The New Jersey Tax Court rejected the taxpayer’s argument that the partnership filing fee, which requires a partnership with New Jersey source income to pay a per-partner fee of $150 (capped at $250,000), violated the Commerce Clause. The Tax Court held that the filing fee is not facially discriminatory because all partnerships must pay the fee regardless of the location of the partnership or partner, or the nature of the partnership’s business, provided the partnership earns New Jersey source income. The Tax Court also held that the plaintiff failed to prove that the filing fee, in practical effect, discriminates against interstate commerce. The Tax Court ruled that the filing fee did not “implicate or violate” the Commerce Clause because the fee is imposed to cover the government’s cost of processing and reviewing the New Jersey returns of partnerships and their partners, which, according to the Tax Court, is a purely intrastate activity.


Targa Resources Partners, L.P. v. Director, Division of Taxation, 010749-2015 (N.J. Tax 2018)

Ferrellgas Partners, L.P. v. Director, Division of Taxation, 007051-2014 (N.J. Tax 2018)

The Minnesota Supreme Court held that the state’s gross receipts tax on prescription drugs did not violate the Due Process or Commerce Clauses when applied to transactions between out-of-state pharmacies and in-state customers, reversing the Minnesota Tax Court. After concluding that Minnesota’s “legend drug tax” legally applied to the taxpayer under the imposition statute (Minn. Stat. § 295.52, Subd. 4(a)), because the taxpayer was “a person who receives legend drugs for resale or use in Minnesota … when that person receives or delivers those drugs in Minnesota,” the state supreme court addressed—and rejected—the taxpayer’s US constitutional challenges. First, the court ruled that by delivering the drugs into Minnesota through a common carrier, having a sales representative within the state, and taking other actions “purposefully directed” at Minnesota customers, the taxpayer maintained sufficient contacts within the state to establish the “definite link and minimum connection” required under the Due Process Clause. Second, the court held that the tax was fairly apportioned under the internal consistency test and, therefore, did not violate the dormant Commerce Clause. Because the legend drug tax is imposed on a person’s taxable receipt of “legend drugs for resale or use,” the court reasoned that such taxable event in another state is “mutually exclusive” of a person’s receipt of legend drugs for resale or use in Minnesota. Walgreens Specialty Pharmacy, LLC v. Comm’r of Revenue, 916 N.W.2d 529 (Minn. 2018) reversing Minn. Tax Ct., Dkt. No. 8902-R (Oct. 16, 2017).

On Tuesday, June 24, the Judiciary Committee of the US House of Representatives held a hearing on “Examining the Wayfair decision and its Ramifications for Consumers and Small Businesses.” The hearing was scheduled at the direction of Rep. Robert Goodlatte (R-VA), Chairman of the Judiciary Committee and did not address any specific pending or former legislation, but instead was informational and used to assist the committee in determining whether and how Congress should intervene.

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In a 5-4 decision, the US Supreme Court today overruled its landmark decisions in Quill Corp. v. North Dakota and National Bellas Hess, Inc. v. Department of Revenue of Illinois, disposing of the “physical presence” rule that has served as the bright-line standard for whether remote sellers are required to collect state sales taxes. Although the Court made clear its criticisms of the physical presence standard—referring to it as “arbitrary,” “artificial,” and a “judicially created tax shelter”—it was less clear in describing a new standard to replace it.

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On May 24, 2018, the Circuit Court of Cook County upheld the City of Chicago’s imposition of its amusement tax on streaming services.

  • On June 9, 2015, the Chicago Department of Finance issued a ruling indicating that electronically delivered amusements are subject to the amusement tax.
  • The circuit court upheld the tax against arguments that the tax violated the federal Internet Tax Freedom Act, the Commerce Clause of the United States Constitution and the Uniformity Clause of the Illinois Constitution, and that the tax exceeds Chicago’s home rule authority.
  • Now that Chicago has received a court ruling that the tax does not violate state and federal law, taxpayers should expect that Chicago will aggressively step up their enforcement of the tax.

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Maryland Tax Court holds that Maryland’s limitation of interest on refunds resulting from the US Supreme Court’s decision in Comptroller of the Treasury of Maryland v. Wynne violates the US Constitution.

  • In 2014, the Maryland legislature passed a law to retroactively limit the statutory interest rate on refunds related to the Comptroller of the Treasury of Maryland v. Wynne decision.
  • The Tax Court held that the same rationale used by the Supreme Court in finding the law at issue in Wynne was in violation of the dormant commerce clause also applies to the limited interest rate on Wynne refunds.
  • The limited interest on Wynne refunds is also the subject of a separate class action lawsuit filed in the Circuit Court of Baltimore City, which had previously been dismissed due to Plaintiff’s failure to exhaust administrative remedies.

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The Oregon Tax Court held that the state was not constitutionally prohibited from imposing its statewide 911 tax on an out-of-state VOIP service provider with no physical presence in the state. The court held that the 911 tax was not a sales or use tax because it was not measured by sales price (rather it was a fixed fee) or imposed on the purchase or sale of telecommunication services (rather on those who have access to the 911 system through such services). Accordingly, the 911 tax was not a tax controlled by the Quill physical presence standard for Commerce Clause purposes. Instead, the court found that the taxpayer’s regular sales of telecommunication devices and services directly to Oregon residents constituted sufficient purposeful availment (Due Process) and substantial nexus with the state (Commerce Clause) to satisfy both constitutional standards. In finding that the tax did not create an undue burden on interstate commerce, the court found that the taxpayer did not show that the tax created a “welter of complicated obligations” similar to the sales and use taxes in Bellas Hess and QuillOoma Inc. v. Dep’t of Revenue, No. TC-MD 160375G (Or. Tax Ct. Apr. 13, 2018).

The New Mexico Administrative Hearings Office affirmed the Taxation and Revenue Department’s assessment based on General Electric’s exclusion of foreign dividend and Subpart F income from its base income in its New Mexico consolidated return. In this case of first impression, the Hearings Office held that New Mexico’s inclusion of dividends and Subpart F income received from foreign affiliates, while excluding dividends received from domestic affiliates, did not unconstitutionally discriminate against foreign commerce, did not result in multiple taxation of foreign commerce, and did not result in unfair apportionment of foreign commerce. The Hearings Office engaged in a detailed analysis of US Supreme Court case law regarding state taxation of foreign commerce, as well as the New Mexico Supreme Court’s decision in Conoco, Inc. v. Taxation & Revenue Dep’t, 931 P.2d 730 (N.M. 1996), in which the court prohibited the state from including foreign dividend income in the base for separate method filers because domestic dividends were provided favorable treatment over foreign dividends.

With respect to facial discrimination, the Hearings Office determined that there was no facial discrimination under the consolidated reporting method elected by General Electric, because unlike the separate reporting situation considered in Conoco, the inclusion of the domestic subsidiaries’ income in General Electric’s consolidated group created a “taxing symmetry.” According to the Hearings Office, the consolidated reporting method ensured that the income generation activity of the entire group, including the income ultimately distributed through domestic dividends, is still included. The Hearings Office further found that there was no inevitable multiple taxation of foreign income because the apportionment factor included factor representation of the foreign activity and the New Mexico tax was not imposed on the foreign corporation itself, but was an apportioned tax on the entire domestic consolidated group’s income. Regarding General Electric’s third argument, the Hearings Office held that General Electric had not met its burden of showing that the apportionment method resulted in unfair apportionment of income to New Mexico. The Hearings Office cited the US Supreme Court’s decision in Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983), for the proposition that standard three-factor apportionment formulas generally avoid unfair distortion and observed the difficulty of finding that General Electric’s 0.1895% New Mexico apportionment factor was “out of all appropriate proportion” to its New Mexico business activities.

In addition to the rulings based on the Commerce Clause arguments, the Hearings Office held that General Electric had a good faith legal basis for excluding foreign dividends and subpart F income from its New Mexico income, given that this was a case of first impression in New Mexico. As a result, the civil negligence penalty under N.M. Stat. Ann. § 7-1-69 was abated. Finally, the Hearings Office denied General Electric’s request for an award of costs and fees related to the protest. New Mexico law provides for the award of reasonable costs and attorney’s fees when a taxpayer is the prevailing party in an administrative proceeding under N.M. Stat. Ann. § 7-1-29.1. The Hearings Office held that General Electric did not prevail on the major issue of the hearing and therefore was not entitled to costs and fees. In the Matter of the Protest of General Electric Company & Subsidiaries, N.M. Admin. Hearings Office, Decision and Order No. 18-12 (Apr. 6, 2018).

The state and local tax (SALT) implications of federal tax reform are numerous, yet still often unclear. With states releasing new law and guidance about federal tax reform, taxpayers must stay abreast of this very dynamic area of law. In this videocast, Todd Lard and Todd Betor discuss the gating question to the SALT implications of federal tax reform—state conformity to the IRC—along with other SALT considerations pertaining to major general, domestic and international tax provisions included in the new tax law.

View the videocast.

On November 2, 2017, Republicans in the House of Representatives released their much-anticipated tax reform bill. The Tax Cuts and Jobs Act proposes numerous changes to the Internal Revenue Code, many of which will have an impact on taxpayers’ state and local tax liabilities.

  • Most states conform to the federal income tax base —at least in part. Consequently, federal base changes—either in the form of contraction or expansion—will have an impact on the state tax bases. States will need to weigh many considerations as they decide whether to conform.
  • The Commerce Clause may restrict a state’s ability to conform to some of the international tax provisions of the House Plan that may not also apply to purely domestic companies.
  • The House Plan proposes numerous changes that would move toward a territorial system of taxation. These will have an impact on state and local taxation, both by changing a taxpayer’s federal taxable income and by impacting taxpayer decision-making.

View the full Legal Alert.