Amicus Curiae Brief — Armco Export Sales Corp. v. Comptroller of the Treasury of Maryland

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No. 90-986

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

ARMCO EXPORT SALES CORPORATION, et al.,

Petitioners,

Vv.

COMPTROLLER OF THE TREASURY,

Respondent.

On Petition for Writ of Certiorari to the

Court of Special Appeals of Maryland

BRIEF OF THE COMMITTEE ON STATE TAXATION

OF THE COUNCIL OF STATE CHAMBERS OF

COMMERCE AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

AMY EISENSTADT *

Tax Counsel

JAMES F.. BURESH

PAUL H. FRANKEL

Co-Chairs, Lawyers

Coordinating Subcommittee

Committee on State

Taxation of the

Council of State

Chambers of Commerce

122 C Street, N.W., Suite 330

Washington, D.C. 20001

(202) 484-8103

* Counsel of Record

~- cn * mnetias sathtnienmn erm em sc

WILSON - Epgs PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

TABLE OF CONTENTS

; Page

INTRODUCTORY STATEMENT .............................------ 1

INTEREST OF AMICUS CURIAE INEM ea 2

tp EN 9 OM oe i) |: , ee 3

I 4

THE MISAPPLICATION OF THE UNITARY

CONCEPT TO CREATE “IMPUTED NEXUS”

VIOLATES THE DUE PROCESS CLAUSE ........ 4

NI Sibi eticiceransictestecs cerseniltnituhisiohcnibitnanieablictetids 7

TABLE OF AUTHORITIES

Cases Page

Cannon Manufacturing Co. v. Cudahy Packing Co.,

SUT UG. GD CRI scceccttatte ccdbieninee tank 6

Container Corp. of America v. Franchise Tax

Board, GB UB. TBD CBG vsieccteieniis 6

International Harvester Co. v. Evatt, 329 U.S. 416

(1947) : 5

Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954)... 4

Mobil Oil Corp. v. Commissioner of Taxes of Ver-

emnonl, G65 UB: GB CERT aes 6

Underwood Typewriter Co. v. Chamberlain, 254

is > | Re er eet ee 5

Wisconsin v. J.C. Penney Co., 311 U.S. 485 (1940)... 4

Statutes

Md. Ann. Code art. 81 ...... wea 6

IN THE

Supreme Court of the United States

OCTOBER TERM, 1990

No. 90-986

ARMCO EXPORT SALES CORPORATION, et al.,

Petitioners,

COMPTROLLER OF THE TREASURY,

Respondent.

On Petition for Writ of Certiorari to the

Court of Special Appeals of Maryland

BRIEF OF THE COMMITTEE ON STATE TAXATION

OF THE COUNCIL OF STATE CHAMBERS OF

COMMERCE AS AMICUS CURIAE

IN SUPPORT OF PETITIONERS

INTRODUCTORY STATEMENT

This brief is submitted by the Committee on State

Taxation of the Council of State Chambers of Commerce

as amicus curiae in support of the petitioners’ petition

for writ of certiorari in the above-captioned case. Writ-

ten consents of the petitioners and respondent have been

obtained and filed with the Clerk of this Court.

INTEREST OF AMICUS CURIAE

The Council of State Chambers of Commerce (Counci!),

organized in 1932, consists of 43 state chambers of

commerce. The Committee on State Taxation (COST),

an advisory committee of the Council, consists of 364

corporate members. Most of these corporations have a

large number of subsidiaries, each of which conducts

business in one or more states.

COST member corporations conduct a substantial por-

tion of the interstate commerce in the United States.

The members are representative of that part of the Na-

tion’s business sector which is most directly affected by

the state taxation of interstate operations. COST’s ob-

jective is to preserve and promote equitable and non-

discriminatory state and local taxation of corporations

and to ensure that states do not exceed constitutional

limitations in imposing their various taxes. COST mem-

ber companies recognize their responsibility to pay their

fair share of state tax to the jurisdictions in which they

do business. However, COST strongly objects to the

expansion of jurisdictional nexus beyond constitutional

limits to allow a State to assess a tax against an entity

that has no physical presence in that State.

COST member companies have a great concern in see-

ing that traditional due process nexus standards are ob-

served and maintained. COST members and their uni-

tary subsidiaries are, of course, subject to formula ap-

portionment in those states which have adopted a com-

bined scheme of taxation, but even under such a scheme

of taxation non-nexus members of the combined group

are not subject to tax. Those members of the combined

group are taxed only in the states in which they have

nexus. COST members are vitally interested in seeing

that the decision of the Maryland Court of Special Ap-

peals, which extends taxing jurisdiction to a corporate

entity with no connections to the State, be reversed.

SUMMARY OF ARGUMENT

The only issue before the Court in this case is whether,

under the Due Process Clause, a State may impose its

taxing jurisdiction over a corporate entity that has no

physical presence in that State. In the decision below,

the State of Maryland has completely ignored Due Proc-

ess protections. With absolute disregard to well estab-

lished principles that a state has no jurisdiction over a

person or corporation that has no contacts with that

state, the State has issued an assessment against a cor-

poration which it admits has no property or employees

within Maryland.

The lower court’s decision is mired in its attempt to

apply “unitary”, a concept used to determine how a state

may measure an in-state corporation’s tax base, to a

case in which the only issue is “nexus”. Nexus is the

term used to describe the minimum contacts necessary

under the Due Process Clause for a state to exercise

its taxing jurisdiction over an out-of-state corporation.

The lower court’s confused analysis has given us the

surreal result in which Maryland has assessed a franchise

tax against a corporate entity which has no contact with

the State. Such a result is clearly without authority,

creates a dangerous precedent for multi-entity taxpayers

and must be overruled.

ARGUMENT

THE MISAPPLICATION OF THE UNITARY CON-

CEPT TO CREATE “IMPUTED NEXUS” VIOLATES

THE DUE PROCESS CLAUSE

According to the lower court, the three key elements

necessary for constitutional nexus are: 1) the parent of

the corporate entity which the State seeks to tax is en-

gaged in business in the State; 2) the parent is unitary

with the entity it seeks to tax; and 3) the apportionment

factor is fair. Petitioners’ App. 8a. Under this analysis,

the State claims to have nexus with a corporate entity

that has no physical presence in the State. Such “im-

puted nexus” ignores this Court’s “consistent adherence

to one time-honored concept: that due process requires

some definite link, some minimum connection, between a

state and the person, property or transaction it seeks to

tax.” Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-

345 (1954). Thus, “where there is jurisdiction neither

as to person nor property, the imposition of a tax would

be ultra vires and void”. Jd. at 342, quoting St. Louis v.

Ferry Co., 11 Wall. 423, 430. As this Court cogently

stated in Wisconsin v. J.C. Penney Co., 311 U.S. 435

(1940):

“Taxable event,” “jurisdiction to tax,” “business

situs,” “extraterritoriality,” are all compendious ways

of implying the impotence of state power because

state power has nothing on which to operate. These

tags are not instruments of adjudication but state-

ments of result in applying the sole constitutional test

for a case like the present one. That test is whether

property was taken without due process of law, or if

paraphrase we must, whether the taxing power ex-

erted by the state bears fiscal relation to protection,

opportunities and benefits given by the state.

Id. at 444. When that test is applied to the present case,

it is clear that Maryland has given no protection, oppor-

tunities or benefits to the petitioners since they have

no physical presence in the State.

The issue in this case is simply whether Maryland can

assess a tax against petitioners, who have no physical

presence in the State, not whether Maryland can con-

stitutionally include DISC income in the apportionable

income of the parent corporation which does have pres-

ence in the State. Within the appropriate statutory and

procedural framework the State may very well be able

to include the DISC income it wishes to reach in the

parent corporations’ taxable incomes.’ However, the fact

that this income might have otherwise been reached by

the State does not excuse Maryland from the constraints

of the Due Process Clause.

In an attempt to escape these constraints, as well as

its own non-combination law, the lower court developed

its “imputed nexus” test, based on the unitary concept,

a concept which is completely unrelated to the issue of

nexus. The unitary concept simply allows the inclusion

in the apportionment formula of out-of-state values for

the purpose of determining an in-state taxpayer’s in-

come. It is the in-state taxpayer’s income that is taxed.

Underwood Typewriter Co. v. Chamberlain, 254 U.S.

113 (1920); International Harvester Co. v. Evatt, 329

U.S. 416 (1947).2 Significantly, out-of-state income of

in-state taxpayers is not taxed. It follows that out-of-

state income of our-of-state taxpayers should not be

taxed.®

1 As is recognized by the parent corporations of the petitioners,

which have filed returns including the DISC income in states in

which they do business that require combined unitary filing.

2 Petitioners have presented a thorough discussion of the de-

velopment and application of the unitary concept. Therefore, such

discussion will not be repeated in the brief of amicus.

3 Obviously, petitioners had no Maryland property, payroll or

sales factors to use to apportion any income to the State. To avoid

this fata] flaw, the State used the parent corporations’ property

and payroll factors.

Since the unitary concept does not in fact allow taxa-

tion of out-of-state income, the unitary concept, as ap-

plied by this Court, has in no way supported that a

State has jurisdiction to tax income earned outside the

State or to impose a tax on a corporation with no physi-

cal presence within the State. See Mobil Oil Corporation

v. Commissioner of Taxes of Vermont, 445 U.S. 425

(1980) ; Container Corporation of America v. Franchise

Tax Board, 463 U.S. 159 (1983).

The State of Maryland has chosen a corporate income

tax system under which it imposes its tax on each sep-

arate corporate entity doing business within the State.

Md. Ann. Code art. 81. It may be that there are instances

in which the State could increase its revenues collected

from particular corporations if it had chosen to use a

combined unitary reporting system such as that used by

California. See Container, supra. However, having chosen

a system based on separate corporate entities, Maryland

must live with that system. Thus, where a corporation

employs subsidiaries to do business in States other than

Maryland, that corporate separation must be recognized

and the relationship between the parent and the subsi-

diaries cannot be used to extend jurisdiction. See, Can-

non Manufacturing Company v. Cudahy Packing Com-

pany, 267 U.S. 333 (1925). Despite all precedent to the

contrary, this is exactly what the State of Maryland is

attempting to do in this case. The very purpose of the

Due Process Clause is to assure fairness and equity in

that there must be some concrete connection between a

State and the entity over which it seeks to exert its ju-

risdiction. The decision of the lower court threatens this

fundamental basis of due process and cannot be allowed

to stand.

CONCLUSiIC'N

For the foregoing reasons, the Committee on State

Taxation respectfully requesis that the Petitioners’ Pe-

tition for Writ of Certiorari be granted.

Respectfully submitted,