Amicus Curiae Brief — Thiokol Corp. v. Revenue Division, Department of Treasury of Michigan

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Ny No, 95-1913 JUN 19 1996

| CLERK

In THE See To

Supreme Court of the United States

OCTOBER TERM, 1995

4 ounrame ie = > |

THIOKOL CORPORATION, et al.,

.. Petitioners,

REVENUE DIVISION, DEPARTMENT OF TREASURY, STATE

OF MICHIGAN; DouGLas B. ROBERTS, in his official

capacity as Treasurer of the State of Michigan; and

THOMAS M. HOATLIN, in his official capacity as Com-

missioner of Revenue of the State of Michigan,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF COMMITTEE ON STATE TAXATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

KENDALL L. HOUGHTON *

General Counsel

WILLIAM D. PELTZ

GERALD J. MORRIS

Chair and Vice Chair,

Lawyers’ Coordinating

Subcommittee

COMMITTEE ON STATE TAXATION

122 C Street, N.W.

Suite 330

Washington, D.C. 20001

(202) 484-5222

* Counsel of Record

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

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Il.

TABLE OF CONTENTS

MANY STATES CURRENTLY IMPOSE TAX

BURDENS ON ERISA PLANS, AS EVI-

DENCED BY OTHER ERISA PREEMPTION

LITIGATION IN STATE AND FEDERAL

COURTS, AND A TRUE LINE MUST BE

DRAWN BETWEEN VALID AND PRE-

EMPTED EXERCISES OF SUCH STATE

TAXING JURISDICTION 2200220220. ...sececcceccseeeese

WHERE CONGRESS AFFIRMATIVELY EX-

ERCISES ITS COMMERCE CLAUSE POWERS

TO PREEMPT THE STATES’ TAXATION OF

AN OBJECT OR ACTIVITY, THIS COURT’S

MANDATE IS TO INTERPRET AND TO

APPLY SUCH PREEMPTION PROVISIONS

IN A MEANINGFUL WAY ~.000

THIS PETITION SHOULD BE CONSIDERED

IN CONJUNCTION WITH, OR HELD IN

ABEYANCE UNTIL DISPOSITION OF, THE

PETITION IN DE BUONO v. NYSA-ILA

MEDICAL AND CLINICAL SERVICES

ag | MDH Ata tee EA ACE SES, TANT EMRE ROR

TABLE OF AUTHORITIES

CASES

Akzo America, Inc. et al. v. Michigan Dep’t of

Treasury, No. 4:98-CV-101, 1995 U.S. Dist.

LEXIS 1784 (W.D. Mich Jan. 13, 1995) ..........

Boyle v. Anderson, 68 F.3d 1098 (8th Cir. 1995),

cert. denied sub nom. Boyle v. Smith, 64 U.S.L.W.

SE11 Ciknedin TB, SOOGE icciccsciasencccvidcdiesoeenes

De Buono et al. v. NYSA-ILA Medical and Clinical

Services Fund et al., U.S. No. 95-1594 (filed

RG GTO oisecsceccrnceseb vicina thactiteinscteseiniditintctoase

The District of Columbia and Sharon Pratt Kelly,

Mayor v. Greater Washington Board of Trade,

G66 Ty Te Coe: waectethccoobh aio nesienssnitens

E-Systems, Inc. v. Pogue, 929 F.2d 1100 (5th Cir.

|: by ROR RE Re im AE EF AE ie so gy Me OSE ae CO

Firestone Tire & Rubber Company v. Neusser, 810

VDE GOS Ge Cs Re iortiiccecnteeecattiarntonnens

Ingersoll-Rand Co. v. McClendon, 498 U.S. 1838

C3900) a Re a aad

In the Matter of Morgan Guaranty Trust Company

of New York, 80 N.Y. 2d 44, 599 N.E.2d 656

GUY: Ob. Ane BROS) oe ee.

New York State Conference of Blue Cross & Blue

Shield Plans, et al. v. Travelers Insurance Com-

pany, et al., 115 S. Ct. 1671 (1996) .....................

Northwestern States Portland Cement Co. v.

Minnesota, 358 U.S. 450 (1959) —.....----

NYSA-ILA Medical and Clinical Services Fund v.

Axelrod, 74 F.3d 28 (2nd Cir. 1996), on appeal

to the U.S. S. Ct. sub nom. DeBuono v. NYSA-

ILA, Docket No. 95-1594 (filed April 3, 1996) ..5,

Quill Corporation v. North Dakota, 504 U.S. 298

1 re

Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (19838)..

Sommers Drug Stores Co. Employee Profit Sharing

Trust v. Corrigan Enterprises, 793 F.2d 1456

(5th Cir. 1986), cert. denied, 479 U.S. 1084

h : ¢ SREY SRS pe ME Or TP ee HPAL a

Thiokol Corp. et al. v. Roberts, 858 F. Supp. 674

gM eR ECR at CS

Page

6,7

10, 11

3-4, 7

iii

TABLE OF AUTHORITIES—Continued

STATUTES Page

Section 514(a) of ERISA, 29 U.S.C. §1144(a).... 3,7

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IN THE

Supreme Court of the United States

OcTOBER TERM, 1995

No. 95-1913

THIOKOL CORPORATION, ef al.,

. Petitioners,

REVENUE DIvisiON, DEPARTMENT OF TREASURY, STATE

OF MICHIGAN; DouGLas B. RosertTs, in his official

capacity as Treasurer of the State of Michigan; and

THoMaS M. HOATLin, in his official capacity as Com-

missioner of Revenue of the State of Michigan,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals

for the Sixth Circuit

BRIEF OF COMMITTEE ON STATE TAXATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

INTRODUCTORY STATEMENT

This brief is submitted by the Committee On State

Taxation as amicus curiae in support of the petitioner

in the above-captioned matter. Written consent of the

parties hereto has been obtained and filed with the Clerk

of the Court.

INTEREST OF AMICUS CURIAE

The Committee On State Taxation (“COST”) is a non-

profit trade association that was organized in 1969 as

an advisory committee to the Council of State Chambers

of Commerce. COST, which separately incorporated on

December 11, 1991, has a membership of over 420 major

multistate corporations, engaged in interstate and inter-

national business. COST’s objective is to preserve and

promote the equitable and nondiscriminatory state and

local taxation of multijurisdictional business entities.

Many of COST’s members are engaged in business in

the State of Michigan and thus have a particular interest

in the ultimate settlement of the ERISA preemption

and statute of limitations questions raised in this case.

Moreover, all of COST’s members are adversely im-

pacted by the tax laws of one or more other states,

where such state laws “relate to” ERISA employee benefit

plans through either a reference to or connection with

such plans. Given the broad impact on the United States

business community and its employees of the preemption

question that this case presents, COST has a duty to assist

its members in obtaining more certainty regarding the

extent of rights of each sovereign power, where federal

and state statutory schemes overlap and arguably infringe

upon one another.

SUMMARY OF ARGUMENT

Our common understanding of the principles governing

ERISA preemption of state laws has evolved, with this

Court’s guidance, over the course of years since ERISA’s

preemption provision was first enacted and later reaffirmed

to apply to state tax laws. The precept that a state tax

law may “relate to” employee benefit plans for ERISA

preemption purposes through either direct reference to,

or connection with, such plans is clear beyond cavil.

What remains unclear, however, is where the line is drawn

between state tax laws that have a sufficient relation to

employee benefit plans to warrant preemption, and those

tax laws that are “too tenuous, remote or peripheral” to

justify curbing state powers of taxation.

The time has come for the line to be drawn, and it

should be drawn in such a manner as to imbue the ERISA

preemption language with force and effect. Although the

decided cases appear to rely on disparate factors and to

yield numerous irreconcilable tests to determine when a

state tax law has crossed the line, nevertheless a set of

unified principles can be fashioned to resolve future pre-

emption controversies. First, if the state tax law specifi-

cally refers to ERISA plans, it “relates to” those plans

and must be preempted. Second, if the effect of the state

tax law in question is to exert downward pressure on the

amount of the benefit fund that will be available for the

provision of benefits, the law “relates to” such fund and

must be preempted. In both instances, even if this Court

insists on testing the state tax law by reference to the

“tenuous, remote or peripheral” analysis—which COST

contends is logically applicable only to state tax laws that

do not directly refer to employee benefit plans—the direct

economic impact of the tax law on the employee benefit

plans serves as a “line in the sand” of ERISA state tax

preemption.

ARGUMENT

I. MANY STATES CURRENTLY IMPOSE TAX BUR-

DENS ON ERISA PLANS, AS EVIDENCED BY

OTHER ERISA PREEMPTION LITIGATION IN

STATE AND FEDERAL COURTS, AND A TRUE

LINE MUST BE DRAWN BETWEEN VALID AND

PREEMPTED EXERCISES OF SUCH STATE TAX-

ING JURISDICTION.

In making determinations whether state laws “relate to

any employee benefit plan” in such a manner or to such

an extent as to be subject to federal preemption under

Section 514(a) of ERISA, 29 U.S.C. § 1144(a), this

Court has to date “expressed no views about where it

would be appropriate to draw the line” between valid

and preempted state laws. Shaw v. Delta Air Lines,

Inc., 463 U.S. 85, 100 n.21 (1983). But sometimes,

and particularly in the context of state taxation, a

“bright line” test is needed to prevent the hindrance

of interstate commerce by state regulation and to promote

settled expectations. Thus, in Quill Corporation v. North

Dakota, 504 U.S. 298, 312-316 (1992), this Court articu-

lated a bright-line physical presence nexus standard for

Commerce Clause purposes (relating to use tax collection

duties); anything short of physical presence is insufficient

to warrant the imposition of a duty on an interstate seller

to become a tax collector.

A similar standard is needed regarding state tax pre-

emption under ERISA. Cf. 29 U.S.C. § 1144(b)(5)

(B)(i); E-Systems, 929 F.2d 1100 at 1103 (citing con-

ference report on ERISA amendment). Numerous cases

have been decided but little guidance has been given. A

tension has arisen in the arena of ERISA state tax pre-

emption, as state and federal courts pick and choose

between (1) the expansive interpretation of ERISA’s

preemption language urged by this Court in Delta, supra

(establishing that the key language, “relate to,” contem-

plates that a state law will either have a connection with

or refer to an ERISA plan) and Ingersoll-Rand Co. v.

McClendon, 498 U.S. 133, 139 (1990) (the phrase

“relate[s] to” must be given a “broad common-sense mean-

ing”), and (2) the limitations thereto expressed by this

Court in Delta (a state law “may affect employee benefit

plans in too tenuous, remote, or peripheral a manner” to

warrant preemption) and in New York State Conference

of Blue Cross & Blue Shield Plans, et al. v. Travelers

Insurance Company, et al., 115 S. Ct. 1671 (1995)

(absent a direct reference by a state law to ERISA plans,

preemption may be premised upon acute, albeit indirect,

economic effect of the state law upon such plans). Un-

fortunately, the result is the very inconsistency and lack

of national uniformity in state regulation—specifically,

state taxation—of employee benefit plans that the ERISA

preemption language was designed to prevent.

For example, the States of Minnesota and Ohio (City

of Akron) have been permitted to subject employee bene-

fit plans and the contributions to such plans to certain

state tax burdens, while the States of Texas and New York

have not, on differing formulations of the factors and

based on different lines in the sand. Compare Boyle v.

Anderson, 68 F.3d 1093 (8th Cir. 1995), cert. denied

sub nom. Boyle v. Smith, 64 U.S.L.W. 3511 (March 18,

1996) (2% general health care provider tax that can be

passed on to purchasers of services has only a tenuous,

remote and peripheral effect on ERISA plans), and

Firestone Tire & Rubber Company v. Neusser, 810 F.2d

550 (6th Cir. 1987) (2% municipal income tax on

resident employees that must be withheld by employers

deemed a non-preempted general tax of neutral applica-

tion that applies to employees without regard to their

status as ERISA participants), with E-Systems, Inc. v.

Pogue, 929 F.2d 1100 (Sth Cir. 1991) (2.5% Texas

Administrative Services Tax, which taxes administrative

fees received by a plan and sums received by beneficiaries

of a plan, is preempted because it reduces future plan

assets and the capability to pay benefits); In the Matter

of Morgan Guaranty Trust Company of New York, 80

N.Y. 2d 44, 599 N.E.2d 656 (N.Y. Ct. App. 1992)

(10% real property transfer gains tax is preempted be-

cause it imposes administrative burdens on plan and

directly depletes funds otherwise available for provision

of benefits); and NYSA-ILA Medical and Clinical Services

Fund y. Axelrod, 74 F.3d 28 (2nd Cir. 1996), on appeal

to the United States Supreme Court sub nom. De Buono v.

NYSA-ILA, Docket No. 95-1594 (filed April 3, 1996)

(.6% Health Facility Act tax imposed on revenues of

ERISA plan-operated medical facilities is preempted be-

cause it depletes assets earmarked for provision of plan

benefits ).

Even the district court judges who heard the consoli-

dated cases that are hereby being appealed to this court

could not agree on what the appropriate standards were,

or where the line should be drawn. Compare Akzo

America, Inc. et al. v. Michigan Dep’t of Treasury, No.

4:93-CV-101, 1995 U.S.Dist. LEXIS 1784 (W.D. Mich.

Jan. 13, 1995) (held, “tenuous, remote or peripheral”

exception does not apply to state law that refers to an

ERISA plan, therefore ERISA preempts Single Business

Tax) with Thiokol Corp. et al. v. Roberts, 858 F. Supp.

674 (W.D. Mich. 1994) (held, Single Business Tax is

neither direct or indirect tax on ERISA plans, and effect

on such plans is incidental, therefore specific reference to

ERISA plans is not dispositive).

Although a bright-iine test may “appear[] artificial at

its edges,” Quill, 504 U.S. at 315, this Court’s observa-

tions about the utility of such tests applies with equal

force in the context of ERISA state tax preemption con-

troversies:

This artificiality, however, is more than offset by the

benefits of a clear rule. Such a rule firmly establishes

the boundaries of legitimate state authority to impose

a duty to collect sales and use taxes and reduces

litigation concerning those taxes. This benefit is im-

portant, for as we have so frequently noted, our law

in this area is something of a “quagmire” and the

“application of constitutional principles to specific

state statutes leaves much room for controversy and

confusion and little in the way of precise guides to

the States in the exercise of their indispensable power

of taxation.”

Quill, 504 U.S. at 315-316 (citing Northwestern States

Portland Cement Co. v. Minnesota, 358 U.S. 450, 457-

458 (1959)). Multistate business entities and their em-

ployees deserve to know where the line has been drawn

in this arena as much as the petitioner and other affected

parties in Quill did.

Il. WHERE CONGRESS AFFIRMATIVELY EXER-

CISES ITS COMMERCE CLAUSE POWERS TO

PREEMPT THE STATES’ TAXATION OF AN OB-

JECT OR ACTIVITY, THIS COURT'S MANDATE

IS TO INTERPRET AND TO APPLY SUCH PRE-

EMPTION PROVISIONS IN A MEANINGFUL WAY.

It is time for this Court to draw the ERISA preemption

line somewhere. Congress has engaged in an affirmative

exercise of its Supremacy and Commerce Clause powers

in this arena,’ and as this Court previously stated in

Ingersoll-Rand, 498 U.S. 133 at 138, where Congress

“has expressly included a broadly worded pre-emption

provision in a comprehensive statute such as ERISA, our

task of discerning congressional intent is considerably

simplified.” Thus, when this Court limits the broad appli-

cability of ERISA preemption to those state laws that

are not “too tenuous, remote or peripheral” to warrant a

finding that the law “relates to” the plan, Delta, 463 U.S.

at 100 n.21, then it must reasonably define the circum-

stances that demonstrate a sufficient relation between the

State law in question and employee benefit plans.

The existing cases decided by both this Court and lower

federal and state courts articulate numerous and seem-

ingly irreconcilable tests to determine when a state law

has crossed the line.* Nevertheless, the facts and legal

1 Cf. Delta, 463 U.S. 85 and 98 (discussion of legislative history

of Section 514(a) of ERISA, which indicates that Congress re-

jected a narrower preemption provision in favor of the present

language).

2 Compare Akzo America, Inc. et al. v. Michigan Dept’ of Treasury,

No. 4:93-CV-101, 1995 U.S. Dist. LEXIS 1784 (W.D. Mich. Jan. 13,

1995) (held, “tenuous, remote or peripheral” exception does not

apply to state law that refers to an ERISA plan, therefore ERISA

preempts Single Business Tax) with Thiokol Corp. et al. v. Roberts,

858 F. Supp. 674 (W.D. Mich. 1994) (held, Single Business Tax

is neither direct or indirect tax on ERISA plans, and effect on

such plans is incidental, therefore specific reference to ERISA is

not dispositive). Both cases applied tests articulated by this Court

to the same set of facts but arrived at opposite conclusions.

analysis presented in most of the cases suggest a set of

unifying principles that may be utilized to resolve future

preemption controversies in a settled manner. First, if a

state tax law directly refers to ERISA plans, it logically

and as a practical matter “relates to” those plans for

ERISA preemption purposes. That alone should settle

the matter. Cf. The District of Columbia and Sharon

Pratt Kelly, Mayor v. Greater Washington Board of Trade,

506 U.S. 125 (1992) (because the District’s Equity

Amendment Act specifically referred to ERISA plans,

preemption was appropriate “on that basis alone”); Peti-

tion, p. 8. By contrast, the application of the “tenuous,

remote or peripheral” analysis to a state tax law that

directly refers to ERISA plans does not make sense. A

state statute either “refers to” ERISA plans or it does not,

whereas a state statute’s “connection with” ERISA plans

is a subjective determination that may be tested by refer-

ence to the “tenuous, remote or peripheral” concepts. In

fact, the question of subjectivity is endless in this context

because the testing tools are themselves as subjective as

the “connection with” determination.

Second, if a state tax law does not directly refer to

ERISA plans—and even if this Court for any reason

chooses to apply the “tenuous, remote or peripheral”

analysis to state tax laws which do so with a specific

reference—the tax scheme still has a “connection with”

those plans that is not tenuous, remote or peripheral and

therefore “relates to” those plans for ERISA preemption

purposes, where the effect of the tax is to exert a down-

ward pressure on the amount of the benefit fund that will

be available for the provision of benefits.

If the line is drawn to preempt state taxes that operate

to reduce the funds available to provide employee benefits,

then the test would generally align with the federal tax

treatment accorded such plans under the Internal Revenue

Code. This test also has the effect of requiring that the

state tax law affect relations between the principal ERISA

ante ee —_

entities (employer, plan, plan fiduciaries, plan _partici-

pants), and thus implicitly acknowledge the underlying

purposes of ERISA itself. Cf. Sommers Drug Stores Co.

Employee Profit Sharing Trust v. C*rrigan Enterprises,

793 F.2d 1456, 1467 (Sth Cir. 1986;, cert. denied, 479

U.S. 1034 (1987).

Such an approach would reconcile most, if not all, of

the apparently disparate results in the above-cited cases,

and would further serve to impose a uniform national

standard upon ERISA preemption determinations with

respect to state tax laws, or indeed that are alleged to

“relate to” employee benefit plans. For instance, under

the proposed test Minnesota would continue to be free to

impose general taxes such as sales and excise taxes, when

(as in the case of Boyle, supra) they are not imposed on

the assets of or contributions to employee benefit plans

and thus do not have a direct economic impact on the

plan’s available benefits or ability to fund benefits. Like-

wise, Akron’s municipal income tax is not imposed on

ERISA plans’ income, but rather on the pre-contribution

income of employees without regard to their participation

in an ERISA plan; once a participant, the level of benefits

available to an employee is not derivative of the economic

impact of the tax in question.

On the other hand, the cases of E-Systems, Morgan

Guaranty and NYSA-ILA continue to warrant ERISA

preemption under the proposed test. As the court noted

in E-Systems, the tax there operated to reduce future plan

assets and the capability of the plans to pay benefits:

“The cost of the plan must therefore increase for ‘he

employe: and/or employees or the benefits must be ad-

justed dovnward to offset the tax bite. This is the type

of impae Congress intended to avoid when it enacted

the ER/:A legislation.” E-Systems, 929 F.2d 1100 at

1103. ‘And that, of course, is the effect of the tax in this

case. See Petition, pp. 18-19. The Court in Morgan

Guaranty also cited the direct and adverse economic effect

a a a a i Ni

of the tax at issue on the employee benefit plan’s available

funds: “Unlike other forms of general State regulation

that may have only incidental effect on plan resources,

the gains tax ‘directly depletes the funds otherwise avail-

able for providing benefits’ and flies ‘in the face of

ERISA’s goal of assuring the financial soundness of such

plans.”” Morgan Guaranty, 80 N.Y.2d 44 at 52.

Finally, the Second Circuit Court of Appeals in NYSA-

ILA found that the tax in question “ ‘depletes those assets

earmarked for the provision of health care benefits and,

as a result, will cause the Funds to reduce benefits pro-

vided and/or to charge beneficiaries more in the future

for benefits received.”” NYSA-ILA, 74 F.3d 28 at 30.

Upon remand from this Court with instruction to recon-

sider its prior decision in light of the recent Travelers

opinion of this Court, the Court of Appeals took pains

in NYSA-ILA to articulate the distinctions between the

operation of the taxes in each of the cases. NYSA-ILA

concludes that the non-preemption result in Travelers

rested on the fact that the statute at issue in Travelers did

not impose surcharges on ERISA plans themselves, but

rather on insurance carriers that provided coverage to the

plans and their beneficiaries. In contrast,

The facts of [NYSA-ILA] distinguish it from

Travelers, °>ecae, unlike in T¢avelers, there is no

third party between the plan .nd the tax imposed

pursuant to the HFA. Ra..icr, the statute at issue

depletes the Fund’s assets directly, and thus has an

immediate impact on the operations of an ERISA

plan. As we observed in our original opinion, the

HFA imposes ‘an immediate tax on payments and

contributions which were intended to pay for par-

ticipants’ medical benefits . . . [and] thus directly

affects the Fund in its principal role as an employee

welfare benefit plan.’

Id. at 30 (emphasis added).

When the proposed test is applied to the case at issue,

the result is clear: the Michigan Single Business Tax,

ence ae

i a a

through a specific reference to ERISA plans, e.= ts a

direct economic impact upon employee benefit ians,

through the effective reduction of employer contriivations

and hence the benefit fund that will be available io pro-

vide benefits to plan participants.

Ill. THIS PETITiGN SHOULD BE CONSIDERED IN

CONJUNCTION WITH, OR HELD IN ABEYANCE

UNTIL DISPOSITION OF, THE PETITION IN

DE BUONO v. NYSA-ILA MEDICAL AND CLINI-

CAL SERVICES FUND

Subsequent to the release of the above-referenced opinion

of the Second Circuit Court of Appeals in NYSA-ILA

(on remand from this Court), that case has been appealed

to this Court a second time, sub nom. De Buono et al. v.

NYSA-ILA M<dical and Clinical Services Fund et aal.,

S. Ct. Docket No. 95-1594 (filed April 3, 1996). This

Court has since requested the Solicitor General to provide

a brief commenting on the views of the Administration

regarding the proper scope of ERISA preemption. The

present case presents equally compelling issues for review,

and your amicus respectfully requests that this Court

either (1) consider the present Petition in conjunction

with the Petition in De Buono, supra, because the Court

will accord itself the broadest presentation of issues, per-

spectives and analyses that pertain to remaining ERISA

state tax preemption controversies in this manner, or

(2) hold this Petition in abeyance until a decision has

been reached whether to grant review of the De Buono

case, as the Solicitor General may well provide additional

insight into the merits of this case, by addressing the

related questions presented by the De Buono Petition.

CONCLUSION

For the reasons set forth above, the Committee On

State Taxation respectfully requests that the Court grant

a writ of certiorari and reverse the decision of the United

States Court of Appeals for the Sixth Circuit.

June 19, 1996

Respectfully submitted,