Reply Brief — Capital One One Bank (USA), N.A. v. Commissioner of Revenue of Massachusetts (No. 08-1169)

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(7) FILED

JUN 3 - 2009

salsa - a ShERK

No. 08-1169

IN THE

Supreme Court of the United States

CAPITAL ONE BANK (USA), N.A., |

F/K/A CAPITAL ONE BANK, AND CAPITAL ONE, N.A.,

AS SUCCESSOR TO CAPITAL ONE F.S.B.,

Petitioners,

COMMISSIONER OF REVENUE OF MASSACHUSETTS,

Respondent.

On Petition For A Writ Of Certiorari

To The Supreme Judicial Court Of Massachusetts

REPLY BRIEF FOR THE PETITIONERS

THEODORE B. OLSON

Counsel of Record

THOMAS G. HUNGAR

INDRANEEL SUR

MISHA TSEYTLIN

GiBSON, DUNN & CRUTCHER LLP

1050 Connecticut Avenue, N.W.

Washington, D.C. 20036

(202) 955-8500

Counsel for Petitioners

TABLE OF CONTENTS

A. The Decision Below Is Irreconcilable

With Quill And Other Precedents Of

I ine cccusdwesies 2

B. The Decision Below Deepens A

Concrete And Persistent Conflict

C. The Existing And Increasingly

Burdensome Uncertainty Over The

Question Presented Intensifies The

Need For Review

TABLE OF AUTHORITIES

Page

CASES

A&F Trademark, Inc. v. Tolson,

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

cert. denied, 546 U.S. 821 (2005)........................... 6

Am. Online, Inc. v. Johnson, No. M2001-

00927COA-R3-CV, 2002 WL 1751434

ge ee eS 7

Borden Chems. & Plastics v. Zehnder,

120 Tee Fee. ee. CL. 2000) ....................0005 7

Buehner Block Co. v. Wyo. Dep't of

Revenue, 139 P.3d 1150 (Wyo. 2006)..................... 7

Complete Auto Transit, Inc. v. Brady,

ge 3,11

Comptroller of the Treasury v. SYL, Inc.,

os Se 6

Couchot v. State Lottery Comm'n,

659 N.E.2d 1225 (Ohio 1996)......................0ccseeeeees 7

Gen. Motors Corp. v. City of Seattle,

25 P.3d 1022 (Wash. Ct. App. 2001)...........000.... ....6

Guardian Indus. Corp. v. Dep't of Treas.,

499 N.W.2d 349 (Mich. Ct. App. 1993).............. 7,8

J.C. Penney National Bank v. Johnson,

19 S.W.3d 831 (Tenn. Ct. App. 1999) .......0 ee. 7

lil

Nat’! Bellas Hess, Inc. v. Dep’t of Revenue,

Be. Mi |. yf neem ead Ce Oe On eee 2

Nat'l Geographic Soc’y v. Cal. Ed. of

Equatization, 430 U.S. 551 (1977).............c0..e0se0 10

Norton Co. v. Dep’t of Revenue of 1ii.,

Er re irc iews dee cee cece ene 3

Quill Corp. v. North Dakota,

BOE US. SOG CLGBZ) qo ccasvecsseccsrsansassess 1, 3, 4, 11, 12

Rylander v. Bandag Licensing Corp..,

18 S.W.3d 296 (Tex. App. 2000) ...................ceceeeee 8

Scripto, Inc. v. Carson,

Se Gas PE © BE veaniceciccvsvsnes Sie aaee aoe 10

OTHER AUTHORITIES

Jessica Silver-Greenberg, Corporate Taxes

Cross State Lines, BUSINESSWEEK,

eee 5 ee i eee 9

REPLY BRIEF FOR THE PETITIONERS

Respondent does not even attempt to rebut peti-

tioners’ compelling showing that the decision of the

Supreme Judicial Court (“SJC”) is utterly irreconcil-

able with the rationale of Quill Corp. v. North Da-

kota, 504 U.S. 298 (1992), which construed the same

“substantial nexus” prong that governs this case.

Essentially conceding that no principled ground for

distinction exists, respondent merely reiterates the

SJC’s ipse dixit that Quill should be limited to its

facts, even though this Court has repeatedly cited

Quill outside the use-tax context. This Court’s

precedents ought not be so lightly dismissed by lower

courts. The SJC’s cavalier treatment of Quill de-

serves further review.

Respondent also overlooks the inconsistencies be-

tween the judgment below anda this Court’s other

Commerce Clause precedents, and fails to rebut peti-

tioners’ showing that the SJC’s ruling exacerbates a

growing conflict among decisions of multiple state

appellate courts. Furthermore, by authorizing an

amorphous “economic-nexus” pseudo-test for taxa-

tion of non-domiciliaries, the decision below contrib-

utes to the growing uncertainty over such taxation,

which only this Court is realistically in a position to

resolve.

Respondent strives mightily to deny the ex-

traordinary importance of the question presented,

but her arguments ring hollow, particularly given

the broad array of amicus voices clamoring for re-

view in this case. Most tellingly, respondent offers

no response whatsoever to the States’ amicus brief

urging this Court to grant certiorari and provide

much-needed clarity and timely guidance in this cru-

cial area of the law. The time has come to confirm,

as Quill’s logic dictates, that “substantial nexus” re-

quires physical presence as a bright-line, irreducible

minimum.

A. The Decision Below Is Irreconcilable With

Quill And Other Precedents Of This Court

1. Respondent first attempts to minimize .the

importance of Quill. Echoing the S.JC’s errors, she

dismisses that controlling precedent as applicable

only to “sales and use taxation and the mail-order

industry” (Opp. 12), and as resting entirely on the

stare decisis effect of National Bellas Hess, Inc. v.

Department of Revenue of Illinois, 386 U.S. 753

(1967). Both arguments lack merit.

First, although the facts examined in Quill con-

cerned use taxation of mail-order catalogue transac-

tions, this Court based its decision on an interpreta-

tion of the Commerce Clause’s substantial-nexus re-

quirement, not on constitutional principles somehow

unique to mail-order merchandising. As demon-

strated (Pet. 11-12), this Court has freely cited Bellas

Hess and Quill in cases outside the sales-and-use-tax

context. Those cases endure, yet respondent fails to

discuss any of them. Contrary to respondent’s im-

plausible theory, Quill established no unprincipled,

formalistic wall dividing sales and use taxation from

income taxation for constitutional purposes. The

SJC boldly overstepped its authority in arbitrarily

confining this Court’s precedents to the particular

taxes at issue in those cases.

Respondent’s insistence that the physical-

presence requirement applies solely to the precise

tax addressed in Quill also disinters the very formal-

ism this Court laid to rest in favor of examining the

“practical effect” of state taxes under the Commerce

Clause. Complete Auto Transit, Inc. v. Brady, 430

U.S. 274, 279 (1977); Pet. 17-18. Respondent does

not even dispute, much less cure, this further weak-

ness in her position.

Second, respondent is mistaken in arguing that

the discussion of stare decisis in Quill supports limit-

ing the decision to the sales-and-use-tax context.

That discussion was necessary to demonsiraie that

the North Dakota Supreme Court had erred in set-

ting aside Bellas Hess as obsolete. Pet. 4-5. But the

Quill Court did not stop there, as respondent would

have it. Instead, the Court went on to hold that the

physical-presence requirement is entirely consistent

with, and is indeed an interpretation of, the substan-

tial-nexus requirement (504 U.S. at 31l)—a re-

quirement that applies equally in this case, which

involves essentially identical nexus-related facts.

Respondent’s improbable contention is that the

logic of Quill should be ignored because Quill relied

in part on stare decisis. That argument is not only

inherently nonsensical but also incomplete. Even

before this Court decided Bellas Hess, it applied the

physical-presence rule outside the narrow sales-and-

use-tax context to a tax analogous to the one chal-

lenged here. Norton Co. v. Dep’t of Revenue of IIl.,

340 U.S. 534 (1951); Pet. 12-13.

Respondent fails even to cite (much less distin-

guish) Norton, but that ostrich-like tactic merely re-

veals the weakness of respondent’s position. Thus,

contrary to respondent's contention that petitioners

are “urging a new rule of physical presence” (Opp.

23), Norton confirms that physical presence has long

been the constitutional precondition for state taxa-

tion of non-domiciliaries, including taxes based on

the taxpayer’s gross receipts (i.e., income). Indeed,

this Court has never upheld a state income tax

where physical presence was lacking. The growing

rebellion by state courts dissatisfied with this Court’s

validation of the physical-presence requirement

should not escape review. !

2. Respondent also confuses the Commerce

Clause and the Due Process Clause as distinct limi-

tations on state taxing powers. As explained (Pet.

19-20), the SJC effectively collapsed the Commerce

Clause’s substantial-nexus requirement into the far

less demanding “minimum contacts” test under the

Due Process Clause, thereby contravening Quill’s

clear holding that the Commerce Clause test is more

rigorous and requires a closer nexus. 504 U.S. at

313. Respondent offers no defense of the SJC’s

analysis, and suggests no means for keeping the in-

quiries under the two clauses separate, as Quill de-

mands.

Indeed, respondent ardently embraces the SJC’s

error when she asserts—without citing any authority

(Opp. 23)—that small and medium-sized businesses

should look to the Due Process Clause, rather than

the Commerce Clause, to protect them from the bur-

dens imposed by the uncertainties of state taxation

under the economic-nexus theory. Cf. Council on

State Taxation (“COST”) Br. 16-17 (describing spe-

Respondent states that petitioners’ marketing eftorts aimed

at Massachusetts consumers included “solicitling| credit card

customers through .. . third parties at marketing events and at

retail establishments” (Opp. 7), but the record is clear that, as

the SJC found, petitioners “neither owned nor leased any real

property” in Massachusetts, they “owned no other Massachu-

setts property, and no employee, agent, or independent contrac-

tor” of petitioners “was located in Massachusetts.” App. 3a

cial burdens on small businesses). In so doing, re-

spondent effectively concedes that the SJC has evis-

cerated the Commerce Clause’s substantial-nexus

requirement as an independent safeguard against

illegitimate state taxation, instead restoring a re-

gime under which only the Due Process Clause con-

strains such taxation. Quill definitively rejects that

approach.

B. The Decision Below Deepens A Concrete

And Persistent Conflict

1. Respondent errs in dismissing the division

among state appellate courts over the question pre-

sented. Opp. 14-15. Multiple state courts have ad-

dressed this recurring issue. Pet. 21-25; Virginia

(“States”) Br. 3-7. Because it hinges entirely on the

proper interpretation of this Court’s own precedents,

however, additional! percolation in the state courts

will not provide enlightenment.

Furthermore, the conflict cannot be disregarded

as “well past its shelf life.” Opp. 15. As the amicus

States correctly observe in urging certiorari, the con-

tinuing split of authority “invites complex litigation

and creates uncertainty” for state tax systems.

States Br. 2. Review is essential now to avoid exac-

erbating those and other serious problems that the

conflict has already spawned. Pet. 26-33.

2. Denying that the state courts are in disarray,

respondent relies heavily (Opp. 15-16) on cases that

involve very different nexus-related facts and are

thus inapposite, as even the SJC recognized. Pet. 25

n.7. The courts in the intangible-holding-company

cases rejected Commerce Clause challenges to state

taxation of “foreign corporations with intangible

property ... that was being used in the taxing State

by a licensee” physically present in the State (App.

21a n.19), where the licensees and the foreign corpo-

rations typically were commonly controlled. See, e.g.,

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

(N.C. Ct. App. 2004) (taxpayer “licenses trademarks

to a related retail company operating stores located

within” taxing State).

The Commerce Clause gives States various ave-

nues for taxing inter-company transfers attributable

to members of a commonly-controlled group of corpo-

rations, one of which does business in-state. See,

e.g., Comptroller of the Treasury v. SYL, Inc., 825

A.2d 399, 415 (Md. 2003) (concluding that intangible

holding companies “had no real economic substance

as separate business entities” for tax purposes). The

question of state authority to tax intangible-holding-

company royalties is thus far removed from the issue

here. Unlike in those cases, there is no suggestion

that petitioners derive income from commonly-

controlled corporations with a physical presence in

Massachusetts. All of petitioners’ physical conduct

supporting their business transactions with Massa-

chusetts residents occurred outside of Massachu-

setts. The apparent agreement among state courts

over intangible-holding-company cases thus sheds no

light here.

Respondent also errs in relying (Opp. 16) on ir-

relevant cases involving taxpayers physically present

within the taxing State. See Gen. Motors Corp. v.

City of Seattle, 25 P.38d 1022, 1024 (Wash. Ct. App.

2001) (taxpayer had physical presence based on regu-

2 Notwithstanding respondent's suggestion (Opp. 6-7), the

SJC did not rely on the appearance of the “Capital One” trade-

mark on credit cards us a purported basis for the assertion of

taxing authority, and there is no suggestion that petitioners

earned royalties from any in-state licensee of the trademark

lar visits by its agents); Borden Chems. & Plastics v.

Zehnder, 726 N.E.2d 73, 81-82 (Ill. App. Ct. 2000)

(partnership’s in-state presence imputed to taxpayer-

partner); Couchot v. State Lottery Comm’n, 659

N.E.2d 1225, 1230-31 (Ohio 1996) (taxpayer pur-

chased lottery ticket in state); see also Buehner Block

Co. v. Wyo. Dep’t of Revenue, 139 P.3d 1150, 1152

(Wyo. 2006) (taxpayer failed to collect sales tax on

product delivered to in-state customers).

3. Respondent also attempts to downplay the

depth of the state appellate conflict by painting the

three key precedents as inapposite or superseded.

Opp. 18-20. As the brief of Virginia and South Da-

kota confirms, however, those cases establish a con-

crete conflict that continues to generate uncertainty

for States and taxpayers alike. States Br. 6-7.

After conceding that the decision below conflicts

with J.C. Penney National Bank v. Johnson, 19

S.W.3d 831 (Tenn. Ct. App. 1999), respondent re-

hashes the SJC’s excuse for ignoring that case (Opp.

18), contending that the decision was abrogated by

the unpublished decision in America Online, Inc. v.

Johnson, No. M2001-00927COA-R3-CV, 2002 WL

1751434 at *2 (Tenn. Ct. App. July 30, 2002)

(“AOL”). As explained (Pet. 23 n.5), AOL held only

that a determination of whether the taxpayer had in-

state physical presence required additional factfind-

ing, and in Tennessee (as elsewhere), unpublished

dispositions cannot overrule published precedents.

Respondent offers nothing in rebuttal. J.C. Penney

thus stands as binding statewide precedent in Ten-

nessee. Pet. 22-23.

Respondent also misreads Guardian Industries

Corp. v. Department of Treasury, 499 N.W.2d 349

(Mich. Ct. App. 1993). Opp. 18-19. There the court

remanded for factfinding to determine whether the

taxpayer had physical presence (through its employ-

ees’ sales activities) in numerous States to which the

taxpayer had made tax payments that it sought to

credit against its. Michigan tax obligations. 499

N.W.2d at 357. The court held that if the taxpayer’s

“employees were never present” within those States

(id.), the taxpayer would not be entitled to a credit

because those States could not validly tax the tax-

payer’s activities—a clear application of the very

physical-presence rule that the SJC rejected. Al-

though Michigan rewrote its tax laws after Guardian

was decided (Pet. 32), nothing indicates that the

Michigan courts have abandoned the _ physical-

presence rule that was clearly adopted and enforced

in Guardian.

Respondent fares no better in her effort (Opp. 19-

20) to distinguish Rylander v. Bandag Licensing

Corp., 18 S.W.3d 296 (Tex. App. 2000). To be sure,

the State there sought to tax the taxpayer’s state-

derived income based on its possession of a certifi-

cate to do business within the State. 18 S.W.3d at

299. The crucial point, however, is that in deciding

whether the State’s assertion of taxing authority was

consistent with the Commerce Clause, the court

squarely held that in-state physical presence is a

precondition for imposition of taxes such as the fran-

chise tax in question. 7d. at 299-300; see Pet. 23-24.

The Commerce Clause “substantial nexus” analysis

that respondent dismisses as dicta was thus a criti-

cal step in the Ry/ander court’s reasoning, and that

reasoning is directly contrary to the decision below.

C. The Existing And Increasingly Burdensome

Uncertainty Over The Question Presented

Intensifies The Need For Review

1. Respondent discounts as mere “speculation”

the unconstitutional burdens on interstate commerce

created by the vague economic-nexus approach and

the continuing uncertainty over the scope of the

physical-presence requirement. Opp. 21-25. Yet

state taxation in defiance of Quil/ threatens “insur-

ers, online retailers, software makers, and other

companies that mainly operate in a single state but

have customers across the U.S.” Jessica Silver-

Greenberg, Corporate Taxes Cross State Lines, BUSI-

NESSWEEK, June 1, 2009, at 28. Amici provide au-

thoritative accounts of the reality and extent of those

harms, belying respondent’s breezy assurances that

review is not warranted. As amici demonstrate,

broad segments of the business community are suf-

fering in ever-increasing measure from the confusion

surrounding this issue and from the burdens of state

taxation under the economic-nexus theory. COST

Br. 6-19; Clearing House Ass’n (“CHA”) Br. 9-11; Tax

Executives Institute (“TEI”) Br. 6-13.

Moreover, even apart trom the impact upon /ax-

pavers, the submission of Virginia and South Dakota

demonstrates that taxing States recognize the uncer-

tainty swirling around the question presented and

the urgent need to resolve it. States Br. 3-13. It is

unsurprising that respondent—having prevailed in

the highest forum (other than this Court) with juris-

diction to address the constitutionality of Massachu-

setts’ tax—now seeks to avoid review. But that self-

interested preference ought not prevail over the ear-

nest plea of other States for this Court’s intervention

to settle the controversy for the entire Nation.

2. In contending that income taxes must be dis-

tinguished under the Commerce Clause from sales

and use taxes, respondent parrots the SJC’s unsub-

stantiated musings about the comparative compli-

ance burdens that purportedly make the latter more

onerous than the former. Opp. 21-22. As explained

(Pet. 13-16), however, this Court has already ad-

dressed that question, and has concluded that in-

come taxes are more burdensome than sales and use

taxes. A use tax often is not a significant obligation,

this Court stated, because the “burden of the tax is

placed on the ultimate purchaser,” such that the out-

of-state vendor itself “is charged with no _ tax”

(Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960)),

which makes the “case for the validity of the imposi-

tion” of use taxes “stronger” than the case for imposi-

tion of “fairly apportioned, non-discriminatory direct

taxes” (Nat'l Geographic Soc’y v. Cal. Bd. of Equali-

zation, 430 U.S. 551, 557-58 (1977)). In addition,

when more than one State imposes a tax on a corpo-

ration’s income, the serious “risk of double taxation”

that arises has no counterpart in the sales-and-use-

tax context. Id.

The SJC’s refusal to heed those conclusions

heightens the conflict between its reasoning and this

Court’s prior decisions. The difference in burdens,

moreover, has not diminished since this Court last

considered them: Income taxes remain far more

burdensome than sales and use taxes, imposing di-

rect liability (rather than mere collection responsibil-

ity) and requiring multiple filings each year (typi-

cally including quarterly estimated taxes as well as

annual returns) that are subject to a vast array of

often-differing rules regarding reporting method, ap-

portionment, computation of tax base and deduc-

tions, depreciation, etc. COST Br. 8-16; TEI Br. 14-

16.

3. Respondent also contends (Opp. 24) that tne

burdens identified by petitioners and their amici

should not be relieved through enforcement of the

substantial-nexus requirement, but rather through

the non-discrimination and fair-apportionment re-

quirements. See Complete Auto, 430 U.S. at 279.

This Court made explicit in Quill, however, that the

substantial-nexus requirement serves an independ-

ent function as “a means for hmiting state burdens

on interstate commerce.” 504 U.S. at 313. The ele-

ments of the Complete Auto test cannot be used to

undermine each other. Respondent’s approach must

be rejected, as it would promote double taxation

while rendering the substantial-nexus requirement

effectively superfluous.

4. Respondent invokes the waiver doctrine (Opp.

24-25) to answer the argument that the economic-

nexus approach may have significant and disruptive

ramifications for foreign relations. Pet. 29-30; see

CHA Br. 14-21. Respondent misses the point. The

crucial concern—essentially unrebutted by respon-

dent—is that the _ substantial-nexus approach

adopted by the SJC threatens to undermine this Na-

tion’s preferred apprvuach to international taxation by

encouraging reciprocal violations of the “permanent

establishment” principle. Review by this Court is

therefore warranted, because reaffirmation of the

physical-presence requirement will alleviate the for-

ecign-relations concern by clarifying the constitu-

tional prohibition against state efforts to pursue non-

domiciliary foreign businesses.

5. Finally, respondent advocates denial of review

on the theory that Congress is “better qualified” to

address whether physical presence is a precondition

fer state taxation of non-domiciliaries’ income. Opp.

25-27. Congressional competence, however, is not at

issue.

The SJC’s holding rests on a misreading of this

Court’s constitutional decision in Quill, which af-

firmed the Commerce Clause component of Bellas

Hess and thus interpreted the Constitution itself.

504 U.S. at 314. Accordingly, the decision below re-

flects an error in constitutional interpretation, not

the mere adoption of unsound policy suited for legis-

lative alteration. This Court’s review is necessary to

restore the “bright-line rule” of Quill (504 U.S. at

317), a rule that some state courts (like the SJC)

have eroded since Quill was decided. It is well

within this Court’s competence to secure obedience to

its own precedents.

Congress has shown no inclination to take up the

constitutional issue presented in this case. Pet. 33-

34 & n.14; see TEI Br. 12-13 & n.8 (observing that

Congress has never voted on “the nexus related por-

tions” of any post-Quil/ bills “that would have legis-

lated the limits of state tax nexus”). The mere possi-

bility of congressional action did not foreclose review

in Quill (see 504 U.S. at 318 & n.11), and should not

do so here. It is time for this Court to eliminate the

intolerable uncertainty created by the willingness of

some state courts to pronounce Qui// a dead letter in

this context.

* * *

For the foregoing reasons, and those stated in

the petition, certiorari should be granted.

Respectfully submitted.