Are Aggressive State Tax Rules Unconstitutional?
July 9, 2014
Questions about the boundaries of the states’ powers to tax have again made their way to the highest court in the land.
On July 2nd the U.S Supreme Court granted cert in two state tax cases which, in the long term, could potentially force states to change their approach to tax laws and administrative processes. This brings to three the number of state tax cases to be decided by the Court in the coming term (Maryland’s Wynne case involving taxation of interstate commerce income of an individual was granted cert in May).
Here is a summary of the two additional cases and their implications:
1) Direct Marketing Association (DMA) v. Brohl (as Executive Director of the Colorado Department of Revenue)
DMA is asking the Court to overturn the US Court of Appeals, Tenth Circuit, decision that vacated the lower court’s ruling. The District Court had held that Colorado’s law requiring Internet sellers to a) report information to the state regarding their customers and b) provide notifications to the customers regarding sales tax violated the Commerce Clause as discriminatory and an undue burden on interstate commerce. The Court of Appeals ruled that the Tax Injunction Act prohibited the District Court’s ruling. This case is important for sales tax administration concerns, privacy of customer information, and most importantly for the general issue of when federal courts can and cannot rule on state tax matters.
2) AL Dept. of Revenue, et al v. CSX Transportation, Inc.
“The petition for a writ of certiorari is granted. In addition to the question presented by the petition, the parties are directed to brief and argue the following question: Whether, in resolving a claim of unlawful tax discrimination under 49 U.S.C. Section 11501(b)(4), a court should consider other aspects of the State’s tax scheme rather than focusing solely on the challenged tax provision.”
The CSX case involves whether Alabama’s sales tax statute is discriminatory under the Railroad Revitalization and Regulatory Reform Act of 1976 [the so-called “4-R Act” cited above] which prohibits a tax “that discriminates against a rail carrier.” It is a follow on to the Court’s 2011 decision in which it ruled that CSX could challenge Alabama’s sales and use tax but remanded the discrimination question. On remand the District Court held that the tax was not discriminatory, but the Court of Appeals for the Eleventh Circuit reversed that decision.
Hearings on the cases will be held after early October when the Court begins its new session.
SC&H Group will continue to keep you posted on these “hot button” issues as they make their way through the Court’s process.
In addition, experts in the SC&H Group State & Local Tax practice can serve as trusted tax advisors by helping clients to proactively manage their tax liabilities in the ever-changing tax landscape.