The World Health Organization has officially declared the coronavirus outbreak to be a pandemic. In addition to the cost on human life, the rapid spread of COVID-19 has left a trail of economic damage affecting business revenues. COVID-19 has caused complete or partial shutdown of factories, supply chain disruptions, and labor shortages, and has impacted demand in certain industries. This impact will also be felt by U.S. state, and local governments.
Baker McKenzie attended the U.S. Supreme Court’s oral arguments yesterday in South Dakota v. Wayfair, Docket No. 17-494. At issue in the case is whether the Court should abrogate the physical presence nexus standard that it first articulated in National Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967), and later affirmed in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court’s decision could have a profound impact on sales and use tax nexus in the United States by altering the limitations currently imposed on a state’s ability to require out-of-state retailers to collect such tax.
On May 3, 2017, in Romantix Holdings Inc. v. the Iowa Dept. of Revenue, the Court of Appeals of Iowa affirmed the Iowa Department of Revenue’s (the “Department”) determination that (1) a parent holding corporation was ineligible to join its Iowa subsidiaries’ consolidated Iowa income tax returns because the holding company was not subject to Iowa income tax; and (2) the holding company’s Iowa subsidiaries could not deduct certain expenses incurred and paid directly by the holding corporation but ratably allocated to the subsidiaries based on a percentage of revenue approach. While the Court ruled against the taxpayer on both issues, this case more broadly holds that an in-state operating subsidiary’s use of an out-of-state holding company’s intangible property, including a business trademark, does not necessarily create nexus for the out-of-state holding company with Iowa. The Court’s ruling potentially conflicts with determinations from other state courts under similar facts where intangible holding companies were held to have nexus based on the activities of in-state operating subsidiaries involving the out-of-state entities’ intangible personal property. See our prior coverage, Colorado District Court Holds Economic Nexus Exists for a Minnesota Intangible Holding Company and Agrees to a Modified Alternative Apportionment Method, June 19, 2017.
On June 12, 2017, Congressman Jim Sensenbrenner (R-WI) reintroduced into Congress H.R. 2887, also known as the “No Regulation Without Representation Act of 2017” (the “Legislation”), which codifies the physical presence nexus requirement established by the U.S. Supreme Court in Quill v. North Dakota, 504 U.S. 298 (1992) (“Quill”). The Legislation is interesting for several reasons: (1) it proposes to employ a result that is the exact opposite of the recent trend to overturn Quill; (2) it defines “tax” broadly to include net income and business activity taxes; and (3) it expands the law to require a physical presence for states to regulate a person’s activity in interstate commerce outside of the tax context.