severance tax on each ton of coal
mined in the state.
Then-Governor Tom Judge called the statute "the most significant piece of legislation enacted in Montana in this century."
It was attacked in a RAND Corporation study (partly financed by the National Academies of Science) as excessive.
o An amendment was proposed and adopted in 1976 requiring that at least one-fourth of the coal severance tax be deposited into a Permanent
Coal Tax Trust Fund and that, after 1979, at least half the tax revenues be deposited into the fund.
The fund could not be tapped unless three-fourths of each chamber of the state legislature voted to do so.
o The tax, levied on the cost "at the mine mouth," varied depending on the market value of the coal, the coal's energy content, and the method
of extraction.
Generally speaking, most sub-bituminous coal was taxed at a rate of 30% and lignite coal at 20%.
o Coal producers in Montana and 11 out-of-state utilities (including Commonwealth Edison) challenged the constitutionality of the severance
tax, arguing it was invalid under the Commerce and Supremacy Clauses of the U.S. Constitution.
The Montana state district court for Lewis and Clark County dismissed the complaint in July 1979.
Montana State Attorney General Mike Greely hailed the decision, declaring "Montana will never again roll over and play dead when
big outside interests decide to take our resources."
The plaintiffs appealed to the Montana Supreme Court. Additional Midwestern utilities joined the suit, claiming that the state of
Montana was acting like OPEC and accusing Montanans of being "blue-eyed Arabs".
The Montana Supreme Court upheld the tax's constitutionality on July 17, 1980.
The utilities appealed, and the U.S. Supreme Court granted certiorari in December 1980.
- Holding:
o Justice Marshall addressed the Commerce Clause issue first. The majority agreed with Commonwealth Edison's claim that, even though a tax is
imposed before the goods become interstate commerce, this does not mean the tax evades constitutional analysis.
Rejecting the reasoning in Heisler v. Thomas Colliery Co., 260 U.S. 245 (1922), the majority "disapproved" of any distinction
between intrastate and interstate commerce based on the idea that the Commerce Clause denies states the right to burden
interstate commerce, and concluded that state severance taxes came under the jurisdiction of the Constitution's Commerce Clause.
o The respondents argued that the appropriate test for evaluating a tax under the Commerce Clause should be the four-prong test set forth
in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and that the Montana tax violated the third prong of the Complete Auto
Transit test by discriminating against out-of-state consumers of Montana's coal.
But the majority concluded no discrimination existed, because the tax burden was borne equally by all out-of-state consumers.
o The appellants also argued the tax violated the fourth prong of the test because it was not "fairly related to the services provided by the State"
(e.g., the amount of the tax collected exceeds the cost of services provided).
But the majority disagreed: Commonwealth Edison had fundamentally misconstrued the Court's test in Complete Auto.
The Montana Supreme Court had characterized the severance tax as intended for general government purposes, a finding
the U.S. Supreme Court refused to dispute. Thus, there could be no "excessiveness" test.
Nor was there any question that the state of Montana had the right to levy the tax for the purposes it did.
Justice Marshall next identified how the fourth prong of the Complete Auto test should be interpreted:
o The relevant inquiry under the fourth prong of the Complete Auto Transit test is not, as appellants suggest, the
amount of the tax or the value of the benefits allegedly bestowed as measured by the costs the State incurs on
account of the taxpayer's activities. Rather, the test is closely connected to the first prong of the Complete
Auto Transit test. Under this threshold test, the interstate business must have a substantial nexus with the
State before any tax may be levied on it. See National Bellas Hess, Inc. v. Illinois Revenue Dept., 386 U.S. 753
(1967). Beyond that threshold requirement, the fourth prong of the Complete Auto Transit test imposes the
additional limitation that the measure of the tax must be reasonably related to the extent of the contact, since
it is the activities or presence of the taxpayer in the State that may properly be made to bear a "just share of
state tax burden," Western Live Stock v. Bureau of Revenue, 303 U.S., at 254. See National Geographic
Society v. California Board of Equalization, 430 U.S. 551 (1977); Standard Pressed Steel Co. v. Washington
Revenue Dept.,419 U.S. 560 (1975).
 o The Court held that the Montana severance tax easily met this test.
The Court refused to decide whether a tax could ever be "too high" under the Constitution, leaving this judgment expressly to the
legislative branch
o Takeaway:
Prong 4 is very weak (although American Trucking 1)
Prong 4 is kind of prong 1 now because of threshold question:
Now de-facto three part test.

WYNEE OUT OF STATE TAX IS OK!!!!

Monday Oct 2nd Class 8: Fair relation; Complete Auto Transit revisited.
Goldberg
- Facts:
o In Goldberg v. Sweet, 488 U.S. 252, 263-64, 109 S. Ct. 582, 102 L. Ed. 2d 607 (1989), the United States Supreme Court analyzed a five
percent excise tax on gross charges of interstate telephone calls originated or terminated in the state and charged to an Illinois service address,
as well as on intrastate calls.
o The service provider challenged the tax as violative of the Commerce Clause.
o
- Holding:
o The Goldberg Court observed that "the path taken by the electronic signals is often indirect and typically bears no relation to state
boundaries."
 o The decision confirmed that even a state or local taxing authority may impose transaction privilege taxes on the interstate activities of a
telecommunications provider without violating federal law if it satisfies four tests. The tests are:
(1) the taxpayer has a substantial nexus with the city or state;
(2) the tax is fairly apportioned;
(3) the tax does not discriminate against interstate commerce;
(4) the tax is fairly related to the taxpayer's activities and presence in the city or state. Id. at 257.
o In Goldberg, the taxpayer argued that the Illinois tax was not fairly apportioned because it taxed the gross charge of each telephone call.
o In lieu of imposing an apportionment formula, the Court determined whether the tax was internally and externally consistent.
A tax is internally consistent if no multiple taxation would result from identical taxes and externally consistent if the taxing authority
taxes only that portion of the revenue from the local activity that reasonably reflects the local component of that activity.
o In Goldberg v. Sweet, the Court noted that if a taxpayer's telephone service address and billing location were "in different States, some
interstate telephone calls could be subject to multiple taxation."
The Court found this possibility insufficient to invalidate the Illinois tax, however, because the Illinois Tax Act contained a credit
provision that operated to avoid actual multiple taxation. Id. at 264.
- Notes:
o Long distance telephone call between Chicago and Indianapolis (going through MO)
o Step 1: Nexus
If MO (transitory state) tries to tax Bellas Hess: You have CC Problem and under Due Process you dont have nexus
If IL Tries to tax (1) source origination of the call (2) residence building address
If Indianapolis tries to tax (1) source collect call Accept charges of call
o Step 2: Fair Apportionment (Multiple taxation)
Remember Ginsberg didnt like that court didnt give enough weight to this prong in Wynne
In this case, the Illinois Tax Credit works against the multiple taxation threat
o Step 3: Non-discrimination
Works together with step 2 as improper apportionment usually leads to discrimination
Internal consistency (multiple taxation) and external consistency (local component)
Internal Consistency: Arco, American Trucking, Wynne, Jefferson Lines
o If you take a states tax scheme and project it will there be discrimination?
o Why is this called internal consistency?
Doesnt require any evaluation beyond the specific states tax laws (projecting the one states law
throughout the state)
External consistent: Defined Here
o Test: Did the tax payer actually get fair treatment in respect to its interstate activity?
Once Complete Auto overruled Freeman and Specter [direct and indirect distinction between
interstate commerce, complete auto rejects to say that it may be taxed no more than its fair share]
this test, had to come about.
o Step 4: Fair Relation
After Commonwealth Edison, this is not much of a test
o Concurrence:
Should be even more fairly apportioned, based on amount of usage.
But what about technology today?

Wynne
- Clarifies internal Consistency and defines external consistency

Greyhound
- Can NY levy a tax on gross receipts realized by the bus company for tickets sold for bus travel?
o Referred to in Wynne but Jefferson Lines was not.
o Court You may not tax the entire route, we know how much is in NY

OKC Tax Commn v. Jefferson Lines

- Court: OKC sells a ticket and customer must pay a sales tax on the cost of the entire journey even though it is between OKC and Dallas.
- In this case, the SCC said that the purpose to ensure that each State taxes only its fair state of the interstate transaction was met.
o BUT HOW?! this is the same as Greyhound, one of these cases must be wrong.
- Distinguishes Greyhound because you are taxing the sale as opposed to the gross receipts [Court calls this the Seller-taxpayer distinction]
o Argument for Distinguish service of the whole is the sale of the ticket, characterization of the transaction is not the movement of people but
the purchase of the ticket in OKC.
- Note: this is still good law for now but doesnt make any sense.
o What if Texas tried to tax their portion?
Then OKC would have to provide a credit.

C. RESTRICTION ON STATE TAXATION OF FORIEN COMMERCE

- Art 1 3 CC regulates all states and foreign nations

o But what about foreign commerce?
- Japan Line Ltd v. County of LA Case:
o Facts:
Appellant international shipping companies challenged the decision of the Supreme Court of California, which held that appellee
State of California's ad valorem property tax, Cal. Rev. & Tax Code 117, 407, 2192, was valid under the Commerce Clause as
applied to shipping companies' cargo containers of international commerce.
Shipping companies contended that they were entitled to a refund because the taxes they paid to California were unconstitutional
under the Commerce Clause.
o Holding:
The court agreed. The court held that when determining whether instrumentalities of foreign commerce could be taxed, it must
consider, in addition to the nexus, apportionment, and nondiscrimination factors applicable to interstate commerce, whether the tax
created a substantial risk of international multiple taxation; and, whether the tax prevented the federal government from speaking
with one voice when regulating commercial relations with foreign governments.
The court concluded that California's tax was impermissible because it violated both of these principles.
o First, California's tax resulted in multiple taxation of the instrumentalities of foreign commerce because it
produced multiple taxation in fact.
o And, second, California's tax placed impediments before the federal government's conduct of its foreign
relations and its foreign trade.
The court reversed the judgment of the state supreme court and held that California's tax on foreign commerce violated the
Commerce Clause.
o Notes:
Stipulated Containers are in transit in California, coming in from in Japan.
If this was between states, there would be no problem based on Complete Auto:
o Physical Nexus? Yes, trucks are in California.
o Apportionment? Unlike Norfolk and you are taxing them because on this day they are in California.
o Non-discrimination? Interstate Commerce Component Facially neutral ad velorum tax
o Fair Relation? California protects the port with police services
Court Any difference from this and a foreign operation?
Problems:
o Impediments to Foreign Trade
o Double Taxation Risk here because its been already taxed in Japan
When Dealing with Foreign Operations Must Consider:
o Double Tax would have to go back to Tokyo and get a tax credit for being multiple taxed, much more
difficult.
o In a state vs. state context you can complain to your legislature through intrastate reconciliation (come up with
a set of rules), cannot expect Americans to walk into a Japanese tax tribunal unfair to federal government
What if state cuts a preferential tax for foreign commerce?
Tiff Indirect subsidy to a foreign corporation as opposed to own citizens
o It could be argued that it is no different than a pro-in state subsidy but also could be argued the other way.
REMEMBER JAPAN LINE IS A COMPLETE AUTO CASE
If this case wasnt Japan but another state, there would be no case
o BUT THIS CASE ADDS TWO NEW FACTORS FOR FOREIGN CORPORATIONS
1. Does it interfere with foreign relation interest palpable because of container agreement
2. Threat of Double taxation.
3. NO realistic remedy

3. FEDERAL LEGISLATION ON RESTRICTING STATE POWER TO TAX (p 221)

E. Import/Export Clause
No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for
executing it's [sic] inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the
Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.
United States Constitution Article I, 10, Clause 2
- History:
o Art. 1 9 Clause 5: No Tax or Duty shall be laid on Articles exported from any State.
This banned congress from taxing exports (but not imports)
Whereas 10 limits the states taxes on limits on imports and exports
Thus, Expressio Unius argument that when one or more of a class are expressly mentioned, others are excluded
o Import tariffs were required to recover from
Non-costal states were in rival with costal state
- 3 interests here:
o i/e clause combines some of the interests with japan lines case with department of revenue (relation with US)
o State to state relationship dont want one state to hurt the poor states
o Nor do you want the states to preempt the federal governments ability to tax imports into the united states as it is not allowed to be taxed by
states (including property) by clause 10
 Wednesday Oct 4th Class 9: Fair relation; Complete Auto Transit revisited.

3. FEDERAL LEGISLATION ON RESTRICTING STATE POWER TO TAX (p 221)

E. Import/Export Clause: United States Constitution Article I, 10, Clause 2

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for
executing it's [sic] inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the
Treasury of the United States; and all such Laws shall be subject to the Revision and Control of the Congress.

- Related to 3 Other Clauses:

Export Clause
Foreign Commerce Component to 8 Cl.3
Apportionment of direct taxes
- Introduced in Japan Line:
In 18th century, federal government had one main source of revenue imports
- At the time, they couldnt tax property taxes because of apportionment
o Couldnt just tax the item, must assess it state by state relative to the population
Tax burden between states should be apportioned to its overall population
If there is only 1 carriage in Kentucky, must pay all Kentuckys tax
- There was nothing left for the federal government could do because if they taxed property, per person burdens of tax would be disproportioned
thus they could fund through tariffs.
o Consequence Banned federal taxes on exports, thus federal taxes on

1. State Taxation of Imports

- Micheline Tire Corporation v. Wages (1976)
Facts: The Michelin Tire Corporation (MTC) operated a warehouse in Gwinnett County, Georgia, in which products imported from France and Nova
Scotia were stored for later distribution.
- The County levied a nondiscriminatory ad valorem property tax on the goods (a percent of the property's value).
- MTC claimed that the contents of the warehouse were constitutionally free from state taxation because they were in their original containers.
- The county declared that the products were subject to the tax because they had been sorted and arranged for sale.
Issue: Did the Gwinnett County tax violate the Import-Export Clause by taxing goods that maintained the character of imports?
Holding: The Court affirmed the decision of the Georgia Supreme Court, finding the tax to be valid. The Court stated that the Framers of the
Constitution had adopted the Import-Export Clause to give the federal government a source of revenue and the superior position to regulate such
foreign trade.
- This was to overcome the problems under the Articles of Confederation where states lacked uniformity in import regulation, burdening inter-
state trade.
- The property tax was consistent with the Import-Export Clause because it did not (1) interfere with the Federal Government's regulation of
foreign commerce (2) deprive the Federal Government of its exclusive right to revenues from imposts and duties on imports (3) interfere with the
free flow of goods between the states. It taxed the use of the property and was not based on the origin of the goods.
Note:
- Prior Case Law: Lowe Original Package Doctrine (but this is very unrealistic so it was abandoned)
o
o After Complete Auto Transit Can look to (1) history of the law and (2) economics
- Complete Auto Test:
o Yes, physical nexus, yes fairly apportioned, no discrimination, yes fair relation
- Japan Lines Applies:
o Interfere with national interest of U.S.
o No problem with double taxation
- This Court:
o (1) Government must speak with one voice/ Feds right to tax on imports
o (2) Import revenue were to be the major source for Feds
o (3) Harmony among states
- No court yet has found that it violates non-discrimination prong but not the import-export clause

- Brown v. Maryland
Clause in the constitution protects imports and exports against excises or duties
- A mutual tax that doesnt refer to the origin is not an impost or duty
- Just because there is an impact to the origin (ex. Hawaii) doesnt mean constitution protects it
-

2. State Taxation of Exports

- Dept. of Revenue of State of Washington v. Association of Washington Stevedoring Companies
Facts: SD was a loading and unloading business.
- Washington adopted a rule to have SD lose their tax exemption and forced to pay Washington gross-receipts business tax (subjecting them to
the same tax)
- This is not a formal tax on import-exports, instead they are taxing the activity of people who move the stuff on and off the boat.
o In practice this made importing and exporting more expensive (realistically it is a tax on business of exporting)
 Holding:
- The Court held that the tax did not violate the Commerce Clause, because the stevedores bore a substantial nexus with the state and the tax
was fairly apportioned, did not discriminate against interstate commerce, and was fairly related to the services of the state.
o In so ruling, the Court overruled prior decisional law, which held that the business of stevedoring was interstate commerce.
o However, the Court noted that it was not the purpose of the Commerce Clause to relieve those engaged in interstate commerce from
their share of the state tax burden, even though it increased the costs of doing business.
- The Court also held that the tax did not violate the Import-Export Clause, because it did not restrain the ability of the federal government to
conduct foreign policy, did not divert import revenues to the State, and, did not disturb the harmony among the states.
o The Court noted that the tax was not on the goods, but on the business of handling the goods, and merely compensated the State for
services extended to the stevedoring business.
Note:
- No federal interest for tax on export because of Congresss ban Art.1 1, Cl. 5
o 10th amendment if Federal government cannot do it, invitation for states
- SD unites the import-export analysis of Micheline
- This is neutral every business is WA has to pay tax on gross receipts

3. Virgina Indonesia Problem Still good law.

- Richfield Oil goods in transit must not be taxed
o Argument for Categorical Exemption for goods in transit:
Because this is still interstate multiple taxation might result
Textual component goods in transit arent imported or exported whereas Michiline were not imports anymore, they were
o Argument Richfeild Oil cannot survive Micheline SD
MD is supplying protections for the goods

4. Tonnage
- No State shall, without the Consent of Congress, lay any Duty of Tonnage. [USCS Const. Art. I, 10, Cl 3].
o Includes all taxes and duties regardless of their manner or form, and even though not measured by the tonnage of the vessel.
o Does not extend to charges made by state authority, even if graduated according to tonnage for services rendered to the vessel, such as
pilotage, towage, wharfage, or storage.
(1) taxing ships based on weight Roberts/Thomas
(2) only a problem when basing on weight as opposed to size - Breyer/Scalia/Ginsberg
(3) Ships vs. any other aspect of import/export business Stevens
o US v. Marks Doctrine Most abided by would be view (2)

Monday October 16th

TO DO:
- Remember tax cases are heard in state court, thus you should always plead state constitutional claims
- Assignment 9 = Equal protection, arbour
- Make own copy of constitution (leave out 26th and the ones that dont count)
o Highlight words that matter
Commerce clause is not just interstate commerce . And with foreign nations
Foreign nations [Japan line - adds 2 prongs to CAT]

REVIEW:
- DCC: Winner is instate business
o Owatonna, Baucus, Wynne, Hawaii case
- CAT
o Substantial Nexus
o Nondiscrimination IMPLICATED BY EQUAL PROTECTION
Owatonna Charity Tax exemption
 Could have been a Maine corporation,
Wynne Tax on interstate earnings (couldnt get a refund)
This is odd because it is a DCC claim pressed by instaters by other instaters
o Fair Relation

- What happens when state favors international commerce over interstate commerce Sears Roebuck [p213]
o State Court said violates international aspect of CC
Affirmed by divided court
In an Exam: Chen will write out state constitution provision will refer to federal constitution

CHAPTER 4: THE CONSTITUTIONAL REQUIREMENTS OF EQUALITY AND UNIFORMITY

A. STATE CONSTITUTIONAL UNIFORMITY AND EQUALITY CLAUSES

1. INTRODUCTION
- State constitutions usually have three words
a. Equality
b. Uniformity
c. Proportionality
2. THE SCOPE OF STATE UNIFORMITY AND EQUALITY PROVISIONS
3. THE OPERATION OF STATE UNIFORMITY AND EQUALITY PROVISION
o IN RE OPINION OF THE JUSTICES
Facts:
The New Hampshire "business profits tax," codified at RSA chapter 77-A, is imposed on the "taxable business profits" of business
organizations.
These profits are "gross business profits" adjusted by certain additions and deductions, and then further adjusted by a method of
apportionment.
Under the current tax scheme, reasonable compensation is deductible in full.
House Bill 412-FN-A proposes an amendment to RSA 77-A:4 which would limit the compensation deduction to no more than
$100,000 for "any individual employee, proprietor, partner, or trustee of the business organization," regardless of the
compensation actually or reasonably paid.
The individual's compensation which exceeds $100,000 would thus be included in the "taxable business profits," which are
essentially the "net" taxable business income of the organization.
The bill also proposes an amendment to RSA 77-A:4 which would provide that "[i]n determining the compensation paid
or deducted . . . for instances where an employee, proprietor, partner, or trustee is employed by, or performs services for
more than one business organization, compensation shall be the aggregate of all compensation received from such
business organizations."
o Holding:
The effect of this bill would be to impose differing tax burdens and differing tax rates on business organizations which have identical gross
income and aggregate reasonable compensation expenses.
A simple illustration of this would be the situation where two business organizations have the same amount of gross business profits and
reasonable compensation expenses totalling $200,000, but one organization has only one employee, whose salary is $200,000, and the
other organization has two employees, each with a salary of $100,000. It is clear that an unequal and unreasonable tax burden would
result because the organization with two employees could fully deduct $200,000 while the organization with one employee could only
deduct $100,000 of compensation.
We have stated that a deduction for compensation under the "business profits tax" is not constitutionally required; however, to the extent
that it is allowed, "it must be available to all business organizations."
The proposed $100,000 cap on reasonable compensation deductions would result in disproportionate taxation and would violate
the constitutional principle that the legislature "must substantially treat all business entities uniformly and equally."
Finally, we fail to see any just or valid distinction between these two classes of taxpayers which would permit the discrimination inherent in
the proposed amendment
Our Constitution cannot support the apparently arbitrary limitation on the amount of compensation which may be deducted as
reasonable
As discussed earlier, the net result of this limitation on the deduction, without reference to the reasonableness of the compensation paid,
would be preferential tax treatment for organizations paying individual employees less than $100,000.
In sum, the provision would offend the constitutional requirements for equality, proportionality, and reasonableness and would
impermissibly classify taxpayers in violation of our State Constitution.

- Opinion of Justices 106 NH 202 [page 256 Note A]

o Court invalidated a tax on sales of prepackaged snacks from vending machines, because sales of such snacks by supermarkets were not taxed.
Flunks Uniformity

- Johnson & Johnson & Porter Realty v. Commissioner 122 N.H. 696 [Pg 256 Note B]
o NH enforced business profit at 9.08% on taxable business profits. In addition, it imposed a minimum 250$ tax

- If you are plaintiff taxpayer what would Bring? [must bring all federal claims, otherwise waived]
o DCC [State court can recognize claims]
 o Equal Protection Claim
Equality
Uniformity
Proportionality

- *** ANNOTATE ARTICLE 3 2 in constitution Why tax court can petition to SCC for centreori
o If there is a verdict for plaintiff citing state law:
SCC cannot review:
No diversity because suing as a
Thus, it has to be it has to be a federal question
But this is a state constitution.
o Thus, the judicial case is over.

o What If there is a verdict for mixed motivation (citing both state and federal constitution)
If opinion is written crispy, and written for state constitution then case is over
However, if it is not crisp, it is not in absence of Article
Independent and local ground doctrine

B. EQUAL PROTECTION OF THE LAWS

1. CLASSIFICATION OF PROPERTY TAXPAYERS
o Skip Armour
2. EQUAL PROTECTION CLAUSE AND PROPERTY TAX DISPARITIES
o Skip Nordlinger v. Hahn

3. SEPARATE CLASSIFICATION OF FOREIGN AND DOMESTIC COCPORATION: INSURANCE COMPANIES CASE

o Metropolitan Life Insurance Company v. Ward
Facts: Out-of-state life insurance companies pay a tax on their gross premiums received from business conducted in Alabama at a tax rate
of 3% and out-of-state companies selling other types of insurance pay at a rate of 4%.
However, all Alabama insurance companies pay only a rate of 1% on all types of insurance premiums.
No matter what you do as a Non-Alabama company you are facially discriminated compared to Alabama
o This would be a blatant violation of CAT [non-discrimination]
But this is not a DCC claim because legislatively this is not commerce
However, legislation cannot take away 14th amendment [persons]
The Appellant, Metropolitan Life Insurance Co. and other insurance companies (Appellant), sought to have the higher tax rate
declared unconstitutional.
The Alabama Supreme Court denied certiorari on all claims.
Issue: Whether Alabamas domestic preference tax statute, that taxes out-of-state insurance companies higher rates than domestic
insurance companies violates the Equal Protection Clause of the United States Constitution (Constitution).
Held: Justice Lewis Powell (J. Powell). Yes. The Alabama tax on out-of-state insurance companies violated the Equal Protection Clause of
the Constitution because it imposes a higher tax rate on the out-of-state insurance companies than it does on domestic insurance
companies.
Alabamas interest in promoting the business of its domestic insurance companies is not rationally related to a legitimate state
purpose.
The judgment is therefore reversed and the case is remanded for further proceedings.
Dissent. Justice Sandra Day OConnor (J. OConnor). The newly unveiled power of the Equal Protection Clause would come as a surprise to
the Congress that passed the McCarran-Ferguson Act and the Court that sustained the Act against constitutional attack.
In the McCarran-Ferguson Act, Congress expressly sanctioned such economic parochialism in the context of state regulation and
taxation of insurance.
The doctrine adopted by the majority threatens the freedom not only of the States but also of the Federal Government to formulate
economic policy.
Discussion. This case brings state discrimination of out-of-state commercial interests into the series of equal protection cases requiring
review under the rational basis standard of review.

Notes:
Southeastern Underwriters said insurance wasnt commerce
Congress then legislated this away
Can Congress legislate away equal protection?
14TH AMENDMENT SECTION 5 Must be Appropriate
A 26-272 would work as article 8 clause 3 legislation
Wants the states to legislate X over this issue
But Equal Protection is different because of Section 5
Also remember 14th amendment the key word is person
Versus 4th amendment the key word is citizen
Retaliatory taxation was held constitutional in Western & Southern Life

- Allied Stores of Ohio v. Bowers

o When you discriminate against out of state vs. in state, it is a per-say violation
o But when you discriminate instate vs. out of state, it is a tax increments
 But you cannot penalize and discriminate out of state for not participating.
There is a remedy for in-staters as opposed to none for out-of staters
This is taxation WITH Representation

4. SEPARATE CLASSIFICATION OF FOREIGN AND DOMESTIC COCPORATION: THE NON-ISURANCE CASES

5. DISCRIMINATION AGAINST NONRESIDENT INDIVIDUALS

C. PRIVILEGES AND IMMUNITIES

1. INTRODUCTION
- The Privileges and Immunities Clause of Article IV, Section 2 of the Constitution states that "the citizens of each state shall be entitled to all privileges and
immunities of citizens in the several states."
o Key word is citizen of a state
Within the meaning of c

EXAM/ HOW TO PLEAD THESE CASES:

- Always going to be in state court under tax injunction
o Plead the hell out of uniformity, equality, proportionality (potent source after NH)
o Plead the hell out of Equal Protection
But may not be as strong as DCC based on rational basis
Encouraging out of state businesses to pay in state tax Is a losing basis
o DCC is much easier to plead CAT

Wednesday October 18th

Dear SALT students:
I offer some feedback on last week's take-home assignment. We still have one more piece of the puzzle: the privileges and immunities clause of article
IV. Pending class discussion Wednesday, ponder one minor item and one major item:
Minor: Compare the P&I clause of art. IV, 2 with the P-or-I clause ("privileges or immunities") of the 14th amendment, 1. Is the difference simply
an application of syntactical and logical rules? Cf. https://en.wikipedia.org/wiki/De_Morgan%27s_laws. Or is there more to the difference between the
two clauses?
I suppose I would be willing to accept PI-4 and PI-14 as abbreviations for exam-writing purposes. ;-) The conjunction/disjunction between "privileges"
and "immunities" isn't critical. The location of the clauses within the Constitution, all joking regarding 4 and 14 aside, does matter. Another pro tip: Pay
very close attention to the clauses' precise wording.
Major: Think of at least one instance where the coverage of PI-4 and the dormant commerce clause is not coextensive. Recall that Metropolitan
Life represented this sort of exercise, albeit with respect to DCC, PI-4, and equal protection (fail, fail win!).
If there is at least one taxpayer's claim that PI-4 would not cover, but DCC would, then this is evidence that continued adherence to the DCC is needed
to afford taxpayers continued protection against potential abuses in taxation by state and local governments. Such a reliance interest may not count for
much in the minds of the high court's DCC critics but cf. Scalia's statements in ATA v. Scheiner, West Lynn, and Wynne indicating acquiescence to
aspects of the DCC on stare decisis grounds but it does figure in major SALT decisions, such as Quill and Complete Auto Transit. You know obscure
cases cited by neither courts entertaining SALT claims nor advocates coming before them.
Finally, make sure that you have tallied all plausible alternatives to DCC doctrine. This is not necessarily an exhaustive or a rationally ordered list:
1. PI-4 Bonus: explain why PI-14 offers no succor to SALT plaintiffs
2. equal protection
3. import/export
4. tonnage
5. due process
6. federal legislation under Congress's affirmative CC/art. I, 8, cl. 3 power, such as P.L. 86-272 a.k.a., punting to Congress
7. state constitutional claims under equality, uniformity, and/or proportionality clauses a.k.a., punting to the states
Note that option 6 converts Supreme Court supervision of SALT doctrine from an exercise in constitutional law to one of federal statutory interpretation,
without the benefit of an administrative agency. Cf. Chevron; Mead. Option 7 raises the possibility of zero Supreme Court oversight, at least where state
supreme courts know how to handle the IASG (independent and adequate state-law grounds) doctrine of federal jurisdiction. See Michigan v. Will.
Bonus question: Does a disappointed taxpayer have a way to petition for Supreme Court review after a failed SALT challenge where the state supreme
court relies exclusively on state statutory or constitutional law? If so, explain. Double bonus: Suppose that the state department of revenue loses. I.e.,
the state supreme court sustains a state constitutional or statutory challenge to a tax, and does so explicitly on an IASG. Under these circumstances,
does the commissioner of revenue have recourse to the Supreme Court of the United States?
One way of responding to the Scalia/Thomas challenge to the DCC the Thomas challenge, really, since his Owatonna dissent calls for wholesale
abandonment of the doctrine is to see whether items 1-5 above, either alone or (much more likely) in concert, can fully supplant the four-pronged
test of Complete Auto Transit. I'll leave that problem as an exercise for all of you to undertake after we've discussed PI-4 in full.
Best wishes to all; see you in class on Wednesday.
Very truly yours,
Jim Chen

2. LIMITATION ON STATE TAXATION UNDER ARTICLE IV, SECTION 2

- Article IV, Section 2 of the Constitution Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States
o Interstate Privileges and Immunities Clause, has been the principal basis for a claim of denial of privileges and immunities since 1940.
o Ward v. Maryland: the SC indicated that the clause plainly and unmistakably secures and protects the right of a citizen of one State to pass
into any other State of the Union for the purpose of engaging in lawful commerce, trade, or business without molestation.
The Court indicated that the clause entitles nonresidents to be exempt from any higher taxes or excises than are imposed by the
State upon its own citizens.
- 14th Amendment No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States.
- Why is article 4 so much more powerful as a critique against SALT?
o All citizens are persons but all citizens are not persons
State Citizens
Specific Example Corporations: if Metlife was a natural person, then they would be able to use the Privileges and interstate
Privileges and Immunities clause
o Article 4 is all about state obligations relative to each other
While 14th amendment is a response to slavery
US Citizens: born and naturalized
o Toumer Shrimp Case
SCns could get shrimp license for $25, out of state was $2500
Toumer Wins Toumer is a for profit-fishermen
o The privilege or immunity is that it is tied to your livelihood
o Scentz v. Roe Welfare is a privilege or immunity
o Baldwin Deer Case
This case in-staters were charged $200, out-of-staters were charged $2000
Baldwin loses because it was for fun/recreational hunting purpose

- P&I 4 vs. PI 14 vs. DCC vs. Equal Protection

o Wynne EP Claim: Wynne could have argued EP but didnt because standard of review is rational basis vs. DCC (CAT test) is much easier because
once discrimination is proven, strict scrutiny applies.
o PI 4: Can congress modify Art 4, PI?
Art 4 Sec 1 And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be
proved, and the effect thereof.
Section 3 also contemplates congressional intervention in recognizing exceptions
HOWEVER, Section 2 doesnt Expressio Unius Congress cant do anything about this
o PI 14:
Under Saenz you have a right to travel
Wynne Could have argued this because they are making money outside MD to do this its a right to travel to claim for public
assistance you have a right to travel to harvest shrimp you should have a right to travel for business purposes
o NO PI-4 Claim:
 WHEN YOU ARE BEING DISCRIMINATED AGAINST MEMBERS OF YOUR OWN STATE, YOU CANNOT ASSERT PI-4 BUT YOU CAN ASSERT
A DCC CLAIM
Because you are not being deprived of a privelage and immunity of the state
But could bring PI 14 claim

o Huges v. OKC Law that banned selling baitfish outside the state
Vector of discrimination is the activity not the place
THUS, P&I does nothing
To reach this claim you need the DCC
This is one claim that requires DCC

- Standard of Review:
o DCC Strict Scrutiny
o PI-4 & PI-14 Intermediate Scrutiny
Louis Piper v. SC of NH
You must live in NH to practice law
o Argument was you need to take continuing legal education
Must have an important state interest
In the absence of a substantial reason for the difference in treatment of nonresidents,
o Equal Protection Rational Basis

- Austin v. New Hampshire

o Facts: The New Hampshire Commuters Income Tax treated income earned by residents and non-residents differently.
New Hampshire residents were not taxed on income earned in-state or out-of-state, whereas non-residents were taxed on income earned within
New Hampshire.
Austin was a Maine resident who commuted to New Hampshire for his employment.
Austin filed suit against New Hampshire in state court arguing that the tax violated the Privileges and Immunities Clause and Equal Protection
Clause of the state and federal constitutions.
The trial court transferred the matter to the Supreme Court of New Hampshire, which upheld the validity of the tax. The United States Supreme
Court granted certiorari to review.
o Issue:
o Holding: The Court determined that the requirement of the tax that the residents of Maine file a New Hampshire tax return and that their employers
withhold four percent of their earnings established the Maine residents' status as adversely affected and gave them a direct stake in the outcome of
the litigation.
The Court found that the New Hampshire tax fell exclusively on the income of nonresidents and was not offset even approximately by other taxes
imposed upon residents alone.
The Court also found that the possibility that Maine could shield its residents from New Hampshire's tax did not cure the constitutional defect of
the discrimination in the tax.
The Court determined that such a possibility invited the residents of Maine to induce their representatives, if they could, to retaliate against New
Hampshire.
o Note:
When you impose a tax on out of staters, alarms go off
Is this a retaliation tax that this offset (western & southern said this was constitutionally permissible)?
Well there is a resident tax and tax on certain passive income only for NH but it would rarely equal, much less exceed 4% So
cannot be a retaliation tax.
Court says Internal Consistency cannot be applied to P&I
Even though it imposes the 4% initially on NH residents it completely exempts such income for tax (3 exceptions describe the universe its a
fake consideration)
(1) discrimination of citizens (2) basis of taxation is income from professional activities (which is a privilege or immunity)
Precedent for this case:
Ward License was discriminator between in-state and out of state
Exactly like toumer but doesnt have a justification
Travellers non-residents are taxed on dividends on state but residents are attributable to property tax
As long as it is balanced, it is okay.
Shaffer OKC taxes income from wherever derived but Shaffer is not an OKC resident and OKC is taxing his income in OKC
Because Shaffer was still taxed at a 6% OKC rate, he loses.
YOU CAN ALWAYS DICRIMINATE MORE ON YOUR OWN CITIZENS, in this case OKC residents are worse off than Shaffer but
because the tax was the same, he must pay

- Lunding v. New York Tax Appeals Tribunal

o Facts: New York Tax Law section 631(b)(6) denies only nonresident taxpayers a state income tax deduction for alimony paid.
o In 1990, Christopher Lunding and his wife, residents of Connecticut, were required to pay higher taxes on their New York income when the State
denied their attempted deduction of a pro rata portion of the alimony Lunding paid a previous spouse.
 Lunding commenced suit, asserting that section 631(b)(6) discriminates against New York nonresidents in violation of the Privileges
and Immunities, Equal Protection, and Commerce Clauses of the Federal Constitution.
o Ultimately, the New York Court of Appeals held that section 631(b)(6) was adequately justified because New York residents who are subject to
taxation on all of their income regardless of source should be entitled to the benefit of full deduction of expenses, while personal expenses of a
nonresident taxpayer are more appropriately allocated to the State of residence
o Issue: Does New York Tax Law section 631(b)(6), which effectively denies only nonresident taxpayers a state income tax deduction for alimony paid,
violate the Privileges and Immunities Clause of the Constitution?
o Holding: Yes. In a 6-3 opinion delivered by Justice Sandra Day O'Connor, the Court held that, in the absence of a substantial reason for the difference
in treatment of nonresidents, section 631(b)(6) violates the Privileges and Immunities Clause by denying only nonresidents an income tax deduction
for alimony payments.
"The alimony obligation may be of a 'personal' nature, but it cannot be viewed as geographically fixed in the manner that other
expenses, such as business losses, mortgage interest payments, or real estate taxes, might be," wrote Justice O'Connor. Justice
Ruth Bader Ginsburg wrote a dissenting opinion, in which Chief Justice William H. Rehnquist and Justice Anthony M. Kennedy joined.
o Note:
o Child support is never income to recipient (not deductible) but alimony is deduction based on the payor of alimony
If this was a personal deduction its like shooting deer for fun
If this is a part of your livelihood its like Toumer

 Oct 23rd: Personal income taxes. 373-414 (S). This unit may span more than one class.

Review:
- We have deferred the intergovernmental immunity doctrine

CHAPTER 6: PERSONAL INCOME TAXES

- Residence

A. CONFORMITY OF STATE INCOME TAXES TO THE FEDERAL INCOME TAX

- State personal taxes conform closely to federal personal income tax
o Have their own adjustments to federal figure determining state taxable income (ex. deduction for federal obligations or of local concerns.
o Common adjustments include (1) additions for lump-sum distributions from pension plans and % depletion allowances and (2) subtractions for
certain forms of retirement income and the taxable portion of Social Security and Railroad Retirement Fund Benefits.
- Alask Steamship Company v. Mullaney TPs challenged Alaska territorial legislatures effort to base Alaskas personal income tax on the IRC
o Court attainment of uniformity
o This case is an argument for conformity because you dont want Alaska to be able to tax freely
- US v. Windsor struck down DOMA on constitutional grounds, the terms spouse, husband, and wife include an individual married to the person of the
same sex if lawful under state law.
o This is an argument that you want disconformity otherwise the Federal terms would stay.

B. DETERMINATION OF RESIDENCE FOR STATE TAX PURPOSES

- States possess the power to tax personal income of their residents regardless of its source.
o They are constitutionally restrained, from taxing he income of nonresidents except insofar as it is derived from sources within its state.
- Remember Wynne: Residence
o But it is limited based on income earned within the state.
- 5 Concepts:
1. Domicile:
2. Presence in state for other than temporary or transitory purpose
3. Presence in the state for a specified period of time either 6,7,8, months.
4. Maintenance of a permeant place of abode or a place of abode for a specified period; and
5. A combination of (3) & (4), i.e., presence in state for a specified period of time accompanied by maintenance of a permanent place of abode.
- Texas vs. Florida
o That 2 or more states may each constitutionally assess death taxes on a decedents intangibles upon a judicial determination that decedent
was domiciled within its proceedings binding upon the representatives of the estate is an established principle.
- Residence of Military Personnel Section 514 of Soldiers and Sailors Reliefs Act:
o For purpose of taxation, you dont lose residence based on duty. For purposes of taxation, income is not a resident or in which he is not
domiciled.

C. THE TAXATION OF INCOME OF RESIDENTS

1. STATE POWER TO TAX RESIDENTS INCOME REGARDLESS OF ITS SOURCE
- Oakhloma Tax Commn v. Chickasaw Nation well established principle of interstate and international taxation that a jurisdiction such as OKC, may
tax all the income of its residents, even income earned outside the taxing jurisdiction
o Residence in a state provides a sufficient basis under the Due Process Clause to permit a state to tax all of its residents income without regard
to its source.
o Under this Principle State can claim 100% based on Residence Status
- New York ex rel. Cohn v. Graves court upheld an income tax on resident, which included from out-of-state real estate
o Court rejected the contention that a tax on income is a tax on the land which produces it
o Due process can be satisfied without regard to source

- Lawrence v, State tax Comission Mississippi resident who earned income from building highways in Tennessee contended that Mississippis taxation of
income violated the Due Process Clause, because the tax was imposed on income from activities carried on solely outside the state
o Court Domicile in itself establishes a basis for taxation
Enough that he is a Mississippi citizen with reference to the enjoyment of business conducted, regardless of the place to which it is
carried on.
o Same Result.

2. STATE STATUTORY TREATMENT OF RESIDENTS PERSONAL TAXES

- To avoid double tax of their residents income that is attributable and taxed in other states, all states with broad-based personal income taxes provide a
credit for taxes paid by their residents to other states.
o In some instances, states have not exerted their full constitutional power over residents personal income and have excluded from the resident
personal income tax base specific items of income attributable to out-of-state property or activities.
o Oklahoma for example, does not tax on income from real or tangible personal property with a situs outside the state.

D. THE TAXATION OF INCOME OF NONRESIDENTS

 1. STATE POWER TO TAX NONRESIDENTS FROM SOURCES WITHIN THE STATE
- Shaffer v. Carter Court sustained an Oklahoma income tax on income derived by a nonresident individual from the ownership and operation of an oil
and gas producing properties and oil and gas leases located in the state.
o Emphasizing the nature of the tax as a levy on income and not property, the TP contended that because he conducted his business in Illinois,
Oklahoma could not tax him on his income.
o Court states power to tax nonresidents is more limited (only to property owned within the state and business carried on within) tax must be
only to that income derived.
Because of this, you lose in the P&I case.
- Travis v. Yale & Towne NY tax on wages and salaries of nonresident employees working in NY
o The court held that the tax imposed amounted to an unwarranted denial to the citizens of Connecticut and New Jersey of the privileges and
immunities enjoyed by citizens of New York.
o The court held that because there was no reasonable ground for the diversity of treatment between resident and nonresident, it abridged the
privileges and immunities to which such citizens were entitled.
- Whitney v. Graves [p389]
o Whitney sold his seat on the NYSE
Court dominant feature was privilege of conducting the business of buying and selling securities on the floor.
Chen is making the analogy that this is Geoffrey
- International Harvester Co v. Wisconsin
o Court imposed a tax for the privilege of declaring and receiving dividends, out of income derived from property located and business
transacted in this state.
- JC Penny Case:
- What if you dont live in the state, but you engage in an activity
o This is pretty much a fair relation prong usurping the opportunity of the state

2. APPLICATION OF THE SOURCE PROINCIPLE: STATUTORY AND CONSITUTIONAL ISSUES

- Most state personal income tax statutes reflect constitutional restraints on the states power to tax nonresidents income and are therefore limited to
income derived to sources within that state
o Typically point to income derived from compensation earned in that state, services performed in the state, trade or business carried on in the
state, property located within the state.
- ZELINSKY V. TAX APPEALS TRIBUNAL OF THE STATE OF NEW YORK [2003]
o Facts:
The taxpayer did not live in New York state but worked there as a law professor.
He taught in New York three days a week, but for his own convenience, he worked from home in Connecticut the other two days.
He filed nonresident state income tax returns, apportioning[Norfolk v. Western] his income under N.Y. Tax Law 631(c).
The State applied the "convenience of the employer" test and decided that all of the taxpayer's work days should be counted
as New York work days because he was not obligated to work at home.
The taxpayer asserted that application of the convenience of the employer test to him violated the Commerce Clause and Due
Process.
o Holding:
The court disagreed. Nonresidents' income derived from sources within the state could be taxed.
As the taxpayer's employer did not obligate him to work at home, 631 apportionment did not apply.
Commerce Clause: The convenience test did not violate the Commerce Clause because it was both internally and externally consistent
and the taxpayer's crossing of state lines to do work at home did not impact commerce.
If states were to replicate this (internal consistent):
No violation even though may result in double taxation based on Oklahoma Tax Commn as domicile establishes a basis
for taxation
Actual Economic Incident under the fact (external consistency):
Due Process: It did not violate due process because it did not tax "extraterritorial values" and the taxpayer received both tangible and
intangible benefits from working in New York.
Fair Apportionment
o Note:
Phillips v. State Department of Taxation
Lehman brothers employee was set up with equipment in everything in Pennsylvania
Sustained that days in Pennsylvania
There is a problematic aspect to Zelinsky should

- MIchealsen v. NY State Tax Commn:

o TP lived in Connecticut, work in NYC as a senior for Avon. He was granted options to purchase Avon stock, which he later sold for a profit. He
reported no income for NY on the ground that income derived from intangible property that was not employed in a business in the state.
When you buy at the strike price This is a NY based event because the strike price was determined to be lower than the
The Realization Event Only 2 or 3% of sales would be NY event (but for convenience purpose was regarded as not a NY event)
- Shaffer Principle

Wednesday October 25th: Sales tax basics. 647-74

 3. APPLICATION OF PROGRESSIVE MARGINAL TAX RATES TO RATES OF NONRESIDENT INCOME
- WHEELER V. STATE OF VERMONT
o Facts: The taxpayer claimed that the taxation of his income was discriminatory.
The taxpayer lived in New Hampshire and worked as a salesman for a Vermont company and was paid on commission.
Commissions were his only form of payment during the year involved.
The commissioner applied the Vermont taxing procedure under Vt. Stat. Ann. tit. 32, 5811, which did not distinguish the derivation of
the income of the taxpayer.
The taxpayer argued that, since the addition of New Hampshire income increases the tax, it must be New Hampshire income that
was being taxed by the Vermont.
o Holding:
The court found that in reality Vermont income was being taxed at an increased rate, and nothing more.
Thus, the contention that the Vermont taxing authorities were taxing property beyond their jurisdiction was not supported by the
evidence there being no showing of arbitrary regulations or administration thereof.
o Note:
NH was 0% surrounded by 3 states that have aggressive tax rates (Vermont, Maine, Mass)
All three have progressive taxation
Vermont has no jurisdiction through residence, but does through source [Travis Case]
His case: he is not supposed to give them Vermont return through Vermont income, he gives them his federal return that
says how much he makes outside NH [4k in Vermont, 6k overall]
o He thinks he should be taxed not a higher marginal rate than that of 4k, but because Vermont sees that his
overall income is 6k, he is being taxed at a higher marginal tax rate.
Issue: Should he be taxed at 4k (made in Vermont) or should the 4k be counted within a 6k total federal income tax?
Court Rejects Due process, Privileges and Immunities, DCC, and Equal Protection
Problem that arises states are able to take into account of a nonresidents entire income in determining the effective marginal rate
at which the nonresidents income is taxed.
Look at Note B on page 411
-

4. DISCRIMINATION AGAINST NONRESIDENTS

- Salt provisions that discriminate against nonresidents are often subject to challenge under the Privileges and Immunities Clause of Article IV, Section 2 of
the Constitution.

E. CHANGE OF RESIDENCE
- When a TP changes residence during a taxable year, most state tax her as a resident for the period of residence and as a nonresident for the period of non-
residence.
o In some states, taxpayer is required to file 2 returns: (1) from whatever source during the period of residence and (2) as a nonresident, reporting
income from sources within the state during the period of non-residence.
Exceptions during period of non-residence are usually pro-rated on basis of in-state income over total income for period of non-
residence as well as months of residence.
o In other states, not-necessary for part-year residents to file 2 returns, but the must still determine their period of no residence.
In many states, Persona; deductions and exemptions for part-year residents are determined on basis of the ratio of income taxable
by the state to TPs total income without distinguishing between exemptions attributable to period of residence and those
attributable to period of non-residence
 CHAPTER 8: SALES TAXATION

A. INTRODUCTION
Important Qs:
1. Is the subject matter of the transaction tangible personal property?
2. Has there been a sale?
3. Has there been a sale at retail?
4. Does a statutory exemption apply?

Ideal Sales Tax Theory Should be a one-off transaction for the last sale of tangible goods for personal consumption
o Should never tax earlier on in the cycle (burden should rest on the consumer, not on businesses, and he or she should know about it)
o versus Value added Tax: where it is factored in (economic event is the contribution throughout the manufacturing process)
o Retailer should never be able to absorb it
But in reality, the problem is sale of good at retail which shifts 40% of the burden to businesses and not for personal consumption
Ex. Selling can of country time can to kid to use for lemonade (should be taxing end product not can at grocery store)
1. THE CLASSIFICATION AND NATURE OF SALES TAXES
Any tax which includes within its scope all business sales of tangible personal property at either the retailing, wholesaling, or manufacturing stage, with the
exception noted in the taxing law
Sales taxes are classified as:
o Retail Sales Tax imposed only on sales of tangible persona property at retail or for use or consumption. Also includes sales of utility services and levies
on admission
o General Sales Tax which reaches sales of tangible personal property both at retail and for resale, and also the acts of extracting natural resources and
of manufacturing
o Gross Receipts Tax has essential elements of general sales tax and in addition is levied upon sales of personal and professional services, and in some
cases sales of intangibles.
o Gross Income Taxes which includes (a), (b), and (c), and in addition receipts from non-business activities such as rent, interests, and salaries.

Retail Sales Tax is a single-stage levy on consumer expenditures, applies only to final sales for personal use and consumption.
o Every state excludes sales for resale
o Philosophy levy imposed on the purchasers use or consumption of the item sold, with the tax burden resting on the consumer
o 3 Categories: Vendor Taxes, Consumer Taxes, Hybrid Taxes,
1. Vendor sales taxes whose legal incidence rests on the vendor (for privilege of making retail sales, thus vendor must pay tax)
2. Consumer Taxes sales taxes imposed on the retail sale of property or services, and they are measured by the sales price of the goods or
services.
Measure of consumer taxes (sales price to buyer) may be contrasted with the measure of vendor taxes (gross receipts of the seller).
3. Hybrid Taxes contain features of both Vendor and Consumer levis.

2. GROWING FISCAL IMPORTANCE OF STATE AND LOCAL TAXES

Product of the great depression

3. DISTRIBUTION OF THE BURDEN OF RETAIL SALES AND USE TAXES

Presumption sales taxes are passed on the consumer
Sometimes sales taxes are borne by seller, not consumer (ex. if a tax/increase in the price of the product induces a larger decrease in demand)
Criticized as regressive that sales taxes constitute a larger proportion of the income of low-income groups than of high-income groups
o Ramsey Pricing Maximize tax revenue by taxing necessities the most heavily, because people need them the most. when you want to be kind, you end
up taxing luxury items, and when that happens, people will choose other luxury items.
o Mitigated by the fact that many families are in the low-income bracket only temporarily, or are in the high spending phases of the life cycle, and many
welfare measures are primarily aimed at benefiting the low-income groups.

4. STRUCTURAL FLAWS IN THE RETAIL SALES TAX: IMPLICATIONS FOR LEGAL ANALYSIS
Two Main Structural Flaws in sales tax:
1) Retail Sales Tax does not live up to the normative ideal of a tax on household consumption, but in fact includes substantial business purchases within the
tax base
o Shouldnt tax business inputs, that now constitute half of the tax
o Business consumption is outside the personal consumption scope
Business consumption is an inquiry into the physical rather than economic consumption leads to confusing results
2) Sales tax base in confined largely to sales of tangible personal property and does not generally extend to sales of services or intangible property
o If states include the retail sales of services and intangibles, along with the retail sales of tangible property, in the sales tax base, they would
eliminate many of the difficult legal controversies spawned by the retail sales tax.
On one hand, It would be no longer necessary to determine the true object or dominant purpose of a transaction, or the purchase
of services or intangible content
The only question would be whether the goods or services/intangibles were purchased for household consumption.
If they were, the entire transaction would be taxable; if they were not, then the entire transaction would be exempt.

B. DELINEATION OF TAXABLE SALE

Most states tax tangible personal property, some tax services (but the inclusion of services in the sales tax is an exception to the rule)
 Courts will focus on: Whether a particular transaction constitutes a taxable sale of tangible personal property, on the one hand, or a non-taxable sale of services,
intangibles, or real property, on the other.

1. DISTINGUISHING TANGIBLE PERSONAL PROPERTY FROM SERVICES OR INTANGIBLES

To deal with the problem of consuming goods within a service to be exempt as a sale of services or intangibles, many states have adopted a specific statutory
exemption for personal service transactions which involve sales as inconsequential elements for which no separate charges are made.
But this does not resolve difficulty between drawing the line between taxable and non-taxable transactions that involve a mix of the two elements.
Lends itself to an alternative analysis based on distinction between sale of tangible personal property and the sale of (or license to use) an intangible.

Important Qs:
1. Is the subject matter of the transaction tangible personal property?
2. Has there been a sale?
3. Has there been a sale at retail?
4. Does a statutory exemption apply?

Washington Times-Herald v. District of Columbia

Facts: Petitioner, a newspaper publishing company, contracted with several syndicates for its supply of comic strips.
The syndicates carry out these contracts by sending the petitioner, at intervals, fiber matrices (mats) bearing impressions of the current sequence
of strips.
These mats are manufactured by the syndicates, from the original drawings, by a photo-engraving process.
Petitioner uses the mats in the first of a series of operations culminating in the production of a metal plate from which the comic page is printed.
The petitioner pays the syndicates for the comic strip mats sums which are greatly in excess of the price of blank mats.
o For example, the Times-Herald purchased blank mats the size of newspaper page for $0.22, but for a mat containing six daily strips of the
'Gump Family,' with the right to use each strip one time, it paid the sum of $30.00.
Section 47-2701, subd. 1(b)(3) of the Code exempts from sales and use taxes 'Professional, insurance, or personal service transactions which
involve sales as inconsequential elements for which no separate charges are made
Holding:
The syndicates sold to the Times-Herald the right to reproduce one time the work of artists who make the drawings.
o They simply sold the professional and personal services of the artists whom they had under contract and in so doing transferred title to the
mats, of inconsequential value, from which the drawings could be reproduced.
The price was paid for the artists' work, i.e., for the right to reproduce the impressions on the mats, -- not for the mats themselves. The newspaper
bought the creation of the artist -- not the material on which it was impressed -- and the right to reproduce it. Without that right, the comic strips
mats would be entirely worthless.
o Thus, the transactions in question are clearly exempt under Sec. 47-2701, subd. 1(b) (3).
Preston and Washington Heral Governs
Dissent:
Believes
Notes:
When you are looking at a product that is a mix of a service/intangible property and tangible goods?
o Look at true purpose Commodity value vs. Right to Reproduce

(b) Relative Cost of Tangible personal property as the Determining Factor Whether a transaction involves a taxable sale
(c) Sale of Tangible personal property as distinguished from the Sale or License to use Intangibles

2. THE TRUE OBJECT AND SIMILAR TESTS

Washington Times-Herald: shows that legislative effort to distinguish between taxable and nontaxable sales involving transfers of tangible personal property in
conjunction with the transfer of services or intangibles has not put an end to controversies over this question.

City of Boulder v. Leanin Tree, Inc.

Facts: Plaintiff taxpayer, a greeting card manufacturer, sued defendant city after the city denied the taxpayer's protest of a use tax assessment.
The transactions in question were for original artwork by independent artists that the taxpayer copied to use in making greeting cards, then
returned to the artist.
o The city tax code imposed a tax on the purchase price paid or charged for tangible personal property sold or used in the city.
o A tax was to be calculated only on the purchase price of the tangible property involved in a transaction.
o The city manager, rather than imposing a tax on the full purchase price of inseparably mixed transactions, implemented a "true" or "real
object" regulation.
If this was the IRS chevron would apply
But here its not chevron, its Mead you give it respect but court is not bind by this
The district court entered summary judgment in favor of the taxpayer.
The judgment was affirmed on appeal. Certiorari was granted to the Colorado Court of Appeals to review the decision upholding judgment in favor
of the taxpayer in its tax dispute with the city.
Holding:
In the court's view, the transactions at issue involved purchases of other-than-tangible personal property, even if they included the transfer of
tangible personal property as well, and the two portions of the transactions were not meaningfully separable.
o There was no way to separate the value of the tangible medium from the value of the right to reproduce the image appearing on it.
o The transactions were more akin to a transaction for the right to publish.
Any doubt had to be resolved in the taxpayer's favor. The challenged transactions did not constitute the sale or use of tangible personal property
within the city's tax code
Key Take Away:
 Test is true object if the true object sought by the taxpayer is the services per se, the exemption is available, but if the true object of the buyer
is to obtain the property produced by the service, the exemption is not available.

Majority Preston and Washington Herald Governs: the real value was the literary work
Dissent:
Believes visual work must be fixed in a medium, because its a lithographic process,

Note:
o True Object Test p666: If the true object sought by the buyer is the service per se, the transaction is not subject to tax even though some
tangible personal property is transferred

Monday Oct 30th: Retail Sales 706-40 (PART IV: PERSONAL INCOME TAXATION; SALES TAXATION)
 CHAPTER 8: SALES TAXATION
C. RETAIL SALE
Today:
o The anti-pyramid Principle: do not want to exact a tax at every stage of the supply chain
We want a sales tax collected at the retail sales tax that is transparent to the single end user (unlike European VAT)
This way you avoid multiple taxation
o Exemption sales from resale, manufacturing, equipment

In principle: retail sales tax reaches only the ultimate consumer

o State sales taxes exclude or exempt many intermediate transactions in the economic process from sales taxation (typically called a resale exclusion or
exemption)
Includes: purchase of machinery and equipment used in manufacturing property for sale, property consumed in the manufacture of articles of sale
Purpose of all these provisions is to ensure that only the final sale to the consumer gets taxed and that there is no pyramiding of the tax by
imposing it on intermediate purchases as well.

Often treats a business purchaser as ultimate consumer of property or services it purchases.

If a purchaser of property engaged in the service occupation persuades a tax administrator or court that it is reselling the property purchased to its customers,
while at the same time taking the position that its resale of the property is merely incidental to the transaction whose true object is the purchase of nontaxable
services, the sale of the property may escape taxation altogether.
1. SALE FOR RESALE EXEMPTION
McDonalds Restaurants of Mass, Inc. Commissioner of Revenue
Facts: The Commissioner maintained that the toys in a McDonalds happy meal were subject to use tax in Massachusetts because McDonald's used the toys to
promote the sale of food at its fast food franchises.
McDonald's, however, maintained that the toys were exempt from tax because they were actually resold to customers in the regular course of
business.
o Massachusetts imposes an excise tax on the "storage, use or other consumption" of tangible personal property in the Commonwealth at the rate of 5%.
Like most states, "use" is broadly defined to include "the exercise of any right or power over" the property, except that "it does not include the
sale of that property in the regular course of business."
McDonald's relied on this resale exception to argue that it did not "use" the toys within the meaning of the statute.
97% sales are through the traditional meal, 3% of the sales were directly to consumers
o if McDonald advertised selling just the toys alone it would fit the statutes requirement for regular business use and McDonald would
be subject to sales tax on the toy
o Many states routinely impose a use tax on promotional items distributed free-of-charge, under the theory that the distributor actually "uses" the items to
promote its sales.
Indeed, the Massachusetts Supreme Judicial Court had imposed tax in situations where the transferred items were found to be promotional items
designed to induce the customer to engage in a particular transaction or an incidental item that facilitated a purchase of the predominant item or
items.
Under these authorities, McDonald's could invalidate the assessment only if it adequately established that the toys were in fact resold to
customers as part of the Happy Meals.
Issue: Massachusetts Appellate Tax Board considered whether the fast food giant was required to pay use tax on toys included as part of the children's "Happy
Meals" that it sold.
Holding: The Board found that McDonald's met its burden by demonstrating that the "price, marketing, value and desirability" of the Happy Meal was
significantly affected by the inclusion of the Happy Meal toy.
o Because the toys had an intrinsic value to the customer, the Board was unwilling to conclude that they were merely promotional items subject to tax.
It was this key fact that served to distinguish McDonald's distribution of toys from previous authorities that had upheld the tax.
According to the Board, "[i]n none of [those] cases was the item in question an integral component of the sale, as the Happy Meal Toy was to the
sale of the Happy Meal.
o This ruling was consistent with Department of revenue Directive 94-3 ("DD 94-3"), which addresses whether an item of tangible personal property
included in an otherwise tax free transfer should be considered a "give away."
DD 94-3 instructs that "'if the price, marketing, value, and desirability of the tax-exempt property remains substantially the same with or without
the item of taxable tangible personal property,' then the item is a 'give away,'" and the distributor is subject to tax on its 'use' of the property.
o Here, McDonald's provided the Board with numerous facts to support the conclusion that the toys were not giveaways but instead formed an integral
feature of the Happy Meal.
For instance, the toys were heavily advertised and designed to follow trends in children's entertainment and pop culture.
Some of the Happy Meals toys were viewed as highly collectible.
The toys could also be purchased separately without the purchase of a Happy Meal.
Finally, it was clear that the total price charged for the Happy Meal package exceeded the cost of its components, including the toys.
Based on this evidence, the Board concluded that the toys had intrinsic value to the purchaser and greatly enhanced the value of the Happy Meals.
o The Board ruled that McDonald's met its burden of proving that the Happy Meal toys were sold in the regular course of its restaurant business.
"[T]he transfers of the Happy Meal Toy in conjunction with the Happy Meal was one transaction upon which [McDonald's] undisputedly collected
and remitted sales tax based on the actual consideration paid by its customers. Accordingly, [McDonald's] made a sale of Happy Meal Toys and,
therefore, did not owe a use tax on its purchases of the toys from its distributor.
Notes:
o There would be no use tax if the toys were sold on the menu like French fries [there would be a sales tax to the end user], but the odd thing is that it is
blended in with the product (Crackerjack problem)
o Historically Tax Statutes are construed in favor of the tax payer because taxpayers require clear instructions when taxed
However, when the government gives you an exemption (or a benefit), the burden is on the taxpayer in case of ambiguity or legal doubt to prove
 what is intended
o IRS Argument Here McDonald is pyramiding its product to avoid the use tax
Travel Agency/ Brochure Case: Parent distributing brochures, subsidiary sells the cruises. This was a taxable event because it wasnt a course of
the regular business. Rationale was that no one really goes into a travel agency to buy brochures, you are getting the brochure as a part of the
package of the packaged product.
Mini-Golf/ Bowling Prizes: Amusement park was acquiring items and prizes for its games. Contestants could win the prizes. This was a taxable
event because it wasnt a part of the course of business. Note: argument that people only come here to win the prize fails because mini-golf and
bowling are games people play for fun.
Inducement is not an ordinary course of business closer to travel brochures
Fast Food Utensil Case: Burger King Case. Because BK didnt charge extra for the plastic forks it was packaged into the product and was a taxable
event not in the course of business.
This would be the same case for salad dressing packets (where you expect to give out one)
The giveaways should be treated like the napkins, but the ones you sell independently, you should get an exemption for
o But McDonalds wins
3-5% of McDonalds direct sales was just enough to satisfy the ordinary course of business
What about Hotel Amenities?
If its an inducement must pay use tax on it.
What about Lawyers?
Not just selling a document with fancy words on it, you are selling a will
Team Jackets on Fan Appreciate day?
Most Courts would hold that the jersey is just incidental benefit on that day but If you can show evidence that only on those days people showed
up, then maybe not.
Demo Cars?
While it was in demo no one was charged for the demo was an inducement for the customers who bought other cars
Rental Cars?
Different Outcome because your charge for the rental ordinary course of business

2. MANUFACTURING, PROCESSING, AND FABRICATION EXEMPTIONS

Typically excluded or exempt for materials used in the manufacturing, processing, or fabricating of tangible personal property for sale.
Theory underlying is the same for sale-for-resale provisions: materials in question are not purchased for final consumption but rather for the resale in the form of
the final manufactured product.
For this reason, these provisions often require that materials purchased become an integral part of the product that is ultimately sold
In some states the manufacturing and processing provisions are written more broadly to include materials used or consumed in manufacturing or processing
tangible personal property for resale, even if not physically incorporated in the final product solid at retail for resale, even if not physically incorporated in the
final product sold at retail.

Kaiser Steel Corporations v. State Board of Equalization

Facts: Plaintiff, a manufacturer and producer of steel, pig iron and other products, purchased certain materials to charge its furnaces and remove impurities
from the molten metal.
o The removal of impurities is accomplished by combining them with the materials to form slag.
Portions of the materials were incorporated into the steel to achieve a specific quality; portions incidentally remained in the finished steel; portions
were dissipated or lost in the manufacturing process; and portions became components of the slag.
o An independent company, which removed the slag and reprocessed it, paid plaintiff 1 cent for each ton removed and a 10 percent royalty on the net sales
price of the reprocessed slag.
After plaintiff either paid sales tax reimbursement on the materials or purchased them under a resale certificate and later paid use tax, it filed a
claim for refund with the Board.
o The Board's position was that plaintiff purchased the materials for a purpose other than resale, namely to aid in the manufacture of steel.
o Plaintiff argued that the materials were properly purchased for resale in the form of slag, a by-product in the manufacture of steel.
Holding: The Supreme Court, relying on Sales and Use Tax Regulation 1525 and the applicable Sales and Use Tax Annotations, upheld the trial court's finding
that plaintiff's "primary purpose" for purchasing the raw materials determines the application of tax.
o The court found the Board's conclusion that plaintiff purchased the materials to aid in manufacturing steel was reasonable, and held that if property is
purchased as an aid in the manufacturing process, it is taxable despite some portion remaining in the finished product or an incidental waste or by-
product results.
Notes:
o California Approach tax does apply for manufacturing use and processing and not for the purpose for incorporating it
(a) If you use machine as a catalyst, you must pay tax.
(b) Not apply to tangible personal property which is incorporated as an ingredient in finished part.
o California says the real reason you buy the lime junk is because you have to purify it (falls under (a)), however you can also make the same argument for
(b) because there are people who want the slag.
o What about hot dogs?
You buy the casing, take the casing off, but there is part of the casing left on
o Bourbon American stores case p726
o Lithographic plates vs. color transparencies page 727
o KEY IN THIS CASE IS IF THEY ARE MAKING $$ ON THE INDUCEMENT

THIS WILL BE ON THE EXAM:

- WHO WINS
SPLITS THE BAYB
 - - IS THE ULTIMATE PRODUCT SUBJECT TO TAXED OR THE SERVICE ITSELFF!!

3. MACINERY AND EQUIPMENT EXCEPTIONS

Modern trend is to exempt purchases when made for machinery use in manufacturing tangible personal property
o This puts tension on the definition of manufacturing
Theoretical justification same a sale-of-resale machinery and equipment exemptions encourage economic activity, and in particular the location of industrial
plants in that state.
Statutes cover purchases of machinery or equipment for use in manufacturing, or production some also cover fabrication, assembly, extraction, mining,
processing, refining, or finishing of tangible goods
Two Theories:
o (1) Physical Change
o (2)

Concord Publishing House Inc. v. Director of Revenue

Facts: Appellant Director of Revenue sought review of a decision from the Administrative Hearing Commission (Missouri), which exempted respondents,
publishing company and corporation, from sales and use tax on computers and computer equipment that respondents purchased and used to implement
changes in the production process and format of a newspaper and to increase the number of newspapers sold
o Appellant Director of Revenue assessed sales and use tax on certain computer equipment purchased and used by respondents, publishing company and
corporation, to implement changes in the production process and format of a newspaper and to increase the number of newspapers sold.
The Administrative Hearing Commission exempted respondents from the sales and use tax. Appellant sought review.
The court affirmed in part and reversed in part, concluding the computers were involved in "manufacturing."
The court held that machinery that increased production volume qualified for the Mo. Rev. Stat. 144.020.2(5) exemption. The court determined
that as long as the equipment was purchased for and was subsequently used in an exempt manner, the court was not concerned with which
respondent purchased it.
The court concluded that both respondents qualified for the exemptions under Mo. Rev. Stat. 144.030.2(4),(5) because the equipment was
purchased by both respondents to be used, and was used, in an exempt manner.
Holding: The court affirmed in part and reversed in part a commission's decision exempting respondents, publishing company and corporation, from sale and
use tax on certain computer equipment purchased to implement changes in production process because the computers were involved in manufacturing, and
both respondents qualified for a tax exemption where the equipment was purchased by both respondents to be used, and was used, in an exempt manner.

4. CONTINERS AND PACKAGING

A. Exemption of Containers and Packaging under Resale Provisions
In states without an explicit container and packaging provision, their taxability is decided under the resale exemption
Issue turns on: whether taxpayer is using the container or packaging in course of delivering its product or is separately selling the container or package?
o District of Columbia v. 7-up cardboard cartons, wooden cases, and bottles purchased by soft drink bottlers for use in delivering their products were
purchased for use and not resale.
B. Reusable bottles, cases, and other containers
When bottles are reusable, they are generally taxable Arkansas Beverage v. Health
However, some have held that if the title to the bottle passes to the purchaser, who is free do with the bottles whatever she pleases, then they are purchased for
resale Coke v. Kentucky Revenue Board
C. Statutory Exemptions of Containers and Packaging Materials
Typically, statutes provide that the sale of the container to the vendor is nontaxable for resale (generally embraces all forms of packaging ex. paper, twine, etc.
Some states, expressly exclude certain shipping materials and containers from the resale exemption (Texas excludes bags, cartons, crates, tape, twine as well
as property used inside a package to shape, form, stabilize, preserve, or protect the contents.)

Wednesday November 1st: Services: 740-768 (PART IV: PERSONAL INCOME TAXATION; SERVICES)
CHAPTER 8: SALES TAXATION
D. SERVICES
States typically restricted tax base largely to sales initially though some taxes public utility and hotel services.
o Reason Desire to create simple and easily administrable tax
Today: expansion of sales tax base to selected services (utility, admissions, foods services, hotels, repair of tangible property, repair of real property, data
 processing services, cleaning services.)
History:
o Feds switching from tariffs to income tax, sales tax then comes out roaring, now turn into
Municipal and county revenues rely mostly on
Property tax supports particular services (education)
Income tax feds
State income tax (sometimes in the form of business and organization tax) up to the state (Kansas doesnt have, EL is figuring out if they want
one)
Why should we have a consumption tax?
o Argument 1: Rich people consume less;
o Argument 2: Consumption tax offsets behavioral tendencies [encourage people to consume less]
Why do we tax services more reluctantly than personal services?
o Ideal consumption tax should cover all forms of consumption and exactly one tax that is paid at the very end of ultimate consumption

1. REPAIR, ALTERNATION, AND SERVICING OF TANGIBLE PERSONAL PROPERTY

Covington Pike Toyota, Inc. v. Cardwell
Facts: The taxpayer(Toyota) sold extended warranties, which allowed customers to bring their cars to the taxpayer(Toyota) for free-of-charge repairs after the
manufacturers' warranties had expired.
o The commissioner assessed the sales tax on the taxpayer's extended warranties on the basis that the warranties constituted repair services under a rule
that had been promulgated to interpret 67-6-102(13)(F)(iv) and (vi), namely Sales and Use Tax Rule 1320-5-1-.54(2) (Rule 54).
"Repair services" and "repairs" of tangible personal property shall mean and include any one or all of the following for a user and consumer: work
done to preserve or restore to or near the original condition made necessary by wear warranty contracts
In granting summary judgment for the taxpayer, the chancellor determined that the Commissioner exceeded his statutory rule-making authority.
The commissioner argued that the inclusion of the warranties under Rule 54 was consistent with the taxing statutes and that the chancellor should
have deferred to the administrative interpretation of Rule 54 because it had never changed.
Holding: In affirming the judgment, the court held that the chancellor did not error, as the commissioner overstepped his rule-making authority because the
word "repairs" in the taxing statutes and Rule 54 did not include the undertaking of a contractual commitment whereby repair services could, or could not have
been, provided in the future.
Notes:
o Toyota tried to attack if it is beyond the authority
Said the commissioner went beyond his authority because he changed the statute [this whole litigation is for back taxes for a certain number of
years before the statute explicitly mentioned service contracts]
Argument for Toyota: Expressio Unius
o if you added it after, then it changes the meaning But is this right?
What if the change in language is meant to clarify
Argument for IRS:
o This is not the Expressio Unius argument because the subsequent enactment of legislation evidences clear intent that the
commissioner was listened to by the legislature
o Revenue statutes should be construed narrowly against government, but exemption or deduction is construed narrowly against the
taxpayer
The repair agreement is paying in advance
The court held that because the statute says you are taxing on repairs which was likely not when he paid for the contract

o A. Taxable Repair Services and the Sale of Extended Warranties

The purchase of an extended warranty falls outside the statute imposing tax on repair because at the time the warranty is sold, it is not technically
repairing the product
But what about a prepaid cellphone if you were to tax at sale, then you would need a mandatory refund remedy based on due process
o B. Alteration Services
Kansas sales tax applied to service of repairing, services, or maintaining tangible personal property
TP rerouted the flow of oil by cutting pipes, argued he merely altered it
SC upholds the tax the inherent nature of each segment of pipe is not changed by the simple act of connecting the segments into a continuitys
conduit; both before and after interconnection, the pipe remains pipe.
Remember there is an exclusion of taxing real estate
Personal consumption party for chicken wings from Costco vs. chicken wings in sports bar
Sports bar would be taxed as a sale for resale
BUT THEORITICALLY A DIFFERENT RESULT WILL APPLY IF YOU ARE A CONTRACTOR BUYING 50 TOILETs YOU WILL BE EXEMPT BECAUSE IT IS NOT
PERSONAL TANGIBLE PROPERTY
IF YOU WAIT TO TAX TOILET, MICHIGAN LOSES TAX ON ALL OF THESE
BUT HOW DO YOU FIX THIS ALL SALES TO CONTRACTORS ARE INCLUDED IN THE SALES TAX
2. COMPUTER, DATA PROCESSING, AND INFORMATION SERVICES
A. Delineation of Taxable Computer, Data, Processing, and Information Services.
Quotron Systems v. Limbach
o Facts: Appellant taxpayer (provided price information on stocks to its subscribers by means of computer terminals) challenged and argued that a tax
imposed upon it was a burden on interstate commerce.
The commissioner had assessed the taxpayer because it had not collected the use tax.
o Ohio Rev. Code Ann. 5739.01 and 5739.02 tax sales of automatic data processing and computer services, and Ohio Rev. Code Ann.
5741.02 imposes a complementary use tax on the storage, use, or other consumption in the state of tangible personal property or the benefit realized in
the state of any service provided.
 Ohio Rev. Code Ann. 5741.01(N) defines "other consumption" as including receiving the benefits of a service by the person who purchased the
service.
Thus, the purchase of automatic data processing and computer services is subject to the use tax.
o Holding: Rendered taxable automatic data processing service because the subscriber had access to the computers for purposes of accessing
information.
The court found that the United States Supreme Court allowed California to require a nonprofit corporation to collect California's use tax on items
sold in the society's mail-order operation.
The Court searched for an adequate nexus between the society and the taxing state that would permit the state to impose the use-tax collection
liability on the society.
The Court rejected the argument that the society's activity sought to be taxed must have a nexus with the taxing state. The court found that in the
present case, a definite link existed.
The taxpayer owned equipment that it delivered to subscribers in Ohio, constructed two communication concentrators in Ohio, and employed
personnel in Ohio to install and maintain equipment. Ohio could require the taxpayer to collect the tax from its customers, and the taxpayer should
have collected it. Having failed to do so, it was itself liable.
o Note:
Remember resale for sale is applicable to services
Here Commissioner is trying to apply the true object test to intangibles
Argument for Commissioner: True object of this is automated data processing where the service is incidental
Argument for Day trader:
Qutoron is providing a service but what about case on Page 749 a firm who performs law firm back office services, to where automated
data services were incidental to their operations

3. CLOUD COMPUTING SERVICES

A. Distinguishing between Taxable and Nontaxable Cloud Services

B. Cloud Computing as a Taxable Service

Ruling 10-2 the infrastructure to allow various users to communicate and transact business with one another in an electronic environment
Texas controller has included voice recognition, access to web design, web applications to manage transaction, web based reporting system constitutes data
processing

C. Digital Automated Services.

State of Washington Taxable categories include remote access to prewritten software (includes charges made to customers for right to access and use
prewritten software)) and digital automated services (includes any service transferred electronically that uses one or more software applications.)

4. TELECOMMUNICATIONS SERVICES
All but a handful of states impose tax on telecommunication (exception to the general rule)

Ruling No. 95-10

Whether the sale of prepaid long distance telephone cards is taxable under either Conn. Gen. Stat. 12-407(2)(a) as the sale of tangible personal property or
Conn. Gen. Stat. 12-407(2)(k) as the sale of telecommunications services.
A prepaid phone card operates in a manner similar to the cash equivalents discussed in Bulletin 24, in that all or a portion of the purchase price of an item or
service to be purchased in the future is prepaid. Therefore, a phone card is also a cash equivalent
Such services are taxable when a call (1) both originates and terminates in Connecticut; (2) originates in Connecticut and terminates outside Connecticut and is
charged to a telephone number, customer or account located in Connecticut or to the account of any transmission instrument in Connecticut; or (3) originates
outside Connecticut and terminates within Connecticut and is charged to a telephone number, customer or account located in Connecticut or to the account of
any transmission instrument in Connecticut.
Although the sale of the prepaid phone cards at the Company's stores is not taxable under Conn. Gen. Stat. 12-407(2)(a) as the sale of tangible personal
property, the telecommunications services rendered when such cards are used to make calls either originating and terminating within Connecticut or originating
within Connecticut and terminating outside Connecticut are subject to tax under Conn. Gen. Stat. 12-407(2)(k). Tax must be included in the
Telecommunications Provider's calculation of the amount to be debited from the phone card, and must be remitted to the Department by the
Telecommunications Provider.
Notes:
o A. Prepaid Telephone Calling Cards

o B. Gift Cards
o C. Sale for Resale of Telecommunications Services Used in Conjunction with the Provision of Other Services

5. INTERNET ACCESS AND THE INTERNET TAX FREEDOM ACT [p759]

Internet Tax Freedom Act (ITFA): The Act imposes a 3-year moratorium (extended further, if not indefinitely) on three types of taxes: (1) Taxes on Internet Access,
(2) Discriminatory Taxes on Electronic Commerce, (3) Multiple Taxes on Electronic Commerce

A. Taxes on Internet Access

 The prohibition against taxes on Internet access forbids states from taxing charges for a service that enables users to connect to the Internet to
access content, information, or other services offered over the Internet
The Statute plainly forbids states from taxing the monthly fee that Internet access providers charge their customers for connecting to the Internet.
Definition of Internet Access includes home page, electronic mail, and instant messaging (including voice and video)
Just like Public Law 86-272 Express Preemption

B. Discriminatory Taxes on Electronic Commerce

Act prohibits taxes that discriminate against electronic commerce
Definition of discriminatory taxes includes state reliance on the existence of an in-state server as a basis for asserting use tax collection
obligations.
o Also Just like Public Law 86-272 Express Preemption
Overstock Case/Amazon Law click-through nexus which imposes a use tax collection obligation on Internet retailers that enlists in-state persons
to refer customers to the retailer through links on their website.
o Illinois Tried doing something similar but made the fatal mistake of couching its tax collection obligation only on a retailer having a
contract with a person located in this state, under which the person, for a commission or other consideration, refers potential customers
to the retailer by a link on the persons Internet Website
b/c they targeted tax collection obligation to retailers who enlisted those who referred customers to the retailers by a link on
the persons Internet website [NY taxed referral sales; Ill taxed only based on an internet only transaction] this was found to
be preempted
Corrected the mistake by amending the statute to provide that a retailer that has a contract with a person located in Ill., under
which the person provides to the potential customers a promotional code or other mechanism that allows the retailer to track
purchases referred by the person, creates a rebuttable presumption that the retailer is doing business in Ill.
C. Multiple Taxes on Electronic Commerce
Multiple tax is defined as any tax that is imposed by one state on the same or essentially same electronic commerce that is also subject to another
tax imposed by another state (whether or not the same rate or on the same basis), without a credit (for example, a resale exemption certificate) for
taxes paid in another jurisdiction.
Congress excluded a tax on persons engaged in electronic commerce which may also have been subject to a sale or use tax thereon.
D. Bundled Services
If charges for intrastate telecommunications services or telecommunications services between this state and another state and other billed services
not subject to the tax under this act are aggregated with and not separately stated from charges for telecommunications services that are subject to
the tax under this act, the nontaxable telecommunications services and other nontaxable billed services are subject to the tax under this act unless
the service provider can reasonably identify charges for telecommunications services not subject to the tax under this act from its books and records
that are kept in the regular course of business.

Monday November 6th: 867-890 (PART V: PROPERTY TAX: Introduction)

Tax Reform:
- Getting rid of the SALT deduction while doubling the standard deduction (from 12k to 24k for a joint family)
- Limiting property deduction to $10k has an impact on house prices:
o Will have to pay home for price of home lending in NY and Cali and property tax deduction is limited to $10k so they arent happy cause price of
their home are more expensive

CHAPTER 9: AD VALOREM PROPERTY TAXES

- Riverboat-Casino Case Is a fixture real property or personal property? Depends on state law
- Jeffrey/ConAgra Geoffrey was taxed as taxed, Conagra was not.
- Property tax was primary tax for school funding, generally more unpopular because highly visible but also a good thing because transparency
- History:
o Originally was a tax on all forms of property, real and personal, tangible and intangible upon every man according to his estate, and with consideration to
all his abilities whatsoever
o Today, the property tax in the US is limited largely to real estate, reaching only selected items of personal property
Ex. Cars (through registration), business personal property (but allow broad exemptions)

A. PROPERTY TAXATION AND PROPERTY RIGHTS

Millennium Park Joint Venture LLC v. Houlihan
- Facts: Millennium Park in Chicago is owned by one or more tax-exempt entities, including the Chicago Park District, and the entire park is considered exempt
property under the Property Tax Code
o Millennium Park Joint Venture LLC entered into a Concession Permit Agreement with the Park District (Houlihan was Cook County Asessory) in February
2003, which allowed plaintiff to use certain portions of Millennium Park to operate a food concession service (grille, caf, store).
Term Sheet: min fee of $275k, % fee based on revenue 3% up to 12 million, 1% afterwards (increased %s), term of 20 years. Millennium Park LLC
doesnt have much control over the contract (gross sales are reviewed, no subcontracting opportunity. Were granted the ability to negotiate other
concessioners apart from the flagship concession (but even pest control had to be negotiated).

o The Property Tax Code authorizes the assessor to tax a lessees leasehold interest in tax-exempt property in certain circumstances.
o The statutory scheme, however, does not authorize a tax or an assessment on exempt property that is merely licensed
o In The assessor sent a notice of assessment to the limited liability company, which soon became final. The limited liability company did not seek
administrative review, but filed a declaratory judgment action that contended that its interest was not taxable.
- Issue: Is it a lease or a license?
- Holding:
o The trial court agreed with the limited liability company. The appellate court affirmed.
o The state supreme court first found that the limited liability company could file the declaratory action rather than seek administrative review because it
was seeking a determination that the assessment was "unauthorized by law," which was an exception to the common-law exhaustion-of-administrative-
remedies doctrine.
o It then found that the interest was exempt from assessment because it was an untaxable license given the amount of possession and control the park
district retained under the agreement and the fact that the limited liability company did not own the land.
o Court This was a License and not a lease (no property interest; thus, not assessable and nontaxable)
- Chen Notes:
o Ad Velorum property tax is based on real property
o If this was a sales tax question you want to characterize this as a lease (time defined interest in real property, thus taxable) not personal property as it
is borne on the taxpayer
o If it is a mere license not characterized as a taxable event
o Lease v. License
o [A] license generally provides the licensee with less rights in real estate than a lease. If the contract gives exclusive possession of the premises
against all the world, including the owner, it is a lease, but if it merely confers a privilege to occupy the premises under the owner, it is a
license.
- Notes:
- Precedent: In each case, someone for profit enters into a contract with local government run waterpark, parking garage, community college food court.
o Charlton Waterslide (makes sense want someone else to operate it with park running the show with regulations)
o Rosewell Parking Garage (city of Chicago was in control over the actual operation of the garage to the color of uniform and shape of badges,
even though contracted out)
o Stevens This was distinguished because terms in McDonalds agreement was rented for a fixed amount of 30k/year (this was more similar to
a lease)
- Argument for License:
o Not paying fixed rent, contingent on gross revenue, no assignment of rights, no pest control, dictated the operation and timing, newspaper
found fact that the owners knew they mayor and got the bill
- Reconcile this to Geoffrey/Conga:
o Geoffrey the Corporation tightly runs the show [Geoffrey makes a conscious decision to avail itself in one market that is tightly knit]
o ConAgra Only imposed minimum requirement, but you can make it wherever you want [no control, conscious decision]
 A. Partial Interests in Tax-Exempt Property
B. Licenses and Leases
o SCC of Hawaii distinguished nontaxable licenses from leases on the grounds that a license conveys authority to do a particular act or series of
acts upon anothers land without possessing any estate therein
o Inequitable to tax security guards or construction contractors for their right to work on state land In re Fasi
o The taxation of other forms of governmental permits, stock exchange seats, press association memberships, memberships in social,
professional, and fraternal clubs, patents, copyrights, goodwill, judgements, causes of action, and insurance policies, which have never been
taxed as property for this state during its entire existence Roehm v. County of Orange
But Melinium Park wasnt like this
o Restatement of Property recognize that a finding that possession has or has not been transferred is often a means of stating that the rights and
obligations of a lease should or should not be enforced.

C. Easements
o Kanakee County v. Property Tax Board, cited in Mellinum park.
Found an energy companys easements to move gas underground to reservoirs for storage of natural gas to be nontaxable rights and
privileges.
The rights were conveyed to the company itself, thus constituted easements in gross rather than appurtenant easements benefiting
specific real property.
This distinction has a long history in real property tax.
o Gramercy Park Case
Access if you only have adjoining property (owners were taxed for park)
o RULE An easement carved out from one tract of land, which is created to benefit another tract of land, the use of the easement being
incident to the ownership of that other tract.
o
D. Effects on Nontaxable Interests on Taxable Values
E. Special Franchises
F. Possessory Interests in California
o People v. Shearer considered a possessory land claim (squatting), one way to avoid the tax bill
G. Property Tax as a Division of Property Rights
H. The Millennium Park Controversy

1. ECONOMIC PERSPECTIVES: IS PROPERTY TAX REGRESSIVE?

- Property tax is the engine of redistribution in our society.

2. POLITICAL CHALLENGES TO MARKET-VALUE ASSESSMENT

A. Alternate Tax Base Measures
3. ASSESSING AND COLLECTING THE TAX

Wednesday November 8th: 257-290 (PART V: PROPERTY TAX: Equal Protection in Property Taxation)
 B. EQUAL PROTECTION OF THE LAWS
- 14th Amendment: nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its
jurisdiction the equal protection of the laws.
o Initially aimed at the black codes adopted in southern states after civil war, equal protection reaches far beyond
o Corporations are not citizens thus do not get 14th protection

1. CLASSIFICATION OF PROPERTY AND TAXPAYERS

- Armour v. City of Indianapolis
o Facts:
In April of 2001, the City of Indianapolis ("the city") sent a letter to property owners in the Northern Estates neighborhood informing them
that their properties were part of the Brisbane/Manning Barrett Law Sanitary Sewers Project ("the project").
The project was designed to connect properties to the city sewer system, reducing or eliminating the use of septic tanks.
In July of 2004, the Indianapolis Board of Public Works ("the board") levied an assessment of $9,278 against each property subject to the
project.
Indianapolis offered each property owner the option of paying the assessment in its entirety or of paying in monthly installments,
subject to an annual interest rate.
The petitioners, Christine Armour and 30 other property owners ("property owners"), chose to pay the assessment in its entirety.
In 2005, the city abandoned the Barrett Law method of assessing owners' contributions in favor of the Septic Tank Elimination Program
("STEP").
As part of the transition to STEP, the board passed a measure forgiving all outstanding Barrett Law assessment balances owed as of
November 1, 2005, including those assessed for the project.
As a result, owners who chose to pay their assessment in monthly installments were forgiven from future payment.
Owners who chose to pay their assessments in their entirety were given no reimbursement.
The property owners requested compensation from the board in February of 2006 and were denied.
The property owners filed complaint against the city in July of 2007, alleging violation of due process and equal protection under the
Fourteenth Amendment.
All parties filed for summary judgment; the trial court granted the property owners' motion, and entered judgment against the city.
On appeal, the property owners abandoned their due process claim, arguing that the city violated equal protection.
The Indiana Court of Appeals affirmed, holding that the city did not have a rational basis for only forgiving the debt of owners who chose to
pay in installments.
The Indiana Supreme Court granted the city's motion to transfer the case, vacating the decision of the Court of Appeals.
Justice Frank Sullivan, writing for a unanimous court, held that the city's tax policy survives rational basis review and does not violate equal
protection.
The city legitimately believed that 1) owners who fully paid their assessments were in a better financial position than those making
monthly installments, 2) the benefits of simplifying funding for the sewer system outweighed the effort of continuing the previous
taxation system and 3) the new taxation system would preserve city resources.
He rejected the property owners' argument that they were a "class of one": requiring heightened scrutiny of the city's action--
because the property owners were not singled out for discriminatory treatment.
o Issue: Did the City of Indianapolis violate equal protection by forgiving only outstanding Barrett Law assessment balances, and not those of
property owners who paid in full?
o Holding: No. Justice Stephen G. Breyer, writing for a 6-3 majority, affirmed the Indiana court.
The Supreme Court held that the distinction between homeowners who had paid the full amount and homeowners who had their balance
forgiven had a rational relationship to the legitimate interest of reducing administrative costs.
The Court used rational basis review because the classification between homeowners was not suspect and did not involve a
fundamental right.
Chief Justice John G. Roberts, Jr. dissented, writing that the extreme disparity in tax burdens between homeowners violated the equal
protection clause under rational basis review.
While administrative costs can play a role, they do not justify charging some taxpayers 30 times what other similarly situated taxpayers
paid.
Indianapolis even provided detailed records of how much each homeowner overpaid, so the only administrative cost would be cutting
checks and mailing them to the homeowners.
Justice Antonin Scalia and Justice Samuel A. Alito, Jr. joined in the dissent.
o Chen Notes:
Simple as: people who chose installment plan; get a windfall. People who paid up front; lost their money.
Equal Protection Argument Choice is irrelevant (trivial only because some chose to pay up front)
o Transition from Barrett Law to Bond Model
Why does Indianapolis win?
Remember Order of Claims:
o DCC/ P&I is strongest out of state vs. instate
o Equal Protection (Met-Life)
Strict Scrutiny (narrowly tailor)
Intermediate (substantially related)
This is Rational Basis Review (just rational to legitimate)
What else could Indianapolis do?
o Keep charging installments
o Forgive installments based on how many years have been paid so far
o So, they chose to forgive future obligations for some but no refund
 Remember: Bell Alaska State Oil Dividend according to state residency/ Hooper veteran exemption based on if you lived in an
area based on a certain day Struck down based on right to travel argument
o But here there is no discrimination based on state residency (everyone is from Indiana)
o NOTE: 14th amendment Criticizes in which you are in state you reside
Amour is not a mobility question they were just dumb enough to pay the entire amount up front

o Textbook Notes:
A SCCs General Approach
Where taxation is concerned and no specific federal right, apart from equal protection, is imperiled, the States have large leeway in
making classifications and drawing lines which, in their judgment, produce reasonable systems of taxation. Lehnhausen v. Lake
Shore Auto Parts Co. (73)
Carmicle drew a distinction based on 8+ people vs. 20 employees; Lenhausen drew a distinction between corps and individuals for
property ownership
o Both claims struck down as a matter of equal protection
o One is a small business with one or two outsiders; vs. others were people dont know each other and it is easier to collect
money for larger companies
o Same with corporations and
In GMC v. Tracy (97), Court rejected GMCs equal protection attack on the states differential tax treatment on public utilities and non-
public utility marketers of natural gas
o the hurdle facing GMC is a high one, since state tax classifications require only a rational basis to satisfy the Equal Protection
Clause.
o Indeed, "in taxation, even more than in other fields, legislatures possess the greatest freedom in classification."
Florida Homestead Exemption:
o Because occupant doesnt live their full time,
o Not a violation not a discrimination against out of staters
Allied Stores property tax exemption for non-Ohio residents
o Discriminating instates against out-of-staters
o Remember camps Owatanna There is a remedy for in-states as opposed to none for out-of-states
This is taxation WITH Representation
B Classification by Gender
Kahn v. Shevin SC held that Fl statute that provided an annual $500 property tax exemption for widows without providing any
comparable exemption for widowers did not offend the Equal Protection Clause.
States v. Virgina parties who seek to defend gender-based government action must demonstrate an exceedingly persuasive
justification for the action

2. THE EQUAL PROTECTION CLAUSE AND PROPERTY TAX DISPARITITES

- Alleghey Pittsburgh (BIG TAX PAYER WIN but limited after this): Equal protection may have a significant role to play in challenges to discriminatory property
tax assessments.
o Facts: Challenge to gross disparities in ad veloreum property tax assessments resulting from the practice of assessing property based on its
recent sale price.
WA relied on sales price of recently conveyed property in determining its value for ad valoreum and did not systematically adjust its
assessment of unsold comparable properties to reflect current value.
So, long as property was unsold, it remains on the tax rolls with the same assessment it bore in prior years, with only minor and
infrequent adjustment.
The county, as a consequence, assessed recently conveyed property at a property that had not recently conveyed property at a
property that had not recently been sold.
o Holding: Taxpayer wins this case (BIG CASE)
Even though it is rational to use most recent sale price tied to property court held it is not!
Court state did not evenhandedly apply the state policy that land was to be taxed uniformly to all similar property.
Petitioners did not have to attempt to have taxes on other land raised because equal protection was not satisfied if a
state did not itself remove the discrimination.

- Nordlinger v. Harhn (Opposite of Pittsburgh)

o Facts: In a statewide ballot, California residents approved the addition of Prop 13 to their State Constitution. This amendment to the state
constitution imposed strict limits on the rate at which real property was taxed and on the rate at which real property assessments were increased
from year to year.
Prop. 13 exempted two types of transfers from this reassessment limit:
first, if the principal seller is 55 or older and moved to a home of equal or lower value, and
second, when a transfer occurred between parents and children.
Prop. 13 effects are that over time the taxes of new property owners, adjusted to reflect recent values, would be substantially higher than
long-term property owner's taxes.
A new property owner filed suit to challenge the state constitutional amendment.
o Issue: Does Prop.13 "acquisition value provision," which created a dramatic disparity in the property taxes paid by long-term property owners as
compared with new property owners, violate the Fourteenth Amendment's Equal Protection Clause by discriminating against new property owners?
o Holding: The Court, through Justice Blackmun, held that California's new property tax system rationally and plausibly furthered legitimate state
interests in restraining increasing property taxes and preserving local neighborhood stability.
 The discrepancy which Prop.13 created between new and longtime property owners is warranted, because the latter had a far greater reliance
interest in their property than the former.
Thus, long-time property owners deserved more protection from higher property taxes than new property owners.
This demonstrated a significant difference between the two property owner types.
In addition, both of Prop.13 exemptions rationally promoted a legitimate state interest.
The first exemption did not discourage older people from moving to a smaller home that is likely to better suit their smaller family
and income.
The second exemption aimed at preserving family unity and neighborhood stability.
Accordingly, the Court held that Prop.13 did not violate the Fourteenth Amendment's Equal Protection Clause.
o Chen:
Wants to elevate her standard of review from rational basis to strict scrutiny she doesnt get the benefit because she was already an LA
resident
Still doesnt discriminate out of state vs. in-states
Only discriminates property owners
o Stevens Dissent to Blackman This is un-American
This is anti-newcomer sentiment (this betraying the whole point of having a California), this keeps the rich, rich and the wealthy,
wealthier, and dis-insinuates moving and people coming in.
If you like your white privilege, you get to keep it.
If you got here before 1978, you win.
When you give tax amnesty, it is actually a trade-off: will forgive past violation as long as you agree to say plus sign a forbearance
(distinguishable); this is a crude remedy this is a perpetuity
o LAW: EVEN THOUGH YOU CANT DISCRIMINATE BASED ON STATE CITZENSHIPS (as long as you are discriminating out of states because instates
have a voice); YOU CAN DISCRIMINATE BASED ON NEWCOMERS
o Notes:
A) Alleghney, Nordlinger, and the Equal Protection Clause
B) State Court Equal Protection Decisions
C) School Finance Litigation and the Equal Protection Clause
 Monday November 8th: 890-919 (PART V: PROPERTY TAX: Uniformity and Equality in Assessment)

Review of Last Week:

School of Finance: School districts are financed by property tax but school districts have different (p289)
o Rodriuez education is not a fundamental right therefore ordinary rational basis test applies:
It is rational (ties finance to school, administratively convenient, deal with resources you are dealt, not going to interfere with
how much emphasis to put on education)
o This put pressure on state constitutional law
o Historically:
Education was not a public-sector enterprise (churches, some schools, private) only when you had a big wave of immigrants
came in (early 1800s sales tax and income tax werent constitutional at this point; all you had was property tax)
o New Jersey: Robinson v. Cahill
State constitution required thorough and efficient system of public schools opens up to claim that revenue generated
in each district is unequal
State constitution went beyond US constitution equality
o Normally in state constitution its stated as uniformity and equality.

B. UNIFORMITY AND EQUALITY IN ASSESMENT

This chapter State statutory and constitutional limitations on uniformity and equality in property tax assessments vs. last class is uniformity and
equality in property tax assessments.

1. CLASSIFICATION AND FRACTIONAL ASSESSMENT

Based on value
3 typical forms (1) Single Uniform Rate: uniformed rate levied on FMV for property or (2) Effective Rate: uniform rate based on some fraction of FMV or
(3) non-uniform system: based on property type (such as residential, commercial, industrial)
Extra-legal classification:
o Property must be revalued
o Over-assessment of property may be a problem (not as much under-assessment)

2. JUDICIAL AND LEGISLATIVE RESPONSES

Taxpayers seeking to challenge relative but not absolute over-assessment have faced obstacles Sioux City Bridge Co. v. Dakota County
- SC for the first time found a violation of federal equal protection in the case of a TP whose property was assessed at a higher % of value than prevailed in
the jurisdiction generally, even though the valuation was below its full value
o The only remedy in such situation was an action to require tax official to raise the assessments of all undervalued parcels.
o SC said this would deny the injured TP any remedy because it was impossible him to secure an increase in the assessment of the great mass of
under-assessed property in the taxing district. Where it is impossible to secure both the standard of the true value, and the uniformity and
equality required by law, the latter requirement is to be preferred as the just and ultimate purpose of the law.

People Ex Rel. Schlaeger v. Allyn

- Facts:
o TP is an accountant by trade.
o Lives on the boundary of cook county and lake county (property was in a village that was located in different counties, but which was included
within one park and school district)
o Constitution said shall provide such revenue as may be needful by levying a tax, by valuation, so that every person and corporation shall pay a
tax in proportion to the value of his, her or its property - such value to be ascertained by some person or persons, to be elected or appointed in
such manner as the General Assembly shall direct, and not otherwise.
The taxpayer objected to taxes levied, which were based on a determination as to value by assessors for the counties (because
assessors have to get re-elected) on the grounds that the taxes violated the principle of uniformity in taxation of the same class of
property in the same taxing unit.
TP argues that different units of
- Issue: Whether S1 of Art 9 of Ill Constitution (shall provide such revenue as may be needful by levying a tax, by valuation, so that every person and
corporation shall pay a tax in proportion to the value of his, her or its property - such value to be ascertained by some person or persons, to be elected or
appointed in such manner as the General Assembly shall direct, and not otherwise) effects the tax treatment of his property that falls under both county
- Holding:
o On appeal, the court ruled that the three common taxing bodies, the village, the park district, and the school district, were each separate taxing
bodies with authority to levy taxes for their separate corporate purposes.
As long as cook county commissioner acts in a uniform way, state constitution is not violated, even if lake county assesses a
different tax, as long as that one is uniform (within its county), not violated
The court ruled that the taxpayer had not shown how uniformity was to be maintained as between properties located in different
counties but included within one park or school district.
 The court further determined that the value of the property had been fixed by an assessor authorized to fix the value of property for
taxation purposes.
o The court concluded that the taxpayer had not alleged fraud on the part of the assessor nor shown grounds therefor, thus, the assessor's
judgment as to valuation was entitled to a presumption that the tax was just.
- Notes:
A. Nature of Taxpayers Complaint
B. Application of Uniformity and Equality Provisions to Different Assessment Methods
C. Changing Judicial Attitudes Toward Relative Overassessment

Hellerstien v. Assessor of Islip

- Facts: Hellerstien is in long island and objects to assessments because they are not at full value and conflicts two provisions.
o Article 16 2 of NY Constitution assessments shall in no case exceeds full value.
o In 1975, section 306 of the State Real Property Tax law directed that; All real property in each assessing unit shall be assessed at the full
value thereof.
The history of the full value standard in New York can be traced back at least to 1788, and the traditional practice of ignoring this
standard was as old as the statute itself but no one does this.
The practice of assessing at a percentage of full value was referred to in an 1852 decision (Van Rensselaer v. Witbeck), where the
court, even at that early date, commented that if this be so, the practice should be corrected.
Few municipalities followed this advice of the Court of Appeals, and most assessors continued to assess at less than full
value, in flagrant violation of the statute.
o Hellerstien is bringing this Suit: wants to follow 306 because it eliminates any discretion by the assessors (even though her effective tax rate is
lower) its her relative tax rate she is concerned about
o A property owner commenced a certiorari proceeding to declare the entire assessment roll of the Town of Islip void.
The sole ground of the argument was that the assessments on the roll were illegal because they were not made in accordance with
the requirement of RPTL 306.
o Interestingly, the Town of Islip admitted that assessments were not made at 100 percent of value but rather at a lesser percentage.
The first defense of the Town of Islip was that the Court of Appeals, in considering inequality cases in the past, had made no
references to the apparently winked-at custom of assessing at percentages less than 100 percent, and had, by its silence, given
judicial sanction to this practice.
The town placed great reliance upon the famous case of C.H.O.B. Associates v. Board of Assessors of County of Nassau,
in which, at the supreme court level, it was suggested that section 306 did not mandate assessments at 100 percent of
full market value. Rather, the argument held that section 306 required only that assessments be at a uniform rate or
percentage of full value.
- Issue:
- Holding:
o Writing for the majority in Hellerstein, Judge Sol Wachtler pointed out that the question of the validity of fractional assessment was not really at
issue in C.H.O.B. He lamented the numerous lower court opinions spawned by C.H.O.B. and observed: Thus the custom of fractional
assessment, once roundly condemned as a flagrant violation of the statute, has endured and acquired a new life through a kind of legislation by
violation.
o The majority opinion in Hellerstein also traced the history of inequality cases. It pointed out that, early on, the courts were faced with a dilemma.
On the one hand, in a situation where assessors were assessing property at a percentage less than full value, but were assessing a
complainants property at a higher percentage of full value than others, there was a rather obvious violation of equal protection.
On the other hand, if the court were to reduce or order a reduction of an assessment which was already below the market value
standard prescribed by section 306, it would be compelling the assessor to perform an unlawful act.
o As a result many courts held themselves precluded by the letter of the law from doing more than advising the complainant that he had the
theoretically satisfactory privilege of swearing out a writ of mandamus to compel the assessors to revalue every other piece of property in the
jurisdiction.
This dilemma was resolved by the United States Supreme Court in a 1923 decision (Sioux City Bridge Co. v. Dakota County), in which
it held that if it was impossible to secure both the standard of true value and the uniformity and equality required by law, the latter
requirement was to be preferred.
This was the basis upon which the New York courts felt free to order the assessors to reduce an assessment that was already below
the statutory standard.
o A second defense raised by the Town of Islip was that the creation of the State Board of Equalization and Assessment was tantamount to
legislative approval of fractional assessment.
Judge Wachtler made short shrift of this argument in stating that the only significance the Board has in relation to this problem is
found in section 720 of the Real Property Tax Law which permits a taxpayer in an inequality proceeding to rely on the ratio
established by the Board in proving his claim. But this provision was merely designed to ease the taxpayers burden of proof in
inequality cases (i.e., Gut Realty v. Gingold) which, as indicated earlier, is not premised on the legality of fractional assessments.
However, Islips defense relied most heavily upon the argument that the statutory standard on section 306 had been violated for
some 200 years; that the legislature was aware of this violation; that the legislature had done nothing to overturn the practical
construction which those charged with administering the statute had placed upon it; and that since the legislature had thereby
acquiesced in this practical construction, the Court of Appeals should do the same.
The Court acknowledged that sometimes the interpretation of a doubtful or obscure clause in an act of the legislature or
in a constitution may be aided by the practice which has grown up around it.
o However, the Hellerstein majority held this defense to be inapplicable, concluding that the language of section 306 was clear, unambiguous
and capable of only one interpretation.
The court cited an earlier case, Wendell v. Lavin, to the effect that plain and clear provisions must not be smothered by the
accumulation of customs or violations.
o Having rejected all of the defenses raised by the town, the majority held that the petitioner was entitled to an order directing the town to make
future assessments at full value.
 o Clearly, the Court of Appeals considered all of the legal aspects of this case in detail, but it is equally clear that it considered the practical
aspects as well. It refused to invalidate the specific assessment roll before it on the ground that to do so could bring fiscal chaos to the Town of
Islip. It recognized the principle that the courts should not act so as to cause disorder and confusion in public affairs, even though there may be
strict legal right involved. The majority was quick to point out, however, that this did not mean that it was forced to endorse the practice of
fractional assessments or withhold relief insofar as future assessments were concerned.
o In recognizing that future compliance would undoubtedly cause some disruption in procedures, the court allowed what it considered to be
reasonable time for the town to comply with the decision.
And it specifically held that in the interim assessments made be in accordance with the existing practice, and any tax levies, liens,
foreclosures or transfers based on such assessments shall not be subject to challenge for failing to comply with section 306 of the
Real Property Tax Law.
o The court also included in its decision a specific directive to lower courts in future cases to exercise the same degree of restraint with regard to
disturbing settled assessment rolls and providing a reasonable opportunity for compliance with the statute.
o Apparently, however, the court felt compelled to comment further on the practice of fractional assessments, stating that this practice has time
on its side and nothing else.
Citing several note authorities, the court attacked the very concept of fractional assessment, making references to gullible
taxpayers, lack of visibility, the desire of the party in power to maintain fractional assessments and the difficult task of the taxpayer
in proving comparative inequality.
- Notes:
A. Hellerstien, Full-Value Assessments and Limitations on Property Tax Assessments
o Californias reaction to this was Prop 13
o NY 30 to 1 miscalculation of valuation
B. The Massachusetts Experience (Tregor v. Board of Assessors)
o Fix equality rate at 2.5% but locking in fractional assessments but problem still exists of assessors
C. The Pennsylvania Experience (Clifton v. Alegheny County)
o Base Year Approach (no re-valuation unless there is a sale), this is upheld because there is no interstate movement
D. Political Questions Raised by Hellerstien
E. Extra-Legal Assessment Approaches
F. The Situation in Nassau County (OShea v. Board of Assessors)
G. Discrimination in Favor of Homeowners
H. Length of Assessment Cycles
I. Taxation of Timeshare Owners
o TP lost case that taxing his property a t a rate nearly 4x the primary residences was unconstitutional as a violation of the Equal protection clause

CSX Transportation, Inc. v. Georgia State Board of Equalization

- Facts: The Tax Injunction Act establishes a general rule that federal courts will not interfere with matters of state taxation, but the Railroad Revitalization
and Regulatory Reform Act of 1976 (4-R Act) provides an exception for railroads.
o In an effort to prevent state tax discrimination against railroads, Section 306 of the 4-R Act requires that the ratio of the assessed value to the
true market value of railroad property not exceed by more than five percent the ratio of assessed value to true market value for all other
commercial and industrial property in the assessment jurisdiction.
This calculation requires that states determine the "true market value" of the railroads' property - a valuation that can be
subjective.
o Using a new valuation methodology, the Georgia State Board of Equalization appraised the property of the railroad company CSX
Transportation, Inc. at $8.2 billion.
CSX filed a complaint under the 4-R Act, noting that the old appraisal methodology would have valued the property at only $6 billion.
Despite CSX's argument that the 4-R Act allows railroads to challenge state valuation methods, the district court ruled that the only
the state's methodology could be considered.
o The U.S. Court of Appeals for the Eleventh Circuit affirmed the lower court. The Eleventh Circuit ruled that in the absence of a clear statement in
the 4-R Act, principles of federalism weighed against interpreting the Act to give railroads additional power to challenge the taxing authority of
the states in federal court.
The Circuit Court stood by the general principle that federal courts should not interfere with state taxation policies. Since the 4-R Act
did not allow challenges to the state's choice of valuation method, CSX could not bring its arguments that Georgia's methodology
was faulty.
- Issue: Does the Railroad Revitalization and Regulatory Reform Act of 1976 require a federal district court determining the "true market value" of railroad
property to accept the valuation method chosen by the State?
- Holding: The Court reversed the 11th Circuit in a unanimous decision. Writing for the Court, Chief Justice John G. Roberts, Jr. stated that courts cannot
blindly accept the states' market valuations without potentially endorsing the type of discriminatory tax practices that the 4-R Act was designed to thwart.
o The Court also rejected Georgia's state sovereignty argument, holding that tax valuation methods are technical tools utilized by state
employees, not expressions of state policy.
Very minimal
- Notes:
o Georgia wants to hammer Railroad company (out-of-state who dont vote)
o CSX vindicates equal protection and interstate commerce claim
Examples of commerce
(1) Wrigley and (2) NY Internet Taxation Law
Equal Protection
Section 5 legislation
13th, 14th, 15th amendments said that state sovereignty
- if a railroad in Nebraska:
 o Bring CSX
- Pipeline Case:
o Even though it is not covered under 4R Nebraska constitution requires equalize pipelines with federal
-
-
-
Wednesday November 15th: 919-53 (PART V: PROPERTY TAX: Valuation)

C. APPROACHES TO THE VALUATION OF PROPERTY

1. METHODS OF VALUING PROPERTY

CSX v. Georgia State Case Review

- Issue Can state of Georgia survive scrutiny under the 4R act
o Holding as long as the method is cogant, does not allow
o SCC methodology is itself a potential source of discrimination

3 basic methods for valuing property:

o Comparable sales (prices for similar parcels)
Recent sale prices
Presumes you have market
o Cost approach (construction cost +improvements - less depreciation)
Seen in real property and securities, administratively convenient
Least reflective of market unrealistic as real time pricing data
o Replacement cost
Even though this is sounder than the cost approach
Weakness is that you still need comparable
Doesnt come up in tax because you
o Income approach (mkt value of net income stream produced by property)
Works best with investment properties
Discounted Cash Flow
a = rP
a=annuity, r=rate of return, P=property

Rosbroc Associates v. Assessor and Broad of Review of the City of New Rochelle
- Facts:
o Urban Renewal led to eminent domain, tax based foreclosures, tax relief on investment
Because it led to detrimental property prices
o Each one of these government interventions distorts market prices for comparable
o Tax Payer argued over which valuation method to use,
- Issue: When use income and cost methods?
- Holding: court found that income approach isn't appropriate in the beginning.
o Using cost method would be inappropriate since land was bought at a discount.
o Except in this case, income method is appropriate.
- Notes:
o Argument goes that for private transaction affecting public use the government should be able to intervene
o But when this happens it distorts market
3 hotel comparable

Board of Assessment Appeals v. Colorado Arlberg Club

- Facts:
- Issue: Should future use of property be considered?
- Holding:
o In the market, the current value of a property is not based on historical prices or cost of creation; it is based on what market participants
perceive to be the future benefits of acquisition.
o Accordingly, a propertys highest and best use, which is the use, from among reasonably probable and legal alternative uses, found to be
physically possible, appropriately supported, financially feasible, that results in highest land value is a crucial determinant of value in the
market. p.858
Reasonable and future use is relevant to market value.
- Notes:
o According to this case you have to take future use in account
MUCH MORE IMPORTANT TO LOOK AT HISTOCIAL USE
o But how do you square this with all these mileage rates that were departures from market reality
Noerdlinger (prop 13), Armor ALL THESE SALT CASES DISTORTS

HOW DO YOU RECONCILE THIS (1) TIME[DCF] and (2) SPACE[comparable]?

o Time = Present + Foreseeable future (for example easements and all the other)
o Space = no property is an island; only valuable to its comparable
 Non-Market Adjustment to Value:
1) market value sometimes encounters objections (i.e. Prop 13)
2) Non-legislative efforts: "View Factor" (New Hampshire included a factor rate based on the view)
3) Objections to market value during depression - "theoretical line between fair values that are depressed and depressed values that are not fair &
reasonable"

Adjustments to Property:
o Agricultural Exemption only to this use, not highest possible use
o Eminent Domain
o Special Use
o Easements

2. SPECIAL ISSUES IN LAND VALUATION

a. Valuation of Contaminated Property
Westling v. County of Millie Lacs
- Facts:
o The business operators owned a parcel of land upon which they constructed a warehouse and office.
o Tests of the land indicated that it was contaminated with a volatile organic compound.
o The Minnesota Pollution Control Agency listed the land on its State Superfund Permanent List of Priorities, and named the business operators
as the responsible parties.
o Because of its contamination, the tax court concluded that the land had not market value upon which to have assessed taxes.
o The county objected to the assessment, and the court held it was proper. Although the court was cognizant of the county's frustration, the
evidence before the tax court concerning stigma discount and the cost of cleaning up the contamination amply supported its order directing
reduction of the assessor's estimated market value.
o
- Issue: Should market value reflect clean-up costs?
- Holding: Yes, market value is reduced by cost to cure issues Pg 861 Court said you have to reduce the value by cost to cure the property.
o Meaningful departure from reality punishment for not cleaning up

- Notes & Questions:

A. Reduction in Value through neglect or Contamination
B. The Minnesota Contamination Tax
C. Eminent Domain Valuation
D. Cost of Remediation

b. Current Use Valuation of Agricultural Land

Fds
- Notes & Questions:
A. Allocation of Value
B. Bona Fide Agricultural Use
C. Developers Relief
D. Effect of Agricultural Classification
E. Policy Issues Raised by Agricultural Assessment Provisions
F. Current Use Value as Affected by Special Value to the Owner
G. Comparison to Federal Special Use Valuation

c. Valuation of Conservation Land

Village of Ridgewood v Bolger Foundation [easement]
- Facts: Bolger, a private foundation owns 2.8 acres, conveyed to NJ Conservation Foundation a perpetual conservation easement on the property.
o Easement for benefit of general public, prohibited Bolger from removing vegetation, excavating soil, etc. or any act detrimental to the
preservation of property in its natural state.
o Access reserved to Bolger, with limited right to NJCF to ensure compliance with terms.
o Perpetual easement forever
- Issue: Should the value of land be reduced for tax assessment purposes, for a conservation easement granted in perpetuity to a conservation foundation?
- Holding: Yes. Elements of value have been surrendered by the taxpayer by transferring this assurance.
- Notes & Questions:
o The valuation of the easement should be reflected in diminution in the market value
A. The Allison Case
B. The Effect of a Conservation Easement on Land Value
C. Issues of Public Access
3. NON-MARKET ADJUSTMENTS TO VALUE

- Notes & Questions:

A. Willing Buyer-Willing Seller
B. Market Value Implications of Sales for Specific Uses
C. Market Value Implications of Current Income
D. Applying All Factors
S
Uniform, regularity, nondiscrimination, interstate commerce

PART VI: SPECIAL TOPICS

Monday Nov 27th: Class 20 Federal Immunities from State Taxation (p335-366)
This time the taxpayer is the federal government

A. SALES, USE, GROSS RECIPTS, AND OTHER EXCISE TAXES

United States v. New Mexico (1982)
- Facts:
Three private entities had contractual relationships with petitioner United States Department of Energy (DOE).
o (1) Sindia manages fed sponsored research (2) Zia Maintenance and physical upbeat company (3) Los Alamos Contractors
construction and repair work
(1) & (2) get the upside of R&D (free license on discovery)
The contractors used an accounting device known as an advanced funding procedure to meet contractor costs and allowed contractors to pay
creditors and employees with drafts drawn on a special bank account in which United States Treasury funds were deposited.
o
Respondent State imposed a gross receipts tax and a compensating use tax on those doing business within the state.
o
The contractors paid respondent state's gross receipt tax on the fixed fees they received from petitioner.
o Petitioner argued that contractors' other expenditures and operations were constitutionally immune from state taxation.
- Issue:
- Holding:
o The Court found that the contractors were privately owned corporations and could not be termed constituent parts of the Federal Government.
Therefore, allowing the State to apply use taxes to the contractors did not offend the notion of federal supremacy.
Because contractors were independent taxable entities, their gross income was also taxable.
Contractors were not liable for the State's sales tax because the contractors had a substantial independent role in
making purchases.
- Notes:
o Legal Incidence Test If they step into the feet of the government
As opposed to the Economic test or nature of transaction as mentioned in CAT
Because the ultimate consumer will likely be the Federal government
o Application of the test
Legal instance and not economic instance (opposite of CAT)
Formally court says agency principle
Kern-Limerick case where contractor identified as federal procurement agent, purchases title passed directly to government.
[Agency principle drives]
In this event, even though it is a private contractor for profit, because there is no ambiguity,
A. Historical Overview
McCulloch v. Maryland
o (1) Is this (bank) valid federal entity? Congress can in fact authorize and charter a bank of the US
o (2) Can Maryland exact a tax on the federal government?
The aim of the tax was to discriminate against the United states
There should be in principle immunity between government
o Chief Justice Marshall says that a prohibition against state tax to federal government would not extend to tax paid by real property of the
bank, nor to a tax imposed on the interest which citizens of Maryland may hold in this institution in the common with other property of the
same description throughout the state.
B. Scope of the Immunity of Federal Contractors from State Sales, Use, and Gross Receipt Taxes

C. Substance Vs. Form in Federal Immunity Cases

D. Legal Incidence Test as Criterion for Determining Federal Immunity from State Taxation
US v. State Tax Commn found that a Mississippi regulation requiring out of state liquor distillers and suppliers to collect a wholesale markup on
liquor sold to military installations amounted to an unconstitutional state tax on federal instrumentalities.
 o Court find that because who was drinking was military should be tax exempt. a state requires that its sale tax be passed on to the
purchaser and be collected by the vendor from him, this establishes as a matter of the law that legal incidence lands on the purchaser
E. Scope of Tax-Immune Federal Instrumentality Under the Constitutional Immunity Doctrine

F. Federal Employees Purchases
Should federal employees who rent hotels taxable?
o May hinge on federal government card vs. own visa
o Some States say: they are in the feet of government as instrumentalities and others say that legal incidence falls on employee

B. PROPERTY TAXES
1. PROPERTY OWNED BY THE FEDERAL GOVERNMENT
- Notes & Questions:
A. The Michigan Cases [US v. City of Detroit, US v. Township of Muskegon, City of Detroit v. Murray corp.]
All are contractors with possessory interest with government property in connection in performance with government duties
o Detroit contractor leased property from federal government for use in private business, Muskegon used the federal government property
under a permit in the performance of its contracts with the federal government.
In both cases the tax was imposed on the contractor and measured by the value of the tax-exempt property.
o Allegheny invalidated an ad valorum property tax for federal government property used by federal contractors but in this case but that was
on a direct imposition on governments property interest.
Murray Tax on personal property
o F: Federal contractor that used federally owned property in performing its contacts, but the statute provided that the owners or persons in
possession of any personal property shall pay taxes assed thereon.
o We see no difference as far as constitutional tax immunity is concerned between taxing a person for using property he possesses and
taxing him for his possessing property he uses when in both instances, he uses the property for his own private ends

B. State Tax on Federal Employees Possessory Interests in Federal Housing Rented from Federal Government
US v. County of Fresno Michigan Principle was extended
o Convenience of employer doctrine because employee gets to live there, he is liable for the tax.

2. THE MAGNITUDE OF TAX-IMMUNE FEDERAL PROPERTY

Payments In Lieu Of Tax on Federal Real Property US Advisory Commission on Intergovernmental Relations Report A-90, pp 1-18
-
- Notes & Questions:
A. Payments in Lieu of Taxes: 2013 Data

B. Relief from Federal Immunity of Federal Property by Congressional Action

3. STATE TAXES DISCRIMINATING AGAINST THE FEDERAL GOVERNMENT

Davis v. Michigan Dept. of Treasury (1989) 489 US 803
- Facts:
Paul Davis, a resident of Michigan, worked for the federal government and upon retirement received benefits.
o Michigan law exempts state retirement benefits from state taxes.
Smith unsuccessfully petitioned for a refund on the state taxes he paid on his federal retirement benefits.
o He then filed suit in the Michigan Court of Claims arguing that the state's tax policy violated 4 U.S.C. 111 US consents to tax of pay or
compensation of personal service as an officer or employee . . . by a duly constituted taxing authority jurisdiction, if the tax does not
discriminate against the officer or employee because of the source of the pay or compensation by taxing benefits paid to federal
employees but not to state employees.
The court dismissed his suit and so did the Michigan Court of Appeals.
- Issue:
Did Michigan violate federal law when it exempted state and local government pensions from taxation but levied taxes on federal government
pensions?
o
- Holding:
Yes. Justice Anthony M. Kennedy delivered the opinion for an 8-1 court.
o The Court emphasized the principles of intergovernmental tax immunity, which work to keep one part of the government from hindering the
operations of another part.
o Section 111 allows a state to tax income paid by the federal government "if the taxation does not discriminate against the officer or
employee because of the source of the pay or compensation."
o Because the Court found no "significant differences between the two classes [federal and state employees]," it held that the Michigan tax
distinguished between employees solely on "the source of the pay."

- Dissent:
411 doesnt say relative to state employees it says source of pay
o technically source of pay gets taxed regardless through income tax (whether private or a public entity)
- Notes:
This is reverse of McCollugh v. Maryland if the government cannot tax us, can we tax them?
This gives voice to the 2nd half of Maryland
 o Court Federal government is free to consent to the tax unless its based-on discrimination

A. The Rule Forbidding Taxes that Discriminate against the Federal Government

B. The Federal Immunity Principle and the Complementary Tax Doctrine
Washington v. US (gross receipt tax that applies to completed construction work)
o Fact: TP Washington, said well collect tax on the sale of finished construction of federal contractors
o Holding: Upheld the tax because Washington collects tax on all contractors including federal government even though the feds pays less tax)
Court: Washington, rather than discriminating, was merely accommodating for the fact that it may not impose a tax directly on the
US as a project owner
o Notes:
If this was a private business, youd pay gross receipt tax on entire project
Reconcile with Davis:
Federal government was treated more favorably even though there is a discrimination (even though its different its not
negative)
o For governmental immunity must be treated differently and unfavorably

Wednesday Nov 29th: Class 21 Exemptions (768-72, 983-1002)

Remember we treat the business intermediary as the ultimate consumer (ex. Home Depot)
Immunity vs. Exemption
- Immunity arises through Article 6 Clause 2 McCollugh v. Maryland, New Mexico v. US, where one entity (federal government is exempt)
- Exemptions arise through statute

Pp983

D. PROPERTY TAX EXEMPTIONS

1. OWNERSHIP AND USE TEST OF THE PROPERTY TAX EXEMPTION
Christian Home for the Aged, Inc v. Tennessee Assessment of Appeals Commission
- Facts: The community claimed that its property was entitled to an exemption as religious and/or charitable property because the property was used purely
and exclusively for those purposes.
- Appellant retirement community sought review of a decision of the Chancery Court of Davidson County (Tennessee), which upheld a decision of appellee
Tennessee Assessment Appeals Commission denying tax exemption for the retirement community's property except for its chapel, which was used for
religious purposes and its nursing facility, which was a licensed provider of health care.
- Holding:
- Even conceding that the community may have been a religious institution, the court found that the property in question was not used purely and exclusively
for a religious purpose.
- The court stated that the residents of the community paid substantial sums of money to live in the village, and the residences were occupied primarily for
residential purposes and not to further any religious purpose within the meaning of Tenn. Law 67-5-212.
o (a)(1) There shall be exempt from property taxation the real and personal property, or any part thereof, owned by any religious, charitable,
scientific or nonprofit educational institution which is occupied and used by such institution or its officers purely and exclusively for carrying out
thereupon one or more of the purposes for which the institution was created or exists . . . .
- The court agreed that the chapel was the only part, which qualified for the religious exemption.
- Likewise, the court found that the property was not use purely and exclusively for charitable purposes.
o The court noted that though the benefits of the community were significant, only those who were financially and physically well off were able to
receive them.
o The court found that financially disabled members of the public were effectively excluded from the benefits provided by the community.
- Chen Notes:
- But remember, revenue statutes are supposed to be construed against the government, whereas exemption are supposed to be construed against the
taxpayer, even the court considers it:
o We should point out that in this state HN3 the exemption in favor of a religious, scientific, literary, or educational institution is liberally
construed, Mid-State Baptist Hospital, Inc. v. City of Nashville, 211 Tenn. 599, 366 S.W.2d 769 (1963), whereas there is a presumption
against exempting other property from taxation.
- This would still probably be a 501(3)(c) exemption

A.
-
B. Property Leased by One Exempt Organization to Another Exempt Organization
- Cali denied a property tax exemption to a hospitals thrift shop, which sold donated clothing and furnishing and whose proceeds were used for the hospital
and for contributions to a community chest.
C. Partial Exemptions
D. The Construction of Exemption Provisions
- Cooleys reading of exemption: Taxation is the rule, and exemption is the exception.
o Intention to make an exemption ought to be expressed in clear and unambiguous terms
o It cannot be taken to have been intended when the language of the statute on which depends is doubtful or uncertain
o Burden of establishment is upon him who claims it.
 - Page Covington Toyota Tenn Court taxation in exemption statutes are treated differently. Revenue statutes are construed strictly against the government,
tax exemption statutes should be strictly construed against the person seeking the exemption/ taxpayer.

E. Special Assessments

2. THE DELINEATION OF EXEMPT ACTIVITIES

Dove Lewis Memorial Emergency Veterinary Clinic Inc. V. Department of Revenue
- Facts: The taxpayer formed as a nonprofit organization to provide emergency veterinarian services. It received non-profit status by the Internal Revenue
Service, thus exempting it from federal income taxation.
- The taxpayer sought exemption from payment of ad valorem taxes on its real and personal property pursuant to Or. Rev. Stat. 307.130.
- Appellant taxpayer, a non-profit animal clinic, sought review of a judgment of the Oregon Tax Court (Oregon) denying its claim to a real property tax
exemption as a charitable organization.
- Holding:
- The court concluded that the mere fact that the taxpayer was a hospital or a charity did not establish an inherent right to a tax exemption.
- Oregon says we are willing to cut you a break from property tax if you are engaging in things that would otherwise bear the governments act but here they
were not.
- Upon evaluating seven key factors relevant to the determination of the charitable character of the taxpayer, the court concluded that the absence of two
factors negated any claim to an exemption.
o These factors included the absence of evidence indicating the existence of a separate account containing funds and donations committed to its
charitable use and the absence of private advantage to the organization's founders and officials.
The court also considered both the fact that the taxpayer's fee schedule [people who can pay, must pay] covered all costs so it did
not depend upon donations for its survival, and the lack of evidence that the government would be required to use tax dollars to do
the job the taxpayer was now doing.
-
- Notes:
A. Exemption of Property Dedicated to Future Exempt Uses
B. Narrow and Broad Approaches to the Delineation of the Exemption for Charitable, Educational, and Welfare Organizations
C. Judicial and Legislative Determinations
D. Housing Incidental to Exempt Activity
- Latter-Day Saints v. Ada County
o Court the residence in question belongs to the mission president who acts as a leader for 3 years, denied the exemption. Definition of
parsonage must be a building owned by a religious og occupied as a residence by a designated minister who ministers to a specific localized
congregation that gathers to worship at frequent and regular intervals.
o Dissent they dont have a full time priest, but the rotational aspect of 3 year priest defeated the claim, could be a 1st amendment violation
E. Parking Lots as Incidental to Exempt Activities
- Penn says no exemption, Georgia says yes
o Argument for: Need parking for churchgoers
o Argument Against: Christian Home, especially if they are charging for parking (no charity)
F. Taxation of Multi-Use Facilities Owned by Charitable and Educational Organization
G. Exemption of Property Owned and Used by Religious Organizations
(1) Religious Exemption and the First Amendment to the United States Constitution
(2) Belief in a Devine Ruler as Essential to Religious Exemption
(3) Challenges to the Legitimacy of Religious Organizations Seeking Property Tax Exemption
H. Circuit-Border and Homestead Exemptions

F. MISCELLANEOUS EXEMPTIONS AND EXCLUSIONS FROM SALES AND USE TAXES

Notes and Questions:
A. Casual, Occasional or Isolated Sales
- Is this a regular sale or a part of your business?
o vs. aggressiveness
A. Mergers, Reorganizations, Liquidations, and Transfers Between Affiliated Corporations

B. Charitable, Religious, and Other Nonprofit Organizations (Sales Tax)

- Many states exempt sales to charitable organizations but many do not
(1) Qualifying for exempt Status
- Yale Club: Court rejected educational exemption saying while the effort to encourage standards of Yale, they do little to benefit tax-paying public of Ill.
citizens.
(2) The Incidence of the Sales Tax
- Argument For: since we are not taxing you on downstream, we should tax you for when it comes in
- Argument Against: comparable to the whole idea of exemptions in the first place
(3) Leases of Equipment to Exempt Organizations
(4) Property and Activities Producing Income Used for Exempt Purposes

D. Exemptions for the Press

 Monday Dec 4th: Class 22 Refunds and Remedies (p 1011-48)

Today: Standing, Tax Injunction Act, 42 USC 1983

Tax Injunction Act & Standing:

- Why bring state and local tax disputes? No federal Court is allowed to issue an injunction against tax collection
o Whole point is that you have to finance local government
o Might be true that you dont have jurisdiction
- What is the remedy?
o Cant just go to a federal discount court and ask for an injunction for tax
But how did Cuno do this?
REMEMBER THE ISSUE WAS ABOUT CREDITS (inducement) Cuno wanted to sue to collect tax (not enjoining them,
wants them to enforce their laws)

o Cuno Held that a generalized tax payer who has a diminished view cannot sue
o But other businesses (direct competitor) can sue
- Cuno Situation: state has to come up for this revenue somewhere they might tax me more
- vs. Oaklahoma who taxes coal

Exception to Standing:
- Establishment Clause nor shall congress pass any law..
o Cannot have RH handing out subsidy for church (potential to be dragooned into paying tax into something you dont agree)
- Notwithstanding Cuno and general rule against TP standing, you always have standing to object to establishment

1983
- Violation to object to violation of state or fed right when it comes from a Color of law

Tension
- No injunction against state tax collection
- 1983 allows relief against deprivation of a tax law that is under color of law (violation of equal protection right) if you frame injunction in constitional
claim, can be a
- Hibbs p 1041
o Problem is not that you are enjoining a tax, you are enjoining the giving of a credi
- Fair v. McNary
o If there is conflict, Injunction act takes precedent over 1983
- Higgins
o As long as you go to state court, you are fine
- National Private Truck Counsel
o If you go to state court, they can say there is no violation to the extent you have a remedy under state law

C. CHALLENGING ASSESMENTS IN AMINISTRATIVE PROCEEDINGS

Nature of Administrative Remedy

Requirement of Exhaustion of Administrative Remedies

D. SUIT TO RECOVER TAXES

1. STANDING
A. Standing Principles
o Damiler Crysler Corp v. Cuno
o
B. Fds
2. BURDEN OF PROOF
A. Reconciliation of Burden of Proof Principles in Ordinary Civil Litigation and in Tax Cases
B. Burden of Proof in Bankruptcy Proceedings

3. OTHER ISSUES
A. Class Action Suits Challenging Taxes
B. Interest on Overpayments of Tax
C. The Set-Off Remedy
D. Collateral Estoppel and Res Judicata in Tax Cases

E. PROSPECT OR RETROACTIVE RELIEF AND OTHER LEGAL REMEDIES

McKesson Corporation v. Division of Alcoholic Beverages and Tobacco

- Facts: The McKesson Corporation (McKesson) (plaintiff) was a distributor of alcoholic beverages doing business in Florida.
o In 1985, the Florida legislature revised its liquor tax laws to correct a discriminatory tax scheme that gave preferential treatment to companies
whose beverages were made from products grown in Florida.
o The revisions deleted the express preferences for Florida products and instead provided tax rate reductions for use of specific types of crops, all
of which were commonly grown in Florida and used to make alcoholic beverages. McKesson paid the taxes without discount until June 1986,
when it sought a refund of the excess taxes, claiming the tax was unlawful. After the state denied the request, McKesson sued the Division of
Alcoholic Beverages and Tobacco and other state agencies (defendants) in state court, seeking injunctive and declaratory relief under the
Florida and United States Constitutions, as well as a refund of the excess taxes under state and federal law.
o The trial court granted McKessons motion for partial summary judgment, holding that the tax scheme violated the Commerce Clause and
enjoining future enforcement.
The trial court, however, did not order a refund or any other relief regarding the previously paid taxes. The parties cross-appealed,
and the Florida Supreme Court affirmed.
With regard to the refund issue, the Florida Supreme Court found that the state collected the taxes in good faith reliance on a
presumptively valid statute, and that a refund would be a windfall to McKesson, who likely passed the cost of the taxes on to its
customers.
The United States Supreme Court granted certiorari on whether McKesson was entitled to a partial tax refund under federal law.
- Holding:
o The court reversed the judgment of the state supreme court.
o The court agreed with petitioner taxpayer that the Due Process Clause required the state to afford taxpayers a meaningful opportunity to secure
post-payment relief for taxes already paid pursuant to a tax scheme ultimately found unconstitutional. The court held that respondent Division
of Alcoholic Beverages and Tobacco was required to provide such relief.
- Class Notes:
o Didnt matter if they couldnt afford the refund, because they didnt want to impose back-taxes, that was their only option
o You can be aggressive the way you tax, but if someone calls out as unconstitutional you have to either give a refund or charge back taxes
With the exception of shortening Statute of Limitations
But the cost to be paid is that there is always an anti-tax lobby

o Two Cases based on;

Backus Hawaii tax preference for alcohol made with crops from Hawiaii. Not Facially Discriminatory but when look in the books,
they are screwing over community based on equality
McKessen p1030 Florida does the same to oranges and tangerines disadvantages alcohol from other vegetables. But here
Florida
Can you remedy nondiscrimination Prong of CAT and Anti-discrimination of 4 USC 111?
Two Conceivable remedies:
o Back-taxes however this is not the politically right move to do for the commissioner to stay in his position
o Refund problem here was that they spent the tax money already
Due Process Claim
Involves a hearing that is pre-deprivation [must be given a notice]
- Notes and Q:
A) McKesson
B) American Trucking Association v. Smith
American Trucking Associations II
C) Progeny of McKesson and American Trucking Associations II.

- Harper v. Virgina Dept of Taxation

o Remember Davis:
Davis v. Michigan Michigan cut favorable deal for salt employees without extending to federal employees living in Michigan 4
USC 111 US government waives immunity to extent there is nondiscrimination (here they was, Michigan looses)
o Harper Facts: Petitioners, federal civil service and military retirees, sought a refund of taxes erroneously or improperly assessed in violation of
the nondiscrimination principle, which stated that a state violated the constitutional doctrine of intergovernmental tax immunity when it taxed
federal retirement benefits but exempted state retirement benefits.
The state supreme court refused to retroactively impose the nondiscrimination principle to petitioners' benefits. (100s of millions in
back taxes owed)
Petitioners filed for a writ of certiorari.
The court granted certiorari and reversed, holding that when it applied a rule of federal law to the parties before it, that rule was the
controlling interpretation of federal law and was to be given full retroactive effect in all cases still open on direct review and as to all
events, regardless of whether such events predated or postdated the court's announcement of the rule.
Thus, the nondiscrimination principle applied to petitioners' refund action. However, the court did not enter judgment for petitioners
because federal law did not necessarily entitle them to a refund. The action was remanded.
o Holding:
The court granted petitioners', federal civil service and military retirees, request for certiorari challenging the state supreme court's
refusal to retroactively apply the nondiscrimination principle to petitioners' retirement benefits, and reversed and remanded. The
court held that when it applied a rule of federal law to the parties before it, that rule was to be given full retroactive effect in all cases
still open on direct review.

- CHEN:
o Due process for duress in McKesson (back tax or give a refund)
Under Harper Everyone else similarly situated must also get a refund
o If you do not have power because you lack jurisdiction under due process, it would violate civil rights
o State can make you pay under duress McKessell
But if called out, must equalize through Davis and Harper & Jim Bean
o Still an open question if you can announce a non-retroactive judgement
o State can still bring a SOL down all the way down to 90 days, as long as applied equally no due process or equality claim

D) State Statutory Limitations on the Availability of Retroactive Relief

E) Right of a TP to rely on Apparently Available Statutory refund remedy
F) Equitable Nature of Refund Remedies
G) Severability Issues

F. INJUNCTION AND OTHER EQUITABLE REMEDIES

A) Injunction in State Court
B) Injunction in the Federal ourt to Restrain State Tax Proceedings
o Fair Assesment in Real Estate v. McNary