Petition for Writ of Certiorari — Staples, Inc., et al., Petitioners v. Comptroller of the Treasury of Maryland

No. _________

================================================================

In The

Supreme Court of the United States

------------------------------------------------------------------

STAPLES, INC., AND STAPLES THE

OFFICE SUPERSTORE, INC., PETITIONERS

v.

MARYLAND COMPTROLLER OF THE TREASURY

-----------------------------------------------------------------ON PETITION FOR A WRIT OF CERTIORARI TO

THE MARYLAND COURT OF SPECIAL APPEALS

------------------------------------------------------------------

PETITION FOR WRIT OF CERTIORARI

-----------------------------------------------------------------CRAIG B. FIELDS

NICOLE L. JOHNSON

MORRISON & FOERSTER LLP

250 West 55th St.

New York, NY 10019

JAMES R. SIGEL

MORRISON & FOERSTER LLP

425 Market St.

San Francisco, CA 94105

JOSEPH R. PALMORE

Counsel of Record

MORRISON & FOERSTER LLP

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 887-6940

JPalmore@mofo.com

Counsel for Petitioners

JULY 22, 2019

================================================================

COCKLE LEGAL BRIEFS (800) 225-6964

WWW.COCKLELEGALBRIEFS.COM

QUESTION PRESENTED

When an out-of-State business receives royalty

fees, franchise fees, or similar payments from in-State

businesses, may a State imposing income taxes constitutionally apportion such income to itself based on the

activities of only the in-State businesses?

ii

PARTIES TO THE PROCEEDINGS

Pursuant to Rules 14.1 and 29.6, petitioners state

the following:

The parties to the proceeding are listed in the caption.

Staples, Inc. is a wholly owned subsidiary of Arch

Parent, Inc., which is a wholly owned subsidiary of

Arch Parent Holdings, Inc. Arch Parent Holdings, Inc.

is majority owned by Arch Superco, Inc. No publicly

traded corporation owns 10% or more of Arch Parent

Holdings, Inc. Arch Superco, Inc. is not a publicly

traded company. It has no parent corporation and no

publicly held corporation owns 10% or more of its

stock.

Staples the Office Superstore, Inc. is now known

as Staples the Office Superstore LLC. Staples the

Office Superstore LLC is a wholly owned subsidiary

of Office Superstore West LLC. Office Superstore West

LLC is a wholly owned subsidiary of Office Superstore

East LLC. Office Superstore East LLC is a wholly

owned subsidiary of USR Parent, Inc. USR Parent, Inc.

is a wholly owned subsidiary of USR Intermediary, Inc.

USR Intermediary, Inc. is a wholly owned subsidiary of

USR Topco Holdings, Inc. USR Topco Holdings, Inc. is

a wholly owned subsidiary of USR Superco, Inc. USR

Superco, Inc. is not a publicly traded company. It has

no parent corporation and no publicly held corporation

owns 10% or more of its stock.

iii

STATEMENT OF RELATED PROCEEDINGS

Staples, Inc. and Staples the Office Superstore, Inc.

v. Comptroller of the Treasury, Nos. 09-IN-OO-0148,

09-IN-OO-0149, Maryland Tax Court. Judgment

entered May 28, 2015.

In the Matter of Staples, Inc. et al., No. C-02-CV15-002009, Anne Arundel County Circuit Court. Judgment entered January 10, 2017.

Staples, Inc. et al. v. Comptroller of the Treasury,

No. 2597, Maryland Court of Special Appeals. Judgment entered August 9, 2018. Amended judgment

entered November 16, 2018.

iv

TABLE OF CONTENTS

Page

QUESTION PRESENTED .....................................

i

PARTIES TO THE PROCEEDING........................

ii

STATEMENT OF RELATED PROCEEDINGS ....

iii

TABLE OF AUTHORITIES ...................................

vii

PETITION FOR A WRIT OF CERTIORARI .........

1

OPINIONS BELOW ...............................................

1

JURISDICTION .....................................................

1

CONSTITUTIONAL PROVISIONS INVOLVED ....

2

INTRODUCTION ...................................................

2

STATEMENT..........................................................

4

A.

Constitutional Framework ..........................

4

B.

Factual Background .....................................

6

1. The Staples entities ...............................

6

2. The Staples entities’ Maryland tax

returns ...................................................

9

3. The Comptroller’s determination .........

9

Procedural History.......................................

12

1. Tax court proceedings............................

12

2. Appellate proceedings ...........................

15

REASONS FOR GRANTING THE PETITION .....

16

C.

I. STATE COURTS ARE IN CONFLICT ON

WHETHER STATES CAN CONSTITUTIONALLY TAX OUT-OF-STATE ENTITIES’

INCOME ...................................................... 16

v

TABLE OF CONTENTS—Continued

Page

A. Multiple State Courts Have Held That

States Cannot Tax Out-Of-State Entities’ Royalty Income .............................. 18

B. Other State Courts Have Held That

Royalty Payments May Be Deemed

Earned Where Ultimate Sales Are

Completed ............................................ 20

II.

THIS CASE IS A GOOD VEHICLE

TO ADDRESS THE QUESTION PRESENTED .................................................... 24

A. Maryland’s Apportionment Formula Is

Necessarily Unconstitutional................ 25

B. Application Of Maryland’s Formula Has

Had An Unconstitutional Impact Here ... 28

III.

THE ISSUE IS IMPORTANT AND WARRANTS THIS COURT’S REVIEW .............. 30

CONCLUSION .......................................................

34

APPENDIX

Appendix A: Maryland Court of Special Appeals,

Opinion, November 16, 2018 ...............1a

Appendix B: Anne Arundel County Circuit Court,

Memorandum Opinion, January 10,

2017 ....................................................39a

Appendix C: Maryland Tax Court, Memorandum

and Order, May 28, 2015 ...................55a

vi

TABLE OF CONTENTS—Continued

Page

Appendix D: Maryland Comptroller, Notice of

Final Determination (No. 58922),

January 26, 2009 ...............................64a

Appendix E: Maryland Comptroller, Notice of

Final Determination (No. 58921),

January 26, 2009 ...............................79a

Appendix F: Maryland Court of Appeals, Order,

February 22, 2019..............................93a

vii

TABLE OF AUTHORITIES

Page

CASES

A & F Trademark, Inc. v. Tolson,

605 S.E.2d 187 (N.C. Ct. App. 2004) .......................23

Acme Royalty Co. v. Dir. of Revenue,

96 S.W.3d 72 (Mo. 2002) ..........................................20

Allied-Signal, Inc. v. Director, Div. of Taxation,

504 U.S. 768 (1992) ............................................. 4, 30

Arizona v. California, __ S. Ct. __,

2019 WL 2570637 (June 24, 2019) .........................33

ASARCO, Inc. v. Idaho State Tax Comm’n,

458 U.S. 307 (1982) ...................................................5

Beckles v. United States, 137 S. Ct. 886 (2017) ..........17

Bridges v. Geoffrey, Inc.,

984 So.2d 115 (La. Ct. App. 2008) ...........................23

Byrd v. United States, 138 S. Ct. 1518 (2018) ............17

Complete Auto Transit, Inc. v. Brady,

430 U.S. 274 (1977) ...................................................5

Comptroller of the Treasury v. SYL, Inc.,

825 A.2d 399 (Md. 2003). ................ 10, 15, 17, 21, 22

Comptroller of the Treasury v. Wynne,

135 S. Ct. 1787 (2015) ....................................... 27, 28

ConAgra Foods RDM, Inc. v. Comptroller of the

Treasury, ___ A. 3d ___, 2019 WL 2703119

(Md. Ct. Spec. App., June 27, 2019) .................. 21, 24

Container Corp. of America v. Franchise Tax Bd.,

463 U.S. 159 (1983) ................................... 5, 6, 28, 29

viii

TABLE OF AUTHORITIES—Continued

Page

Geoffrey, Inc. v. Comm’r of Revenue,

899 N.E.2d 87 (Mass. 2009) ....................................23

Geoffrey, Inc. v. South Carolina Tax Commission,

437 S.E.2d 13 (S.C. 1993) ................ 10, 17, 19, 22, 23

Gore Enterprise Holding, Inc. v. Comptroller of

the Treasury,

87 A.3d 1263 (Md. 2014) ........... 14, 15, 16, 17, 21, 22

Griffith v. ConAgra Brands, Inc.,

728 S.E.2d 74 (W.Va. 2012) ......................... 18, 19, 22

Hans Rees’ Sons, Inc. v. North Carolina ex rel.

Maxwell, 283 U.S. 123 (1931) .............................. 6, 30

Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal.,

528 U.S. 458 (2000) .................................................27

J.C. Penney Nat’l Bank v. Johnson,

19 S.W.3d 831 (Tenn. Ct. App. 1999) ......................20

KFC Corp. v. Iowa Dep’t of Revenue,

792 N.W.2d 308 (Iowa 2010) ............................. 19, 23

Lanco, Inc. v. Director, Div. of Taxation,

908 A.2d 176 (N.J. 2006) .........................................23

Manuel v. City of Joliet, 137 S. Ct. 911 (2017) ...........17

MeadWestvaco Corp. ex rel. Mead Corp. v.

Illinois Department of Revenue,

553 U.S. 16 (2008) .....................................................4

Mont v. United States, 139 S. Ct. 1826 (2019) ...........17

Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978) ...........6

Nieves v. Bartlett, 139 S. Ct. 1715 (2019) ...................17

ix

TABLE OF AUTHORITIES—Continued

Page

Norfolk & Western R. Co. v. Missouri State Tax

Comm’n, 390 U.S. 317 (1968) ....................................6

Oil States Energy Servs., LLC v. Greene’s Energy

Grp., LLC, 138 S. Ct. 1365 (2018) ...........................17

Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ......... 20

Riley v. California, 573 U.S. 373 (2014) .....................17

Rylander v. Bandag Licensing Corp.,

18 S.W.3d 296 (Tex. Ct. App. 2000) .........................20

Scioto Ins. Co. v. Oklahoma Tax Comm’n,

279 P.3d 782 (Okla. 2012) ........................... 19, 20, 26

South Dakota v. Wayfair, Inc.,

138 S. Ct. 2080 (2018) ............................. 4, 20, 31, 33

Target Brands v. Dep’t of Revenue of Colo., 2017

Colo. Dist. LEXIS 1305 (D. Colo., Dnvr. County,

Jan. 30, 2017) ..........................................................27

Thor Power Tool Co. v. Commissioner,

439 U.S. 522 (1979) .................................................33

Trinova Corp. v. Michigan Dept. of Treasury,

498 U.S. 358 (1991) ............................................. 5, 26

STATUTES & CONSTITUTIONAL PROVISIONS

Md. Tax-General Code § 10-402(c)(1) (2005) ...............9

U.S. Const., amend. XIV, § 1 .........................................2

U.S. Const., art. I, § 8 ....................................................2

x

TABLE OF AUTHORITIES—Continued

Page

OTHER AUTHORITIES

Joseph Bishop-Henchman, The History of Internet Sales Taxes from 1789 to the Present Day:

South Dakota v. Wayfair, 2018 CATO SUP. CT.

REV. 269 (2008)........................................................32

Sanjay Gupta & Lillian Mills, Does Disconformity

in State Corporate Income Tax Systems Affect

Compliance Cost Burdens?, 56 NAT’L TAX J. 355

(2003) .......................................................................32

Uniform Division of Income for Tax Purposes

Act §§ 9, 10, 13, 15 .....................................................5

PETITION FOR A WRIT OF CERTIORARI

Staples, Inc. (“Staples”) and Staples the Office

Superstore, Inc. (“Superstore”) respectfully petition

for a writ of certiorari to review the judgment of the

Maryland Court of Special Appeals.

OPINIONS BELOW

The opinion of the Maryland Court of Special

Appeals (App., infra, 1a-38a) is unreported but available at 2018 Md. App. LEXIS 785. The opinion of the

Circuit Court for Anne Arundel County (App., infra,

39a-54a) is unreported. The opinion of the Maryland

Tax Court (App., infra, 55a-63a) is unreported but

available at 2015 Md. Tax LEXIS 6.

JURISDICTION

The Court of Special Appeals entered judgment on

August 9, 2018. Staples and Superstore timely filed a

motion for reconsideration and the Court of Special

Appeals issued a revised opinion on November 16, 2018.

Staples’ and Superstore’s timely petition for a writ of certiorari to the Maryland Court of Appeals was denied on

February 22, 2019. App., infra, 93a. On May 13, 2019,

Chief Justice Roberts extended the time to file a petition for a writ of certiorari until June 21, 2019. On

June 7, 2019, Chief Justice Roberts granted a second

extension until July 22, 2019. This Court has jurisdiction under 28 U.S.C. § 1257(a).

2

CONSTITUTIONAL PROVISIONS INVOLVED

The Commerce Clause of the United States Constitution, U.S. Const., art. I, § 8, cl. 3, provides: “[T]he

Congress shall have Power * * * [t]o regulate Commerce with foreign Nations, and among the several

States, and with the Indian Tribes.”

The Fourteenth Amendment’s Due Process Clause,

U.S. Const., amend. XIV, § 1, provides: “No State shall

* * * deprive any person of life, liberty, or property,

without due process of law * * * .”

INTRODUCTION

This case concerns the scope of a State’s power to

impose taxes on the income of an interstate business

that has no meaningful operations in the State. Specifically, if an out-of-State business receives franchisefee, royalty, or similar payments from an in-State

entity, may the State constitutionally treat these payments as income earned by the out-of-State business

within the State? The States’ highest courts are

sharply divided on the issue, which implicates hundreds of millions of dollars in tax revenues and creates

uncertainty for thousands of businesses nationwide.

Some courts have held that States cannot impose

income taxes on business that simply receive royalty

or similar income related to another entity’s business

in the State. These courts have recognized that the

Due Process and Commerce Clauses prohibit States

from attempting to tax the value a business has created outside the State’s jurisdiction.

3

Other courts, however, have adopted an erroneously permissive view of the States’ authority over

interstate commerce. These courts have held that

out-of-State entities’ mere receipt of royalties from

businesses within the State is in-State activity that

the State may constitutionally tax.

Maryland—the State that imposed the particular

taxes at issue here—has adopted an especially aggressive version of the latter view. With the approval of the

Maryland Court of Appeals, Maryland taxing authorities have applied a non-statutory apportionment formula that treats all royalty and similar payments as

earned in the States in which the entities making

those payments operate. The State has imposed this

novel formula on over a thousand out-of-State businesses that would not otherwise be subject to Maryland’s corporate income tax.

The present case illustrates the distortions that

this sort of overreach produces. Petitioners Staples

and Superstore conduct no meaningful business within

Maryland. But based entirely on the operations of

their affiliates—separate corporate entities that had

already fully paid any income taxes to the State—

Maryland imposed millions of dollars of tax liability

upon Staples and Superstore. Even accepting the

premise that Staples and Superstore could be subject to some Maryland income tax, Maryland’s nonstatutory formula overstates their taxable income by a

factor of 20.

4

This Court’s review is needed to resolve this split

of authority and ensure that States do not continue to

expand their revenue bases beyond constitutional limits. Without this Court’s guidance, businesses will continue to confront a tangle of conflicting State laws—an

intolerable situation given the paramount need for

certainty in this area.

And if left to stand,

decisions like the one below will encourage States to

seek innovative new ways to tax out-of-State businesses—which generally lack the same political power

as in-State businesses to resist such increased obligations. This Court should grant the petition to clarify

that State taxing authorities cannot venture beyond

State boundaries in the way Maryland has here.

STATEMENT

A. Constitutional Framework

The Due Process Clause and the Commerce Clause

impose “distinct but parallel limitations on a State’s

power to tax out-of-state activities.” MeadWestvaco

Corp. ex rel. Mead Corp. v. Illinois Department of Revenue,

553 U.S. 16, 24 (2008). These limitations reflect the

essential requirement of both Clauses that there

be “some definite link, some minimum connection,

between a state and the person, property or transaction it seeks to tax.” South Dakota v. Wayfair, Inc.,

138 S. Ct. 2080, 2093 (2018) (quotation marks omitted); see Allied-Signal, Inc. v. Director, Div. of Taxation,

504 U.S. 768, 777 (1992). Accordingly, a State may not

“tax income arising out of interstate activities * * *

unless there is a minimal connection or nexus between

5

the interstate activities and the taxing States, and a

rational relationship between the income attributed

to the State and the intrastate values of the enterprise.” Container Corp. of America v. Franchise Tax

Bd., 463 U.S. 159, 165-66 (1983) (internal quotation

marks omitted); see Complete Auto Transit, Inc. v.

Brady, 430 U.S. 274, 279 (1977). In other words, “a

State may not tax value earned outside its borders.”

ASARCO, Inc. v. Idaho State Tax Comm’n, 458 U.S. 307,

315 (1982).

When a business enterprise transcends state

lines, issues arise concerning the fair apportionment

of its income. Consistent with the Uniform Division

of Income for Tax Purposes Act, many States have

adopted a three-factor formula that equally weighs the

proportion of the interstate business’s property, payroll, and sales that is within the taxing State. See

Container Corp., 463 U.S. at 170. If, for example, a

business has 20 percent of its property in a given State,

30 percent of its payroll in that State, and 40 percent

of its sales there, the three-factor formula would permit the State to tax 30 percent of the business’s total

income (the sum of these three proportions divided by

three). See Uniform Act §§ 9, 10, 13, 15. This threefactor formula rests on the understanding that “payroll, property, and sales appear in combination to

reflect a very large share of the activities by which

value is generated” and thus indicate where a business’s income may be fairly considered to have been

earned. Trinova Corp. v. Michigan Dept. of Treasury,

498 U.S. 358, 381 (1991) (quotation marks omitted).

6

Because this formula generally accounts for the

sources of income, it has become “something of a benchmark against which other apportionment formulas are

judged.” Container Corp., 463 U.S. at 170. This Court

has occasionally approved States’ deviations from the

three-factor formula. E.g., Moorman Mfg. Co. v. Bair,

437 U.S. 267 (1978). But it has cautioned that “[s]ome

methods of formula apportionment are particularly

problematic because they focus on only a small part of

the spectrum of activities by which value is generated.”

Container Corp., 463 U.S. at 182. And it has emphasized that where a taxpayer can show “by clear and

cogent evidence that the income attributed to the State

is in fact ‘out of all appropriate proportions to the business transacted in that State,’ or has ‘led to a grossly

distorted result,’ ” the apportionment formula is unconstitutional. Moorman Mfg. Co., 437 U.S. at 274 (quoting Hans Rees’ Sons, Inc. v. North Carolina ex rel.

Maxwell, 283 U.S. 123, 135 (1931), and Norfolk &

Western R. Co. v. Missouri State Tax Comm’n, 390 U.S.

317, 326 (1968), internal citations and alterations

omitted).

B. Factual Background

1. The Staples entities

Staples was founded in 1985, and it opened its first

office superstore in Brighton, Massachusetts in 1986.

CSA Record E.266. Its corporate headquarters and

much of its operations were (and remain) in Massachusetts. CSA Record E.266.

7

In 1996, Staples announced a merger with Office

Depot. CSA Record E.267. As part of the anticipated

merger, Staples developed a plan to reorganize its corporate structure. CSA Record E.268. Although the

merger ultimately fell through, Staples still decided to

proceed with the planned reorganization, which it

implemented in 1998. CSA Record E.268.

The reorganization led to four separate corporate

entities: Staples, Superstore, Staples the Office Superstore East, Inc. (“East”), and Staples Contract & Commercial, Inc. (“C&C”). CSA Record E.269. Staples was

the parent company; Superstore and C&C were its

wholly owned subsidiaries; and East was a wholly

owned subsidiary of Superstore. CSA Record E.269.

Each of these four operating companies had a distinct

role.

Staples provided a variety of managerial and

administrative services to its subsidiaries, including

marketing support, strategic planning, and legal,

financial, and accounting services. CSA Record E.270.

Superstore, East, and C&C paid Staples fees for its

provision of these services. CSA Record E.278. Staples

also coordinated a cash management system, allowing

its subsidiaries to borrow funds (with interest) when

they had negative account balances. CSA Record

E.279-80. To support these operations, Staples owned

more than $100 million in real property, and it paid

employee compensation ranging between $55 million

and $105 million annually during the years in question. CSA Record E.277-78.

8

Superstore operated the Staples franchise system.

It owned and managed Staples’ trademarks and other

intellectual property. CSA Record E.273. It also developed the marketing schemes for the Staples-brand

retail stores, conducted the advertising campaigns,

negotiated merchandizing agreements with various

vendors, and oversaw the construction and remodeling

of retail stores. CSA Record E.273-75. Superstore

operated its own retail stores (none of which was in

Maryland). CSA Record E.275-76. It also provided its

franchise system to East and C&C, which paid it royalties in return (a franchise fee of 4.5 percent of net

monthly income for East, and 3.5 percent for C&C).

CSA Record E.275-76. Like Staples, Superstore was

based in Massachusetts. CSA Record E.271. During

the years in question, it owned more than $150 million

in real property and paid between $100 and $225 million in employee compensation annually. CSA Record

E.272-73.

East operated distribution centers and retail

stores selling office supplies and equipment. CSA Record E.271. It conducted this business in a number of

States, including Maryland. CSA Record E.271.

C&C operated a catalog business selling office

supplies and equipment, as well as a contract stationer

business and a large-customer sales business. CSA

Record E.272. Like East, it conducted this business in

Maryland, among other States. CSA Record E.272.

9

2. The Staples entities’ Maryland tax returns

Because of their operations in Maryland, both

East and C&C filed Maryland corporate income tax

returns for the years 1998 through 2003. CSA Record

E.264. At that time, Maryland used a three-factor

apportionment formula similar to that set forth in

the Uniform Act (though the State did not weigh the

factors equally, providing twice the weight to the sales

factor). App., infra, 88a-89a; see Md. Tax-General

Code § 10-402(c)(1) (2005). When this formula was

applied to their property, payroll, and sales, between

6.5 and 9 percent of East’s income was apportioned to

Maryland, while slightly under 2 percent of C&C’s

income was apportioned to Maryland. CSA Record

E.425, E.434, E.444, E.458, E.478, E.484, E.486, E.488,

E.490, E.498, E.515. East and C&C paid any Maryland

income taxes due on their apportioned incomes. E.g.,

CSA Record E.426, E.435.

Because neither Staples nor Superstore generally

conducted any business in Maryland, neither initially

filed tax returns in Maryland. CSA Record E.264.

Indeed, because neither Staples nor Superstore had

any property, product sales, or personnel based in Maryland, none of their income would be attributed to the

State under Maryland’s standard three-factor apportionment formula. App., infra, 84a; 70a.

3. The Comptroller’s determination

During an audit of East and C&C, Maryland

officials took note of the interest and franchise-fee payments these entities had made to Staples and

10

Superstore. App., infra, 66a. Because these payments

were legitimate costs of business, both East and C&C

had deducted them when calculating their total taxable incomes. App., infra, 66a-67a.

The Maryland Comptroller, however, decided that

it would treat these interest and franchise-fee payments as income earned by Staples and Superstore in

Maryland. In doing so, it relied on Comptroller of the

Treasury v. SYL, Inc., 825 A.2d 399 (Md. 2003). App.,

infra, 70a-72a. There, the Maryland Court of Appeals

held that simply by licensing intellectual property for

use in the State, out-of-State corporations establish a

sufficient nexus with Maryland that the State can constitutionally tax their royalty income. SYL, 825 A.2d

at 416-17 (citing Geoffrey, Inc. v. South Carolina Tax

Commission, 437 S.E.2d 13, 16 (S.C. 1993)).

Under Maryland’s three-factor formula, however, none of Staples’ or Superstore’s income could be

attributed to the State because Staples and Superstore

had no meaningful operations there. The Comptroller

was thus forced to adopt an alternative formula to

impose any tax liability. App., infra, 91a; CSA Record

E.299.

The Comptroller’s formula focused entirely on

East and C&C’s activities—not those of Staples or

Superstore, the entities actually being taxed. App.,

infra, 67a; CSA Record E.264-65. Specifically, the

Comptroller first took the total amount of interest and

franchise fees Staples and Superstore received from

East and C&C. It then multiplied that sum by a

11

“blended apportionment factor” calculated by combining East and C&C’s individual apportionment factors

(that is, the proportions derived by applying the threefactor formula to East and C&C’s property, payroll, and

sales) in proportion to the total amount of interest and

franchise fees each of these two entities had paid to

Staples and Superstore. App., infra, 24a. So if, for

example, 9 percent of East’s income was apportioned

to Maryland in 1998, the Comptroller treated 9 percent

of the franchise fees that East paid to Superstore in

that year as Superstore’s taxable Maryland income. As

a State auditor later testified, the Comptroller had

applied this non-statutory apportionment formula in

“over a thousand” other cases in which out-of-State corporations would not otherwise be subject to Maryland

tax. CSA Record E.213.

This methodology reflected two critical underlying

assumptions. First, Maryland’s formula deemed all

income Staples and Superstore received related to

East and C&C as earned in those States in which East

and C&C operated—not in those States where Staples

and Superstore actually operated. To take a simple

example: if East had operated exclusively in Maryland

and made all its retail sales there, the Comptroller

would attribute to Maryland all of Superstore’s franchise-fee income from East even if Superstore had performed all the work related to the franchise system

that generated this income in Massachusetts. Second

and relatedly, by treating all franchise-fee and interest

payments as income and not just revenue, the Comptroller effectively deemed everything Staples and

12

Superstore had done to earn these payments as

entirely costless.1

All told, the Comptroller ordered Superstore to

pay the State more than $12 million in taxes and

interest. App., infra, 66a. It assessed Staples’ liability

at nearly $450,000. App., infra, 80a. It also imposed

penalties of more than $1.6 million combined. App.,

infra, 66a; App., infra, 80a.

C. Procedural History

1. Tax court proceedings

a. Both Staples and Superstore filed petitions of

appeal in the Maryland Tax Court. During discovery,

Staples and Superstore determined that certain of

their employees had visited Maryland during the years

at issue. CSA Record E.264; E.274. For that reason,

both entities acknowledged they had a sufficient nexus

with Maryland such that they could constitutionally be

subject to some State income tax (e.g., corresponding to

income related to these visits), and they accordingly

filed Maryland corporate tax returns. CSA Record

E.264. Both companies maintained, however, that the

franchise fees and interest they received from East and

C&C could not be treated as Maryland income, and

they asserted that the Comptroller’s apportionment

1

Although the Maryland Court of Special Appeals later

claimed that Staples and Superstore had not provided any evidence of expenses (App. infra, 33a), both Superstore and Staples

had proffered their federal income tax returns—which delineated

all of the expenses these entities incurred—as well as specific

information related to their operating costs. E.g., CSA Record

E.643; E.781-942.

13

formula bore no relation to their business in the State

and was therefore unconstitutional.

Staples and Superstore supported these contentions with the report and testimony of Dr. Brian Cody.

The parties stipulated that Dr. Cody was qualified to

testify as an expert in economics. CSA Record E.281.

As he explained, “income for tax purposes” is generally

“attributed to the locations of the firm’s economically

substantive functions and assets”—which here would

all be outside of Maryland. CSA Record E.1734-37.

Dr. Cody used a comparison to two alternative

benchmarks to illustrate the degree to which the

Comptroller’s apportionment formula distorted Staples’ and Superstore’s Maryland income. First, he

addressed what the tax liability of all four of the Staples entities would have been had they simply been

treated as one corporate entity rather than four separate entities—a calculation performed by combining

the income of all four entities, multiplying it by the

three-factor apportionment figure derived from these

entities’ total sales, payroll, and property, and then

applying the Maryland tax rate. CSA Record E.157;

Pet’s Tax Court Br. 33. This analysis revealed that for

the tax year ending in 2003, for example, the consolidated entities would have been entitled to a refund of

slightly more than $8,000, rather than the additional

$1.05 million in liability the Comptroller had imposed.

Pet’s Tax Court Br. 34. All told, the Comptroller’s

formula transformed what would have been approximately $310,000 in total tax liability into $6.5

14

million—a distortion of over 2,000 percent. CSA Record E.157.

Second, Dr. Cody reached a similar result with a

“market sourcing” benchmark. To perform this calculation, Dr. Cody accepted the Comptroller’s assignment

to Maryland of the interest and franchise fees that

East and C&C paid to Staples and Superstore. Pet’s

Tax Court Br. 31-32. He then calculated a sales-based

apportionment factor by comparing this supposed

Maryland revenue to Staples’ and Superstore’s total

receipts nationwide.2 Pet’s Tax Court Br. 31-32; CSA

Record E.155. Under this methodology, Staples’ and

Superstore’s total tax liability would have been only

around $750,000—meaning the Comptroller’s method

had produced an increase in liability of over 850 percent. CSA Record E.157.

b. The tax court rejected Staples’ and Superstore’s constitutional objections. It explained that in

Gore Enterprise Holdings, Inc. v. Comptroller of the

Treasury, 87 A.3d 1263 (Md. 2014), the Maryland

Court of Appeals had since “sanctioned the constitutionality, propriety, and fairness” of applying this very

apportionment formula to royalty and similar payments. App., infra, 60a. It dismissed Dr. Cody’s use of

the “consolidated entity” benchmark, apparently (and

erroneously) believing that it somehow turned on a

comparison to Staples’ tax liability before 1998. App.,

2

Because this approach disregarded Staples’ and Superstore’s substantial payroll and property outside the State, it actually tended to overstate any Maryland income. CSA Record

E.155.

15

infra, 62a. The court did not address Dr. Cody’s “market sourcing” benchmark at all. Recognizing, however,

that Staples and Superstore “had a reasonable basis

for challenging the law and acted in good faith,”

the court abated all penalties the Comptroller had

imposed. App., infra, 63a.

2. Appellate proceedings

a. The Maryland Circuit Court affirmed the tax

court’s conclusion that the Comptroller’s assessment

did not contravene the federal Constitution. It reasoned that a “Maryland retailer’s use of its out-of-state

affiliate’s intangible assets generally produces income

for the out-of-state affiliate, which income is taxable in

Maryland.” App., infra, 44a (citing SYL, 825 A.2d 399).

And it agreed with the tax court’s conclusion that,

consistent with Gore Enterprise Holdings, the Comptroller’s apportionment formula had not “produced a

disproportionate, distorted, arbitrary, or unreasonable

tax liability.” App., infra, 49a.

b. The Maryland Court of Special Appeals

affirmed. Relying on Gore Enterprise Holdings, the

court concluded that “ ‘the Comptroller’s apportionment formula captured Staples East’s and Staples

C&C’s expenses in Maryland—expenses that simultaneously constituted income’ for Staples, Inc. and

Superstore.” App., infra, 29a-30a (quoting Gore Enterprise Holdings, 87 A.3d at 1287, alterations omitted).

It thus held that “ ‘the formula reflects a reasonable

sense of how Staples, Inc.’s and Superstore’s income is

generated,’ and ‘passes constitutional muster.’ ” App.,

16

infra, 30a (quoting Gore Enterprise Holdings, 87 A.3d

at 1287, alterations and some quotation marks omitted).

Like the tax court, the Court of Special Appeals

addressed Dr. Cody’s testimony in only cursory fashion. It erroneously characterized his “consolidated

entity” benchmark as being premised on some sort

of temporal comparison, and it ignored the “market

sourcing” benchmark entirely. App., infra, 33a-34a.

Instead, the Court of Special Appeals concluded C&C’s

and East’s allocation of “their activities among the

states [in which] they conducted business” was sufficient to “ma[k]e clear to the Comptroller” how much of

Staples’ and Superstore’s supposed income could be

“properly attributed to the State.” App., infra, 34a. In

other words, all of Staples’ and Superstore’s interest

and franchise-fee income could be attributed to States,

like Maryland, in which their affiliates made sales.

c. The Maryland Court of Appeals denied Staples’ and Superstore’s petition for a writ of certiorari.

App., infra, 93a.

REASONS FOR GRANTING THE PETITION

I.

STATE COURTS ARE IN CONFLICT ON

WHETHER STATES CAN CONSTITUTIONALLY TAX OUT-OF-STATE ENTITIES’ INCOME

Maryland’s highest court has firmly established

the critical premise on which the decision below rests:

royalty or similar payments made to an out-of-State

entity establish a nexus between that entity and the

17

State and can be treated as income earned in-State.

SYL, 825 A.2d at 416-17; Gore, 87 A.3d at 1287.3 In

reaching this conclusion, the Maryland Court of

Appeals has followed a line of State-court authority

that started with the South Carolina Supreme Court’s

decision in Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (1993). These courts have all

adopted an expansive view of States’ power to tax outof-State entities.

By contrast, other States’ highest courts have

rejected the premise that the mere receipt of royalty

or similar payments establishes the requisite nexus

with the State from which those payments originate.

Under the reasoning of this line of authority, the

payments that Staples and Superstore received from

East and C&C would only have been taxable in Maryland to the extent of Staples’ and Superstore’s minimal

in-State operations. These payments certainly would

not be treated as earned entirely where East and C&C

operated. The Court should take this opportunity to

resolve this entrenched conflict.

3

Although the decision below is unpublished, this Court has

regularly granted certiorari to review unpublished decisions that,

as here, rely upon and apply binding authority setting forth the

relevant legal principle. E.g., Nieves v. Bartlett, 139 S. Ct. 1715,

1721-22 (2019); Mont v. United States, 139 S. Ct. 1826, 1831-32

(2019); Byrd v. United States, 138 S. Ct. 1518, 1525 (2018); Oil

States Energy Servs., LLC v. Greene’s Energy Grp., LLC, 138

S. Ct. 1365, 1372 (2018); Manuel v. City of Joliet, 137 S. Ct. 911,

916-17 (2017); Beckles v. United States, 137 S. Ct. 886, 891-92

(2017); Riley v. California, 573 U.S. 373, 378 (2014).

18

A. Multiple State Courts Have Held That

States Cannot Tax Out-Of-State Entities’

Royalty Income

1. The decisions of the Maryland courts cannot

be reconciled with that of the West Virginia Supreme

Court of Appeals in Griffith v. ConAgra Brands, Inc.,

728 S.E.2d 74 (W.Va. 2012). There, the court held that

both the Due Process and Commerce Clauses prohibit

States from taxing out-of-State entities solely on the

basis that they receive licensing and royalty fees from

in-State entities. Id. at 84.

In ConAgra, a national food-products company

that held the rights to brand names such as Butterball

and Healthy Choice had created a wholly owned subsidiary—ConAgra Brands—to manage, oversee, and

protect its intellectual property. Id. at 76. ConAgra

Brands then executed licensing agreements with a

variety of third-party and affiliated companies, including a number of licensees that made millions of dollars

of sales in West Virginia. Id. at 76-77. Much like Maryland here, the West Virginia tax authorities sought to

impose the State’s corporate income and business franchise taxes on the royalty payments ConAgra Brands

had received from its West Virginia licensees. Id. at

77.

The West Virginia Supreme Court of Appeals held

that the Constitution precludes such overreach. The

court emphasized that ConAgra Brands’ operations—

that is, where it had “paid all expenses in defending its

trademarks and trade names against infringement

and in overseeing national marketing by developing

19

marketing strategies and purchasing advertisements

with national media outlets”—were located entirely

outside the State. Id. at 81-82. The court thus held

that the corporation lacked a “significant economic

presence” in West Virginia. Id. The court acknowledged that there were “many” decisions from other

state courts that “suggest that the assessments in the

matter now to be determined would be upheld.” Id. at

83-84 (discussing Geoffrey, 437 S.E.2d 13, and KFC

Corp. v. Iowa Dep’t of Revenue, 792 N.W.2d 308 (Iowa

2010)). But the court nevertheless held that an outof-State licensor could not be subject to tax on the basis

of its licensees’ activities in the State. Id. at 84.

2. The Oklahoma Supreme Court reached the

same conclusion in Scioto Ins. Co. v. Oklahoma Tax

Comm’n, 279 P.3d 782 (Okla. 2012). There, Oklahoma

sought to tax the royalty payments a Vermont corporation received from licensing the rights and operating

practices to Wendy’s restaurants through its affiliate

Wendy’s International, which then contracted with

franchisees in Oklahoma. Id. at 783. The Oklahoma

Supreme Court recognized that the “use of the intellectual property by individual Wendy’s restaurants in

Oklahoma has several taxable consequences”—including, for example, the generation of taxable sales made

by those franchisees in the State and the payment of

employment-based taxes related to Oklahoma workers. Id. But the court held the State could not tax royalty payments made to an entity that did not engage

in any of its own operations in Oklahoma. Id. at 784.

Instead, the court held, “due process is offended by

Oklahoma’s attempt to tax an out of state corporation

20

that has no contact with Oklahoma other than receiving payments from an Oklahoma taxpayer (Wendy’s

International) who has a bona fide obligation to do

so under a contract not made in Oklahoma.” Id. In

language directly applicable to the facts of this case,

the court continued: “The fact that the Oklahoma taxpayer can deduct such payments in determining the

Oklahoma taxpayer’s income tax liability is not justification to chase such payments across state lines and

tax them in the hands of a party who has no connection

to the State of Oklahoma.” Id.4

B. Other State Courts Have Held That Royalty Payments May Be Deemed Earned

Where Ultimate Sales Are Completed

1. As the present case demonstrates, Maryland

courts reject this limited understanding of States’ taxing authority. The Maryland Court of Appeals first

4

Other state courts have reached the same constitutional

holding in similar factual circumstances. See Rylander v. Bandag

Licensing Corp., 18 S.W.3d 296 (Tex. Ct. App. 2000); J.C. Penney

Nat’l Bank v. Johnson, 19 S.W.3d 831 (Tenn. Ct. App. 1999).

Unlike the high courts of West Virginia and Oklahoma, these

courts grounded their decisions in the “physical presence”

requirement then set forth in Quill Corp. v. North Dakota,

504 U.S. 298 (1992). See Rylander, 18 S.W.3d at 299-300; J.C.

Penney Nat’l Bank, 19 S.W.3d at 839-42. These courts have not

revisited the issue since this Court overruled this aspect of Quill.

See Wayfair, 138 S. Ct. at 2099. The Missouri Supreme Court has

also reached the same result as the West Virginia and Oklahoma

high courts as a matter of state law. See Acme Royalty Co. v. Dir.

of Revenue, 96 S.W.3d 72, 75 (Mo. 2002) (en banc) (“[I]n order

for the Appellants to be liable for taxes in Missouri, they must

have had some activity: property, payroll, or sales, in the State

of Missouri.”).

21

charted that course in SYL, which involved the State’s

effort to tax two separate out-of-State corporations

that, in exchange for royalty payments, had licensed

their intellectual property to retailers in States including Maryland. 825 A.2d at 401, 408. Both corporations

“did not own or lease tangible property in Maryland,

had no employees in Maryland, and maintained no

bank accounts in Maryland.” Id. Nevertheless, the

court held that “a portion” of these out-of-State corporations’ incomes attributed to the retailers’ “Maryland

business[ ]” could be “subject to Maryland income tax.”

Id. at 417.

The Maryland Court of Appeals expanded on this

reasoning in Gore Enterprise Holdings, approving the

same apportionment formula that the Comptroller

applied to Staples and Superstore here. 87 A.3d at

1284-89; see App., infra, 29a-30a. The Gore court again

confronted the circumstance in which an out-of-State

corporation had licensed its intellectual property to

an entity operating within Maryland. 87 A.3d at 1267.

The court reiterated that Maryland could constitutionally impose its income tax on such out-of-State corporations, and it went on to conclude that all of the

royalty payments corresponding to Maryland could be

treated as “income” in Maryland. Id. at 1287; accord

App., infra, 30a (applying Gore).

The Maryland Court of Special Appeals further

entrenched this position in ConAgra Foods RDM, Inc.

v. Comptroller of the Treasury, ___ A. 3d ___, 2019 WL

2703119 (Md. Ct. Spec. App., June 27, 2019). There,

the Court of Special Appeals confronted Maryland’s

22

attempt to impose its income tax on ConAgra Brands—

the very same corporation that prevailed in the West

Virginia ConAgra Brands decision. 728 S.E.2d 74. As

was true in West Virginia, ConAgra Brands has no

operations of its own in Maryland. ConAgra Foods,

2019 WL 2703119 at *10-11, 17. Nevertheless, the

Maryland court applied SYL and Gore to reject the

very same constitutional arguments accepted by the

West Virginia Supreme Court, holding that ConAgra

Brands could be subject to tax simply because its affiliates operated in Maryland and it received royalty and

other income from those entities. Id. at *17.

2. In adopting this permissive reading of the Due

Process and Commerce Clauses, the Maryland Court

of Appeals has relied in large part on the South Carolina Supreme Court’s decision in Geoffrey, Inc. v. South

Carolina Tax Commission. See SYL, 825 A.2d at 401.

The taxpayer in Geoffrey was the owner of a number of

trademarks and brand names, including “Toys R Us.”

437 S.E.2d at 15. Toys R Us, the taxpayer’s parent

company, operated retail stores throughout the county,

paying a royalty of one percent of net sales for the uses

of these trademarks. Id.

The South Carolina Supreme Court rejected both

Due Process and Commerce Clause challenges to the

State’s effort to tax the receipt of these royalty payments. On the Due Process Clause, the Court reasoned

that the out-of-State corporation had, through its

licensing, “directed its activity” at South Carolina, and

that the “real source” of its income was “South Carolina’s Toys R Us customers.” Id. at 16, 18. As for

the Commerce Clause, the court declared that the

23

supposed “presence” of the corporation’s intellectual

property in South Carolina was enough to create a

“substantial nexus” with the State. Id. at 18.

3. Like the Maryland Court of Appeals, a number

of other States’ high courts have accepted Geoffrey’s

reasoning—and in doing so reached results directly

contrary to those reached by the West Virginia and

Oklahoma high courts. Thus, in KFC Corp. v. Iowa

Dep’t of Revenue, the Iowa Supreme Court (while recognizing that Geoffrey had been “criticized as cursory

and conclusory”) held that the State could impose its

corporate income tax on KFC Corporation based on

KFC’s licensing its franchise system to independent

franchisees in Iowa. 792 N.W.2d at 310, 321, 328. The

court reached that conclusion even though KFC itself

had no property or employees in the State. Id. In

Geoffrey, Inc. v. Comm’r of Revenue, the Massachusetts

Supreme Court reached the same conclusion, again

with respect to the owner of the Toys R Us trademark.

899 N.E.2d 87, 95 (Mass. 2009). And in Lanco, Inc. v.

Director, Div. of Taxation, the New Jersey Supreme

Court agreed that New Jersey could impose its corporate income tax even where “the corporation lacks

physical presence in New Jersey but derives income

through a licensing agreement with a company conducting retail operations in New Jersey.” 908 A.2d 176,

176-77 (N.J. 2006); see also, e.g., Bridges v. Geoffrey,

Inc., 984 So.2d 115, 128 (La. Ct. App. 2008) (upholding

tax on royalty income earned by out-of-State entity);

A & F Trademark, Inc. v. Tolson, 605 S.E.2d 187, 195

(N.C. Ct. App. 2004) (same).

*

*

*

24

The split now involves a large number of state

appellate courts and shows no signs of abating. This

Court should grant review here to resolve it.

II.

THIS CASE IS A GOOD VEHICLE TO

ADDRESS THE QUESTION PRESENTED

This case presents an ideal vehicle for this Court

to resolve this division of authority. Indeed, even if

the decision below did not implicate any split, review

would still be warranted given how far beyond constitutional limits Maryland—with the approval of its

highest court—has extended its taxing authority. Not

only has Maryland declared that it may tax out-of-State

entities based on their licensing and similar income

related to entities that operate in-State, but it has

adopted an apportionment formula that effectively

declares that all such income should be taxed by the

State where those separate entities operate. And it

has sought to apply this revenue-enhancing formula to

“over a thousand” out-of-State businesses. CSA Record

E.213 (emphasis added); see also, e.g., ConAgra Foods,

2019 WL 2703119 at *18-22 (affirming application of

this same formula). Here, as elsewhere, application of

that formula has produced distortions that plainly

exceed constitutional bounds. This Court should use

this opportunity to make clear that such efforts by

State taxing authorities to arrogate to themselves the

proceeds of interstate commerce are unconstitutional.

25

A. Maryland’s Apportionment Formula Is

Necessarily Unconstitutional

Maryland’s apportionment formula cannot withstand constitutional scrutiny. As recounted above

(supra pp. 4-6), States’ power to tax interstate

income is limited by the requirement that there be “a

rational relationship between the income attributed to

the State and the intrastate values of the enterprise.”

Container Corp., 463 U.S. at 165-66 (quotation marks

omitted). Thus, an apportionment formula must

account for the “activities by which value is generated,”

assigning to a given State only the income that could

reasonably be said to arise from the productive activities within that State. Id. at 182.

Yet the formula the Maryland Comptroller has

applied in this (and many other) cases—which treats

all royalty and similar income as earned in the State

in which ultimate sales are made—produces results

that have little or no correlation with the actual business activities that Maryland might reasonably seek to

tax. That is because the formula does not even account

for the operations of the corporations on which the

tax is actually imposed (here, Staples and Superstore).

Instead, Maryland double-counts the in-State operations of other corporations (here, East and C&C) that

have already paid their income-tax liability to the

State.

The distortive effect of Maryland’s taxing scheme

can be illustrated by considering the typical franchise

relationship. Franchisees (like East) generate value by

26

operating retail stores and making sales to consumers.

That value may be taxed in the States in which the

franchisees operate. Franchisors (like Superstore)

generate value by creating the franchise system that

franchisees implement and maintaining intellectual

property rights. The price at which the franchisor sells

those rights to franchisees (i.e., the franchise fee)

reflects the value of the franchisor’s efforts. If all of the

franchisor’s efforts are concentrated in a given State,

its income should be apportioned to that State: that is

where it has actually created the value for which it is

being compensated. See CSA Record E.1733-34. The

decisions in ConAgra and Scioto (supra pp. 18-20)

reflect this straightforward economic reasoning.

Under Maryland’s alternative formula, however,

none of the franchisor’s income will be apportioned in

this manner; rather, its income will be attributed

entirely to the State or States in which the franchisees

operate. Indeed, unless the franchisor also happens to

have franchisees in the State in which it is headquartered, Maryland would not attribute any of the franchisor’s income to the State in which it actually created

and maintained the rights that generate that income.

Effectively, Maryland treats the franchisees’ operations as creating both the value associated with making retail sales and the value of the franchise system

actually created elsewhere by the franchisor. It has

empowered itself to tax both.

Such a duplicative formula cannot possibly approximate a fair assessment of “the activities by which

value is generated” by each taxpayer. Trinova, 498 U.S.

27

at 381 (emphasis omitted); see Target Brands v. Dep’t

of Revenue of Colo., 2017 Colo. Dist. LEXIS 1305, at

*113 (D. Colo., Dnvr. County, Jan. 30, 2017) (recognizing,

under state law, that a formula focused entirely on the

operations of a taxpayer’s affiliate cannot produce “an

equitable allocation and apportionment” of the taxpayer’s income). Rather, Maryland’s apportionment

“constitutes impermissible taxation of income outside its jurisdictional reach.” Hunt-Wesson, Inc. v.

Franchise Tax Bd. of Cal., 528 U.S. 458, 468 (2000).

Maryland’s taxation scheme also discriminates

against interstate commerce. That is because it fails

what this Court has called the “internal consistency”

test, which asks whether interstate commerce would

be subject to duplicative taxation if every State applied

the challenged tax structure. Comptroller of the

Treasury v. Wynne, 135 S. Ct. 1787, 1802 (2015) (holding that Maryland’s scheme for taxing the incomes of

both residents and non-residents was impermissibly

discriminatory). Maryland’s approach would have that

prohibited effect. In contrast to its treatment of outof-State businesses, Maryland apportioned the total

income of businesses based in-State (income which

would include the receipt of franchise fees and royalties) by a three-factor apportionment formula that

included property and payroll (i.e., the inputs used to

create the franchise system). See App., infra, 20a-21a.

Thus, for in-State entities, Maryland deemed the creation of the franchise system, and not just the ultimate

sales by franchisees, to have generated taxable income.

If every State took Maryland’s approach—taxing the

28

creation of a franchise system if it took place in Maryland, but taxing the ultimate sales associated with

that system if created out-of-State—interstate businesses would be taxed twice on the same income and

thus put at a constitutionally impermissible “disadvantage.” Wynne, 135 S. Ct. at 1803.

The State should not be permitted to continue to

employ such a facially unconstitutional tax scheme.

B. Application Of Maryland’s Formula Has

Had An Unconstitutional Impact Here

Maryland’s apportionment formula has created

such constitutionally prohibited distortions here. There

is no question that neither Superstore nor Staples had

any meaningful operations within Maryland. As the

parties have stipulated, neither entity owned any

property in Maryland, sold any products there, nor—

aside from a few occasional visits—employed anyone

in the State. CSA Record E.272; E.277. There is likewise no question that Superstore and Staples did have

substantial operations outside of Maryland. Again,

as the parties have stipulated, both entities owned a

great deal of property and employed a substantial

number of people—all outside of Maryland. CSA Record E.277-78; E.272-73.

Even just these stipulated facts suffice to demonstrate that the income Maryland has attributed to

itself is necessarily “out of all appropriate proportions

to the business transacted in that State.” Container

Corp., 463 U.S. at 170 (quotation marks omitted). Staples and Superstore are not shell companies, but

29

entities that perform significant, productive work.

That work generates the value reflected in the interest and franchise-fee payments they have received.

Because these productive activities are performed outside Maryland (where the personnel and property

required to perform such work are located), the value

they generate cannot be apportioned to Maryland.5

In nevertheless seeking to tax this income, the State

has transgressed constitutional limits. Id.

That conclusion becomes inescapable when Dr.

Cody’s alternative benchmarks are considered. Dr.

Cody’s analysis demonstrates that, even accepting

the State’s premise that Staples and Superstore

earned some revenue attributable to Maryland, a

full accounting of their operations (as opposed to the

State’s myopic focus on the operations of East and

C&C alone) would produce an exponentially lower tax

bill. Indeed, the State’s formula resulted in a 2,000

percent increase compared to what Staples’ and Superstore’s liability would have been had they simply been

treated as a single combined entity with East and

C&C, and more than an 850 percent increase compared

to what their liability would have been had these

franchise-fee and interest payments been treated as

sales attributable to Maryland consumers. CSA Record E.157. This Court has held that an apportionment

method that overstated a taxpayer’s in-State income

5

The formula at issue bears no relation to the Maryland visits by Staples and Superstore employees—visits that provided the

only nexus that could conceivably permit the State to impose some

tax on those entities.

30

by over 250 percent was “beyond the state’s authority.”

Hans Rees’ Sons, 283 U.S. at 128, 134, 136. The distortion here far exceeds any constitutional threshold.

Tellingly, none of the courts below was able to muster any meaningful response to any of this evidence.

Although the Court of Special Appeals emphasized

the interdependence of Staples, Superstore, C&C, and

East, it did not and could not deny that Superstore and

Staples engaged in real, income-producing activities

outside the State. App., infra, 14a-15a. With respect

to Dr. Cody’s alternative benchmarks, the courts were

able to offer up only the peculiar assertion that his consolidated-entity “opinion was premised on the assumption that Staples operated as a single entity prior to

1998”—something that was manifestly not true, and in

any event not at all responsive to Dr. Cody’s separate

market-sourcing benchmark. App., infra, 33a (quotation marks omitted). This case thus presents a clean

factual record on which this Court can address the constitutionality of such a method of apportionment.

III. THE ISSUE IS IMPORTANT AND WARRANTS THIS COURT’S REVIEW

This important constitutional question merits this

Court’s attention. As the Court has recognized, “[i]n a

Union of 50 States, to permit each State to tax activities outside its borders would have drastic consequences

for the national economy, as businesses could be subjected to severe multiple taxation.” Allied-Signal, 504

U.S. at 777-78. The Maryland apportionment formula

applied in this case is a particularly egregious example

31

of a State’s stretching its taxing power beyond its own

boundaries. But the line of state-court authority on

which the Maryland Court of Appeals has relied in

affirming Maryland’s exercise of that power evinces

the same expansive view. In this respect, Maryland’s

approach may be different in degree, but it is not different in kind from that used in other States. This

Court’s intervention is needed to ensure that States

do not transgress this basic premise of our constitutional system.

Without this Court’s guidance, State taxing

authorities can be expected to push further and further

beyond constitutional and territorial bounds. Indeed,

States have every incentive to increase the scope of

their taxing authority, lest they lose out in revenue to

other States more willing to test constitutional limits.

And State taxing authorities are particularly prone to

direct their attention at out-of-State businesses, which

are far less likely to have any political voice in the taxing State. Such efforts to target foreign businesses

may only be further encouraged by this Court’s removal

of the artificial—but nevertheless restraining—“physical presence” requirement, which until recently might

have tempered some States’ more adventuresome

exercises of taxing power. See Wayfair, 138 S. Ct. 2080;

supra, p. 20, n. 4.

The problems created by States’ reaching beyond

their own borders are only further compounded by

businesses’ inability to predict how States might attempt

to exercise such authority. States are often reluctant

to divulge the precise details of whether and how they

32

will tax out-of-State businesses. See Joseph BishopHenchman, The History of Internet Sales Taxes from

1789 to the Present Day: South Dakota v. Wayfair, 2018

CATO SUP. CT. REV. 269, 290-91 (2008) (noting that in

Bloomberg Tax’s recent survey of state tax departments, four declined to say what would constitute a tax

nexus with the State, seven “said their answers cannot

be relied upon as guidance by taxpayers,” and “[t]he

remaining states provide a variety of bewildering and

mostly inconsistent rules”). Here, of course, Maryland’s chosen apportionment formula has been applied

to more than a thousand taxpayers, but it is not

embodied in any statute or regulation—rather, it is

something the Comptroller has devised and applied

on a case-by-case basis. It is no wonder that the relative costs of complying with state income taxes are

already double those of complying with the federal

income-tax regime. See Sanjay Gupta & Lillian Mills,

Does Disconformity in State Corporate Income Tax Systems Affect Compliance Cost Burdens?, 56 NAT’L TAX J.

355, 357 (2003). These costs will only increase if States

continue to seek innovative new ways to tax outof-State businesses.

The importance of this issue—and the degree to

which States’ attempts to expand their tax bases may

threaten the orderly relations among the States—is

illustrated by a recent action Arizona filed against

California. See Arizona v. California, No. 22O150.

Invoking this Court’s original jurisdiction and pressing

constitutional claims paralleling those advanced by

Staples and Superstore here, Arizona challenges

33

California’s imposition of its “doing business” tax on

entities that do not themselves have any operations in

California, but have invested in LLCs that conduct

business there. See Arizona Bill of Complaint 2,

Arizona v. California, No. 22O150 (Feb. 28, 2019) (citing Wayfair, 138 S. Ct. 2080, and Complete Auto

Transit, 430 U.S. 274). This Court recently called for

the views of the Solicitor General in that case. See

Arizona v. California, __ S. Ct. __, 2019 WL 2570637,

*1 (June 24, 2019). Although the Court should grant

the petition for certiorari here regardless of what happens in the Arizona v. California proceedings, it should

at the very least hold this petition pending resolution

of that parallel case.

*

*

*

Tax laws “can give no quarter to uncertainty.”

Thor Power Tool Co. v. Commissioner, 439 U.S. 522, 543

(1979). This Court should grant this petition to make

clear that States cannot reach beyond their boundaries

to tax the value created in other States.

34

CONCLUSION

The petition for a writ of certiorari should be

granted or, in the alternative, should be held for Arizona v. California, No. 22O150.

Respectfully submitted,

CRAIG B. FIELDS

NICOLE L. JOHNSON

MORRISON & FOERSTER LLP

250 West 55th St.

New York, NY 10019

JOSEPH R. PALMORE

Counsel of Record

MORRISON & FOERSTER LLP

2000 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 887-6940

JPalmore@mofo.com

JAMES R. SIGEL

MORRISON & FOERSTER LLP

425 Market St.

San Francisco, CA 94105 Counsel for Petitioners

JULY 22, 2019