No. 2015-01
IN THE
Supreme Court Of The United
States
FEBRUARY TERM 2015
FRED GWYNNE,
Petitioner,
v.
INERTIA BOARD OF REVENUE
and
MOMENTUM REVENUE AGENCY,
Respondents.
On Writ of Certiorari to the Court of Appeals
for the Fourteenth Circuit
BRIEF FOR PETITIONER
Team 5,
Counsel for Petitioner
QUESTIONS PRESENTED
I.
Whether a state tax, which is permitted by the Due Process Clause to tax all of its
residents’ income, wherever earned, violated the Commerce Clause by doubletaxing certain income earned outside its boundaries.
II.
Whether the Tax Injunction Act, 28 U.S.C. § 1341, precludes federal court
jurisdiction over a suit brought by an out-of-state retailer to enjoin a state’s notice
and reporting requirements in an attempt to collect use tax from purchasers in its
state.
III.
If the Tax Injunction Act is not applicable to the second question, whether a
state’s notice and reporting obligations imposed on out-of-state retailers in an
attempt to collect use tax from purchasers in its state violates the Commerce
Clause.
TABLE OF CONTENTS
QUESTIONS PRESENTED............................................................................................. i
TABLE OF CONTENTS ................................................................................................ ii
TABLE OF AUTHORITIES .......................................................................................... iv
STATEMENT OF THE CASE ......................................................................................... i
SUMMARY OF THE ARGUMENT ............................................................................... 5
ARGUMENT .................................................................................................................. 4
I. THE DORMANT COMMERCE CLAUSE APPLIES AND PROHIBITS
INERTIA’S PARTIAL-CREDIT SCHEME BECAUSE IT RESULTS IN
DOUBLE TAXATION ON INCOME EARNED OUT-OF-STATE AND
BURDENS INTERSTATE COMMERCE. ............................................................. 4
A. The Dormant Commerce Clause Applies Because The Tax Unduly Burdens
An Identifiable Interstate Market. ........................................................................................................... 5
1. Gwynne is similarly situated in a single market with those taxpayers
who limit activities to solely intrastate. .......................................................... 6
2. The Fourteenth Circuit’s reasoning creates an unworkable Dormant
Commerce Clause doctrine. ........................................................................... 7
3. In this case, the application of the Dormant Commerce Clause better
protects the interests of interstate commerce than a reliance on the
Legislative process. ....................................................................................... 9
B. Inertia’s Tax Scheme Violates The Dormant Commerce Clause Because It
Fails The Complete Auto Transit Test. ................................................................................................10
1. Inertia’s tax is not fairly apportioned because the tax is not internally
or externally consistent. ............................................................................... 10
i. Inertia’s tax is not internally consistent. ................................................... 10
ii. Inertia’s tax is not externally consistent. .................................................. 11
2. Inertia’s tax discriminates against interstate commerce. ................................. 13
II. THE TAX INJUCTION ACT DOES NOT PRECLUDE FEDERAL
COURT JURISDICTION OVER SUIT BROUGHT BY GWYNNE TO
ENJOIN MOMENTUM’S NOTICE AND REPORTING OBLIGATIONS
IN AN ATTEMPT TO COLLECT USE TAX FROM PURCHASERS IN
ITS STATE. ......................................................................................................... 14
A. Gwynne’s action does not seek to enjoin, suspend or restrain the
assessment, levy or collection of any tax under Momentum law. ........................................14
B. A plain, speedy, and efficient remedy is unavailable for Gwynne in
Momentum’s court. .......................................................................................................................................17
ii
C. The TIA does not bar Gwynne, as a third party, from challenging the MRA for
being unconstitutional in federal court. .............................................................................................17
D. The comity doctrine fails to remove Gwynne’s claim from federal
jurisdiction. .......................................................................................................................................................18
III. IN THE ALTERNATIVE, MOMENTUM’S NOTICE AND REPORTING
OBLIGATIONS IMPOSED ON FRED GWYNNE IN AN ATTEMPT TO
COLLECT USE TAX FROM PURCHASERS IN ITS STATE VIOLATES
THE COMMERCE CLAUSE. .............................................................................. 19
A. The notice and reporting requirements are discriminatory towards out-ofstate retailers. ..................................................................................................................................................20
B. The Notice and Reporting requirements place an undue burden on Gwynne. .............23
CONCLUSION ............................................................................................................. 24
iii
TABLE OF AUTHORITIES
CASES:
Am. Civil Liberties Union Found. of Louisiana v. Bridges,
334 F.3d 416 (5th Cir. 2003)...................................................................................... 15
Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dep’t of Treasury,
490 U.S. 66 (1989) .................................................................................................... 13
Bacchus Imports, Ltd. v. Dias,
468 U.S. 263 (1984) .................................................................................................... 9
Boston Stock Exch. v. State Tax Comm’n,
429 U.S. 318 (1977) ................................................................................................ 4, 9
Brown-Forman Distillers Corp. v. N.Y. State Liquor Auth.,
476 U.S. 573 (1986) .................................................................................................. 20
Byrne v. Public Funds for Public Schools of New Jersey,
442 U.S. 907 (1979) .................................................................................................. 18
Camps Newfound/Owatonna v. Town of Harrison,
520 U.S. 564 (1997) .................................................................................................... 5
Central Greyhound Lines, Inc. v. Mealey,
334 U.S. 653 (1948) .................................................................................................. 12
Complete Auto Transit, Inc. v. Brady,
430 U.S. 274 (1977) .................................................................................. 5, 10, 13, 23
Container Corp. v. Franchise Tax Board,
463 U.S. 159 (1983) .................................................................................................. 23
Dept. of Revenue of Or. v. ACF Indus.,
510 U.S. 332 (1994) .................................................................................................... 5
Direct Mktg. Ass'n v. Brohl,
735 F.3d 904 (10th Cir. 2013).............................................................................. 15, 16
Freeman v. Hewit,
329 U.S. 249 (1946) .................................................................................................... 5
General Motors Corp. v. Tracy,
519 U.S. 278 (1997) ............................................................................................ 5, 6, 7
iv
TABLE OF AUTHORITIES (Cont'd)
Goldberg v. Sweet,
488 U.S. 252 (1989) .................................................................................. 9, 10, 12, 24
Griffin v. School Bd. of Prince Edward Cty.,
377 U.S. 218 (1964) .................................................................................................. 18
Gwin, White & Prince, Inc. v. Henneford,
305 U.S. 434 (1939) .................................................................................................. 13
Hans Rees’ Sons Inc. v. North Carolina,
283 U.S. 123 (1931) .................................................................................................. 12
Hibbs v. Winn,
548 U.S. 88 (2004) ............................................................................................. passim
Hughes v. Oklahoma,
441 U.S. 322 (1979) .................................................................................................. 20
Levin v. Commerce Energy, Inc.,
560 U.S. 413 (2010) ............................................................................................ 18, 19
Luessen-hop v. Clinton County, N.Y.,
466 F.3d 259 (2nd Cir. 2006) ..................................................................................... 17
May v. Supreme Court of State of Colo.,
508 F.2d 136 (10th Cir. 1974).................................................................................... 14
McLeod v. J. E. Dilworth Co.,
322 U.S. 327 (1944) .................................................................................................... 4
Moorman Mfg. Co. v. Bair,
437 U.S. 267 (1978) .............................................................................................. 5, 12
Morgan v. Virginia,
328 U.S. 373 (1946) .................................................................................................... 5
Norfolk & Western R. Co. v. State Tax Comm’n,
390 U.S. 317 (1968) .................................................................................................. 12
Oklahoma Tax Comm’n v. Jefferson Lines, Inc.,
514 U.S. 175 (1995) ............................................................................................ 11, 13
Oregon Waste Systems, Inc v. Department of Environmental Quality,
511 U.S. 93 (1994) .................................................................................... 4, 19, 20, 21
v
TABLE OF AUTHORITIES (Cont'd)
Pike v. Bruce Church,
397 U.S. 137 (1970) .................................................................................................. 21
Pleasures of San Patricio, Inc. v. Mendez-Torres,
596 F.3d 1 (1st Cir. 2010) .......................................................................................... 17
Quill Corp. v. North Dakota,
504 U.S. 298 (1992) ...................................................................................... 20, 22, 24
Rosewell v. LaSalle Nat. Bank,
450 U.S. 503 (1981) .................................................................................................. 17
Southern Pacific Co. v. Arizona ex rel. Sullivan,
325 U.S. 761 (1945) .................................................................................................... 5
Tamagni v. Tax Appeals Tribunal,
91 N.Y.2d 530 (1998) .............................................................................................. 7, 8
Tyler Pipe Industries, Inc. v. Washington Dept. of Revenue,
483 U.S. 232 (1987) .................................................................................................... 9
United Parcel Service, Inc. v. Flores-Galarza,
318 F.3d 323 (1st Cir. 2003) ................................................................................ 16, 17
United States v. Lopez,
514 U.S. 549 (1995) .................................................................................................... 6
Wells v. Malloy,
510 F.2d 74 (2nd Cir. 1975)....................................................................................... 17
STATUTES
28 U.S.C. § 1341 ........................................................................................................... 14
Inertia Tax Code Section 49-686(a) ................................................................................. v
Inertia Tax Code Section 49-686(c)(1).............................................................................ii
Momentum Tax Code Section 14-051(e) .................................................................. iv, 19
Momentum Tax Code Sections 14-051(c) & (d) ............................................................. iv
CONSTITUTIONAL PROVISIONS
U.S. Const. art. I, § 8, cl. 3............................................................................................... 4
vi
STATEMENT OF THE CASE
The taxpayer, Fred Gwynne (“Gwynne”), resided in Traverse County in the State
of Inertia during the tax return years of 2007-2009. R. at 3. During this time, Gwynne
owned all partnership interests in Muenster, LLC (“Muenster”). Id. Muenster produces
and sells artisan cheeses.
Id.
Since Muenster is a single member limited liability
company, it is treated as a disregarded entity for federal and State tax purposes. R. at 3-4.
Therefore, all of Muenster’s income, gain, losses, deductions, and credits are reported
directly on Gwynne’s tax returns as if earned directly by Gwynne. R. at 4.
During 2007-2009, Muenster sold cheese both in the State of Inertia and in other
States. Within Inertia, Muenster sold approximately 30% of its cheeses in three retail
stores. Id. The remaining 70% of cheese was sold outside of Inertia through mail order
or Internet sales. Id. The income generated from these outside sales was taxed in the
States of generation.
Id.
Muenster collected sales tax on all sales within Inertia,
including sales from the retail stores, mail order, and Internet. Id. Muenster did not
collect sales taxes on sales generated out-of-State. Id. Gwynne filed income tax returns
in all States in which Muenster operated. Id. Gwynne only provided sales tax returns
and information regarding sales within the State of Inertia.
Inertia State Income Tax
Inertia Tax Code (“ITC”) Section 49-686 imposes income tax on individuals
based on a three-prong calculation.
Id.
ITC Section 49-686(a) provides that an
individual’s state income tax liability is based upon:
(1) An income tax for the benefit of the state (“the State
Component”) determined by multiplying the
taxpayer’s taxable income by a flat rate of nine
percent;
(2) An income tax for the benefit of the county in which
the taxpayer resides (the “County Component”)
determined by multiplying the taxpayer’s taxable
income by a flat rate of one percent; and
(3) An income tax on those subject to State Component,
but not the County Component (the “Non-resident
Component”), determined by multiplying the
taxpayer’s taxable income by a flat rate of one
percent.
Id.
The Inertia Board of Revenue (“IBR”) collects all three components. Id. The
portion consisting of the County Component is distributed to the county in which the
taxpayer resides – here, Traverse County. R. at 3-4. Taxes collected from the NonResident Component are distributed to each of the counties in the State pro rata based
upon the number of residents in each county as of the date of last census. Id. at 4.
Pursuant to Section 49-686(c), Inertia allows individuals to claim credits against
tax resulting from the individual’s payment of similar taxes to other states. Id. at 5.
However, as of 2001, the Legislature amended this credit to only apply to the State
Component – not the County Component. Id. The Legislature’s reasoning is unknown.
Id. Section 49-686(c)(1) specifically states:
(1) Except as otherwise provided in this Section, the credit
allowed a resident under this subsection (c) shall be
equal to the lesser of:
a. The amount of allowable tax on income that the
resident paid to another State; or
b. An amount that does not reduce the taxes payable
under Section 49-686(a)(1) to an amount less than
would be payable if the income subjected to the
tax in the other state were disregarded.
Id.
On his individual tax returns for the years in question, Gwynne claimed a credit
for the income taxes paid to other states as a credit against both the State and County
2
Components. Id. The IBR Commissioner rejected the credits pertaining to the County
component. Id. Without these credits, Gwynne’s 2007, 2008, and 2009 tax returns
resulted in a deficiency. Id. Gwynne appealed the Commissioner’s assessment of the
deficiencies, arguing that the lack of a credit discriminated against interstate commerce.
Id.
On December 1, 2011, the IBR Hearings and Appeals Section affirmed the
assessment of deficiencies. Gwynne appealed to the Inertia Tax Court. Id. On May 14,
2012, the Inertia Tax Court affirmed the assessment of deficiencies. Id.
Gwynne appealed and sought judicial review in the District Court for the Western
District of Inertia. R. at 6. On August 30, 2012, the court reversed the Tax Court on the
basis that the tax violated the Dormant Commerce Clause and remanded the case back to
the Tax Court to determine the appropriate credit for the out-of-state income taxes
derived from Muenster’s income. Id.
Prior to the re-calculation of Muenster’s tax liability, IBR appealed the District
Court’s decision to the United States Court of Appeals for the Fourteenth Circuit. Id.
The Fourteenth Circuit reversed the District Court and held that the Dormant Commerce
Clause did not apply. R. at 22.
Gwynne appealed to this honorable Court, which granted certiorari on January 12,
2015 with respect to the following question:
I. Whether a state tax, which is permitted by the Due Process Clause to tax all its
residents’ income wherever earned, violates the Commerce Clause by double-taxing
certain income earned outside of its boundaries.
R. at 23.
Momentum Sales and Use Tax Notification and Reporting Requirements
3
Momentum Tax Code (“MTC”) Sections 14-051(c) & (d) impose notice and
reporting obligations on each retailer not obligated by law to collect Momentum sales tax.
R. at 6.
Per MTC Section 14-051(e), the Notice and Reporting Obligations
(“Obligations”) are intended to apply solely to out-of-state retailers. R. at 6-7.
Three separate obligations are imposed.
First, the retailer must notify the
purchaser that although the retailer does not collect sales tax, the purchaser is obligated to
self-report sales or use tax. R. at 6. Second, "non-collecting retailers must mail annual
notices to Momentum purchasers who purchased more than $200 in goods from them in
the preceding calendar year.” R. at 7. Additionally, non-collecting retailers must also
inform the purchasers of their obligation to report use tax on such purchases, and that the
retailer is required by law to report the purchaser’s name and total amount of purchases to
Momentum Revenue Agency (MRA). Id. Third, the retailer must turn over to the MRA
annually the name, billing address, all shipping addresses, and the total amount of
purchases of each of its Momentum purchasers. R. at 8.
The Obligations impose substantial penalties on retailers who fail to comply. R.
at 7. When the retailer fails to satisfy their imposed obligations, the MRA imposes a $50
fine. Id. There is no partial relief for notifying purchasers of a qualifying sale if the
retailer has not also reported such sale to the MRA. Id. Conversely, reporting a sale to
the MRA does not relieve a retailer of the penalty if the notification requirements are not
also satisfied. Id.
The Obligations are inapplicable to in-state retailers. R. at 8. Gwynne sued the
MRA challenging the constitutionality of the Obligations under the Commerce Clause
because they discriminate against and impose undue burdens on interstate commerce. Id.
4
On March 30, 2012, the district court granted Gwynne’s motion for summary judgment.
Id. The court also entered into a permanent injunction prohibiting enforcement of the
Obligations.
MRA appealed to the United States Appeals Court for the Fourteenth
Circuit. That court affirmed the district court’s holding.
MRA has appealed to this honorable Court, which granted certiorari on January
12, 2015, with respect to the following questions:
I.
Whether the Tax Injunction Act, 28 U.S.C. § 1341, precludes federal court
jurisdiction over a suit brought by an out-of-state retailer to enjoin a state’s notice
and reporting requirements in an attempt to collect use tax from purchasers in its
state.
II.
If the Tax Injunction Act is not applicable to the second question, whether a
state’s notice and reporting obligations imposed on out-of-state retailers in an
attempt to collect use tax from purchasers in its state violates the Commerce
Clause.
SUMMARY OF THE ARGUMENT
Inertia’s partial credit scheme violates the Dormant Commerce Clause by placing
a substantial burden on an identifiable interstate market. While States have the Due
Process right to tax residents, that right is not without limitations. Those limitations are
provided in the Dormant Commerce Clause, which has the purpose to protect free trade
among States.
First, the Dormant Commerce Clauses applies in this case because Gwynne has
identified in-state and out-of-state interests that the tax treats differently. This Court has
traditionally asked if interstate competition would be affected if the tax were to be
removed. Under this analysis, Gwynne is similarly situated with those unincorporated
businesses that restrict sales to intrastate commerce. Gwynne and other unincorporated
businesses that engage in interstate commerce are double taxed solely based on their
5
interstate activity. This is evidenced by the fact that otherwise identical unincorporated
businesses that only engage in intrastate commerce are not penalized with double
taxation.
This tax hinders interstate commerce and incentivizes businesses to only
operate intrastate.
The Fourteenth Circuit erroneously applied and expanded the New York Appeals
Tax Tribunal’s reasoning in In re Tamagni. Interstate commerce always implicates
protections from multiple States, while intrastate commerce generally only implicates
protections from one State. Since this Court requires a showing of in-state and out-ofstate interests, there will always be one entity receiving protections from more than one
state. By relying on the characteristic of protections, the Fourteenth Circuit forgoes this
Court’s traditional analysis of whether the entities are in engaged in a similar market.
This Court has a long precedent of providing relief to taxpayers whose own State
unduly burdens participation in interstate commerce. The Dormant Commerce Clause is
intended to protect free trade among states. Such protection includes preventing states
from incentivizing residents to compete in the intrastate markets to the detriment of the
interstate markets.
Second, Inertia’s partial credit scheme violates the Dormant Commerce Clause
because it fails to satisfy two prongs of the Complete Auto Transit Test. The tax fails the
second prong, which requires that the tax be fairly apportioned, because the tax is neither
internally nor externally consistent. To be internally consistent, the tax must be capable
of being enacted in every State without any multiple taxation occurring. Inertia’s tax
scheme applied nationwide would result in substantial multiple taxation. Further, the tax
is not externally consistent because Inertia taxes portions of revenue that are not properly
2
allocable to activity conducted within Inertia. Under the third prong, the tax must not
discriminate against interstate commerce. The tax imposed on Gwynne’s out-of-state
income is discriminatory because the tax burdens interstate commerce but does not also
burden intrastate commerce.
Gwynne has identified an interstate market with in-state and out-of-state interests
that are treated differently under Inertia’s partial credit scheme. Because the tax is not
fairly apportioned and discriminates against interstate commerce, the tax should be
prohibited under the Dormant Commerce Clause.
The Tax Injunction Act (“TIA”) does not preclude federal jurisdiction over
Gwynne’s claims. The TIA prohibits jurisdiction if Gwynne’s action seeks to enjoin,
suspend or restrain the assessment, levy or collection of any tax under State law, and a
plain, speedy and efficient remedy may be had in the courts of such State. Gwynne’s
action does not seek to enjoin, suspend or restrain the assessment, levy or collection of
any tax under Momentum law. A plain, speedy, and efficient remedy is unavailable in
the court of Momentum. Gwynne is also suing as a third party—he is not a Momentum
taxpayer. Further, the comity doctrine is inapplicable because there no alternative forms
of possible relief.
In the alternative, the Obligations imposed by MRA on Gwynne, in an attempt to
collect use tax from purchasers in Momentum, violates the Commerce Clause. The
Obligations discriminate impermissibly against interstate commerce. It treats Gwynne
differently than in-state retailers by creating an additional burden based on his status.
Such requirements have a deleterious effect on Gwynne as an out-of-state retailer, which
results in a hampered interstate commerce.
3
We ask this Court to reaffirm the lower courts holding that federal jurisdiction is
appropriate and that the Obligations are in violation of Commerce Clause.
In the
alternative, this Court should reaffirm the lower courts holding that the Obligations
impose an undue burden on interstate commerce and are unconstitutional under the
Commerce Clause.
ARGUMENT
I.
THE DORMANT COMMERCE CLAUSE APPLIES AND PROHIBITS
INERTIA’S PARTIAL-CREDIT SCHEME BECAUSE IT RESULTS IN
DOUBLE TAXATION ON INCOME EARNED OUT-OF-STATE AND
BURDENS INTERSTATE COMMERCE.
“The Congress shall have Power . . . [t]o regulate Commerce with foreign
Nations, and among the several States, and with the Indian Tribes . . .” U.S. Const. art. I,
§ 8, cl. 3. "Though phrased as a grant of regulatory power to Congress, the [Commerce]
Clause has long been understood to have a 'negative' aspect that denies the States the
power unjustifiably to discriminate against or burden the interstate flow of articles of
commerce." Oregon Waste Systems, Inc. v. Department of Environmental Quality, 511
U.S. 93, 98 (1994). From early cases, the main purpose of the Dormant Commerce
Clause was to protect free trade among States. McLeod v. J. E. Dilworth Co., 322 U.S.
327, 330 (1944). “It is a freedom to trade with any State [and] to engage in commerce
across all state boundaries.” Boston Stock Exch. v. State Tax Comm’n, 429 U.S. 318, 328
(1977).
Under the Due Process Clause, States have the sovereignty to tax residents on all
income and non-residents on income earned within its borders. Dept. of Revenue of Or.
v. ACF Indus., 510 U.S. 332, 345 (1994). However, even without an implementing act
from Congress, the Dormant Commerce Clause “acts as a limitation upon the power of
4
the States.” Southern Pacific Co. v. Arizona ex rel. Sullivan, 325 U.S. 761 (1945);
Morgan v. Virginia, 328 U.S. 373 (1946); Freeman v. Hewit, 329 U.S. 249 (1946);
Camps Newfound/Owatonna v. Town of Harrison, 520 U.S. 564, 571-572 (1997). The
incidental risk of multiple taxation is not, in itself, enough to violate the Dormant
Commerce Clause.
Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978). Rather, the
Complete Auto Transit test determines if the effects on interstate commerce are more
than incidental and, therefore, prohibited. Complete Auto Transit, Inc. v. Brady, 430 U.S.
274, 279 (1977).
The Court of Appeals for the Fourteenth Circuit erred in rejecting Petitioner’s
Dormant Commerce Clause claim for two reasons: (1) Inertia’s tax unduly burdens an
identifiable interstate market, and (2) the tax fails two prongs of the Complete Auto
Transit test.
A. The Dormant Commerce Clause Applies Because The Tax Unduly
Burdens An Identifiable Interstate Market.
"The Dormant Commerce Clause protects markets and participants in markets,
not taxpayers as such." General Motors Corp., 519 U.S. at 300. Thus, the Commerce
Clause only applies when actual or prospective competition exists between the in-state
and out-of-state interests within a single market. Id. This threshold question limits
Commerce Clause applicability, “for the simple reason that the difference in products
may mean that the different entities serve different markets, and would continue to do so
even if the supposedly discriminatory burden were removed.” Id. at 299. Finally, the
effect on interstate commerce must be more than incidental. United States v. Lopez, 514
U.S. 549, 559 (1995).
5
The Fourteenth Circuit erred in finding that the Dormant Commerce Clause did
not apply because (1) Gwynne has identified an interstate market that is unduly burdened
by Inertia’s tax, (2) the Fourteenth Circuit’s reasoning creates an unworkable Dormant
Commerce Clause doctrine, and (3) the application of the Dormant Commerce Clause
best protects the interests of interstate commerce.
1. Gwynne is similarly situated in a single market with those
taxpayers who limit activities to solely intrastate.
Without actual or prospective competition between favored and disfavored
entities in a single market, there cannot be discrimination or undue burden imposed by a
tax. General Motors Corp., 519 U.S. at 300. In other words, the party claiming unfair
treatment must be similarly situated in the same market as the party receiving preferential
treatment. In GMC, Ohio provided regulatory benefits for state-regulated public utilities
selling natural gas. Id. at 282. Other independent sellers, both from within the state and
out-of-state, challenged the law as discriminatory under the Dormant Commerce Clause.
Id. at 285. This Court held that the Dormant Commerce Clause was not implicated
because the independent sellers of natural gas were not similarly situated in the same
market as the public utilities. Id. at 303. The public utility provided a bundled gas
product that was not provided by interstate commerce and could not be provided by
interstate commerce. Id. If the regulatory tax benefits were removed, competition would
not be served because the entities were not engaged in the same market. Id. Therefore,
application of the Dormant Commerce Clause would be futile. Id.
Gwynne is the sole owner of Muenster. R. at 3. Muenster sells artisan cheeses in
brick and mortar stores within Inertia and through mail order and Internet sales outside of
Inertia. R. at 4.
6
Gwynne’s prospective competition would be an identical taxpayer who only sells
cheeses within Inertia. That latter taxpayer, who avoids interstate commerce, is treated
more favorably because his income is not double taxed. This results in different taxation,
even though both taxpayers are in the same market of selling cheese. Unlike in GMC, if
Inertia provides the tax credit, then businesses like Gwynne’s will operate more
competitively with those businesses that only operate intrastate.
2. The Fourteenth Circuit’s reasoning creates an unworkable
Dormant Commerce Clause doctrine.
The Fourteenth Circuit, in what appears to be an expansion on a New York
Appeals Tax Tribunal decision, determined that Gwynne and those who sold only
intrastate could not be similarly situated in the same market because the former received
protections from multiple states (i.e. Inertia and the States in which he sold his goods),
but the latter only received protections from one state (i.e. Inertia). An analysis based
solely on the benefits and protections bestowed upon entities by States fails to answer
whether the entities are engaged in a similar market. Rather, it focuses on a phenomenon
that will likely occur in any Dormant Commerce Clause case.
In Tamagni v. Tax Appeals Tribunal, a taxpayer who was domiciled in New
Jersey was also deemed a statutory resident of New York. 91 N.Y.2d 530, 533 (1998).
Both States taxed taxpayer’s income. Id. New York allowed a credit for income derived
from another State.
Id. at 536.
However, taxpayer’s income consisted entirely of
intangible investment income with no geographical characteristic; therefore, the credit
did not apply. Id. Taxpayer argued that the Dormant Commerce Clause was implicated
because he was double taxed as a statutory resident, but domiciled New York residents
were not. Id. at 538. The Court found that the taxpayer had not identified an interstate
7
market affected by the tax because the tax was based on the protections bestowed upon
residents and was not based on his interstate activities. Id. at 541. Those domiciled in
New York only received the protections of one State, but taxpayer received the
protections of both New York and New Jersey. Id. Because no interstate market could be
identified, the Dormant Commerce Clause could not apply.
This case is distinguishable from Tamagni in many crucial ways. Gwynne is
domiciled in Inertia and is not a statutory resident of another state. Gwynne’s income is
from the sale of product and not an intangible investment. Therefore, apportioning is
possible.
Further, the only protections bestowed upon Gwynne by other states are
inexplicably attached to his interstate business activities.
In consideration for these
protections, Gwynne pays tax to these states and does not challenge these states’ rights to
impose such a tax.
The Fourteenth Circuit’s expansion of Tamagni’s reasoning cripples the threshold
set out in GMC. Anytime an entity engages in the interstate market, that entity receives
benefits and protections from all states in which its products are sold. When combined
with this Court’s threshold requirement that there be in-state and out-of-state interests in
a single market that are affected differently by the tax, the Fourteenth Circuit’s reasoning
makes such a feat impossible. In-state interests will usually only be protected under one
state. Meanwhile, out-of-state interests will always be protected by more than one state.
Such is the character of interstate commerce.
The real question harkens back to whether there is actual or prospective
competition between favored entities, here those solely engaging in intrastate sales, and
disfavored entities, those like Gwynne who engage in both intrastate and interstate sales,
8
that the tax in question treats differently. As discussed previously, the answer to this
question is affirmative because engaging in interstate commerce results in double
taxation, while engaging in intrastate commerce does not.
Therefore, Gwynne has
identified an interstate market that the tax treats differently and passes this Court’s
threshold. The Dormant Commerce Clause applies and the Complete Auto Transit test
should be applied.
3. In this case, the application of the Dormant Commerce
Clause better protects the interests of interstate
commerce than a reliance on the Legislative process.
While the legislative process is a possibility for a taxpayer challenging his
own state’s tax, it is not his only mode of redress. This Court has continually used
the Dormant Commerce Clause to protect insiders from taxes imposed by their own
State. See Goldberg v. Sweet, 488 U.S. 252, 268 (1989) (Stevens, J., concurring)
(citing “Tyler Pipe Industries, Inc. v. Washington Dept. of Revenue, 483 U.S. 232, 240248 (1987) (invalidating manufacturing tax that discriminated between in-state
manufacturers that sold at wholesale in state and those that sold at wholesale out of state);
Bacchus Imports, Ltd. v. Dias, 468 U.S. 263 (1984) (invalidating tax exemption for
locally produced alcoholic beverages in case brought by local wholesalers); Boston Stock
Exch., 429 U.S. at 333-334 (invalidating securities transfer tax that discriminated against
those state residents who sold out of state rather than in state)”).
When a tax
discriminates against interstate commerce, the Dormant Commerce Clause is a
proper mechanism through which the courts may prevent further harm to the
national economy.
9
B. Inertia’s Tax Scheme Violates The Dormant Commerce Clause
Because It Fails The Complete Auto Transit Test.
A State may constitutionally tax interstate commerce if the tax:
(1) applies to an activity with a substantial nexus with the
taxing State;
(2) is fairly apportioned;
(3) is not discriminatory towards interstate or foreign
commerce; and
(4) is fairly related to the services provided by the State.
Complete Auto Transit, 430 U.S. at 279.
Under this well-established test, Inertia’s tax fails the Complete Auto Transit
test’s second and third prongs. This Court should find that the Dormant Commerce
Clause prohibits Inertia’s tax scheme because (1) the tax is not fairly apportioned and (2)
the tax discriminates against interstate commerce.
1. Inertia’s tax is not fairly apportioned because the tax is not
internally or externally consistent.
A tax must be fairly apportioned. Complete Auto Transit, 430 U.S. at 279. A tax
will be considered as fairly apportioned when it is both internally and externally
consistent. Goldberg, 488 U.S. at 261.
i.
Inertia’s tax is not internally consistent.
“To be internally consistent, a tax must be structured so that if every state were to
impose an identical tax, no multiple taxation would result.” Id. Assume every state
adopts Inertia’s partial credit scheme and imposes a 1% county flat tax on all income
earned by residents, regardless of whether income is earned in state or out-of-state.
10
Further, assume that Second State imposes a 1% non-resident county tax on all income
earned within its borders.1
Taxpayer A lives in Home State. A sells 100% of products in Home State.
Assume that A earns $100,000 a year. Home State will tax A’s entire income and A will
owe $1,000 in county taxes. A will not have any other county tax burden.
Taxpayer B also lives in Home State. B sells 30% of products in Home State and
70% of products in Second State. Assume B also earns $100,000 a year. Because B
earned $70,000 from sales within Second State,2 B will owe Second State $700 in nonresident taxes. Home State will tax B’s entire income, and B will owe $1,000 in county
taxes. In total, B will have $1,700 in county tax liability.
At the end of one year, B pays $700 more in taxes than A only because B engages
in interstate activity. This extra $700 is the monetary value of the double taxation
inflicted by Inertia’s refusal to provide a credit for the county component of ITC Section
49-686. If every State in the Union applied this tax, it would “place interstate commerce
at a disadvantage as compared with commerce intrastate” because interstate activities
would result in substantial double taxation. Oklahoma Tax Comm’n v. Jefferson Lines,
Inc., 514 U.S. 175, 185 (1995). Inertia’s tax is not internally consistent because the
burden placed on interstate commerce is a burden that intrastate commerce does not also
bear. Id.
ii.
Inertia’s tax is not externally consistent.
A tax is externally consistent when the “state has taxed only that portion of the
revenues from the interstate activity which reasonably reflects the in-state component of
1
Note: Because ITC Section 49-686 allows for credits against the State component, these examples will
only consider the county component.
2
70% of $100,000 yearly income.
11
the activity being taxed.” Goldberg, 488 U.S. at 262. A tax will not be immediately
invalidated “whenever it may result in taxation of some income that did not have its
source in the taxing State.” Moorman Mfg. Co. 437 U.S. at 272. However, a tax may be
invalidated if the taxpayer can prove “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.” Id. at 274 (citing
Hans Rees’ Sons Inc. v. North Carolina, 283 U.S. 123, 135 (1931); Norfolk & Western R.
Co. v. State Tax Comm’n, 390 U.S. 317, 326 (1968)).
A State may not tax portions of revenue for which that State does not provide
protections. Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 662 (1948). In
Central Greyhound, taxpayer operated bus lines that traveled through New York. Id. at
654. New York imposed a tax on the total mileage of the trip, including mileage not
travelled within New York. Id. This Court found that New York’s tax was not externally
consistent because it “would subject interstate commerce to the unfair burden of being
taxed as to portions of its revenue by States which give protection to those portions, as
well as to a State which does not.” Id. at 662. New York could only tax the mileage that
occurred within the state because it was the portion of income for which New York
provided protections. Id.
Just as in Central Greyhound, Inertia’s partial credit scheme taxes all income
earned by Gwynne instead of apportioning out the County Component for income earned
out-of-state. 3 The income earned from Gwynne’s interstate activities falls squarely
3
Note that allowing a credit is not the one means of properly apportioning. See Goldberg, 488 U.S. at 261
(stating that there is not a single constitutionally mandated way of structuring income tax schemes). Inertia
may adjust resident’s income to exclude income earned outside of the State or any other method that
properly allocates income.
12
within the protections of those other states and not Inertia. While Gwynne does receive
certain benefits and protections for being a resident of Inertia, his activities conducted
intrastate are properly within Inertia’s power of taxation.
2. Inertia’s tax discriminates against interstate commerce.
Under the third prong, the tax must not discriminate against interstate commerce.
Complete Auto Transit, 430 U.S. at 279. A tax “may violate the Commerce Clause if it is
facially discriminatory, has a discriminatory intent, or has the effect of unduly burdening
interstate commerce.” Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey
Dep’t of Treasury, 490 U.S. 66, 75 (1989).
A tax is discriminatory when “its practical operation discriminates against
interstate commerce, since it imposes upon it, merely because interstate commerce is
being done, the risk of a multiple burden to which local commerce is not exposed.”
Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 439 (1939). As previously
discussed, the tax in question imposes a burden on interstate commerce that the intrastate
market does not bear.
The Commerce Clause does not forbid the taxation by multiple states to distinct
events along the stream of commerce. Jefferson Lines, 514 U.S. at 187-188. However,
Inertia’s scheme forces taxpayers who engage in interstate commerce to pay twice on the
same part of that stream. If allowed, this type of taxation will quickly become the norm
in other States. The result would be a death knell for partnerships, LLCs, and other
unincorporated businesses engaged in interstate commerce.
Rather, these types of
businesses would be incentivized to only participate in the intrastate market.
13
We respectfully ask this Court to reverse the Fourteenth Circuit of Appeals and
find that the Dormant Commerce Clause applies and prohibits Inertia’s partial credit tax
scheme.
II.
THE TAX INJUCTION ACT DOES NOT PRECLUDE FEDERAL
COURT JURISDICTION OVER SUIT BROUGHT BY GWYNNE TO
ENJOIN
MOMENTUM’S
NOTICE
AND
REPORTING
OBLIGATIONS IN AN ATTEMPT TO COLLECT USE TAX FROM
PURCHASERS IN ITS STATE.
The Tax Injunction Act (“TIA”) does not preclude federal jurisdiction over
Gwynne’s claim. District courts shall not enjoin, suspend or restrain the assessment, levy
or collection of any tax under State law where a plain, speedy and efficient remedy may
be had in the courts of such State. 28 U.S.C. § 1341. The TIA does not operate to confer
jurisdiction but instead limits jurisdiction that already exists. May v. Supreme Court of
State of Colo., 508 F.2d 136 (10th Cir. 1974). It bars federal jurisdiction only in cases in
which state taxpayers seek federal court orders enabling them to avoid paying state taxes.
Hibbs v. Winn, 548 U.S. 88, 107 (2004).
Federal jurisdiction is appropriate because: (1) Gwynne’s action does not seek to
enjoin, suspend or restrain the assessment, levy or collection of any tax under Momentum
law; (2) a plain, speedy, and efficient remedy is unavailable in the court of Momentum;
(3) Gwynne is suing as a third party; and (4) the comity doctrine is inapplicable.
A. Gwynne’s action does not seek to enjoin, suspend or restrain the
assessment, levy or collection of any tax under Momentum law.
Enacting the TIA, Congress focused its attention on taxpayers who sought to
avoid paying their tax bill by pursuing a challenge route rather than paying the tax
pursuant to the state taxing authority. Hibbs, 542 U.S. at 104. In 2004, Arizona taxpayer
sought injunctive relief by challenging the constitutionality of its state statute that
14
permitted tax credits for contributions supporting parochial schools as a violation of the
Establishment Clause. This Court held that the TIA did not bar action, nullifying Am.
Civil Liberties Union Found. of Louisiana v. Bridges, 334 F.3d 416 (5th Cir. 2003). The
TIA was expressly designed to restrict “the jurisdiction of the district courts of the United
States over suits relating to the collection of State taxes.” Hibbs, 542 U.S. at 104.
Similar to Gwynne, both taxpayers brought suit challenging the constitutionality of the
state statute that confers federal jurisdiction.
Tax statutes have their roots in equity practice, in principles of federalism, and in
recognition of the imperative need of a State to administer its own fiscal operations.
Direct Mktg. Ass'n v. Brohl, 735 F.3d 904, 910 (10th Cir. 2013).
In 2013, Direct
Marketing Association brought action against Executive Director of Colorado
Department of Revenue, challenging the constitutionality of notice and reporting
requirements. Direct Mktg. Ass'n, 735 F.3d at 905 (10th Cir. 2013). The Tenth Circuit
held that the TIA bars suits that would enjoin tax collection and prohibits lawsuits that
would restrain the collection of a state tax.
The cardinal rule is that statutory language must be read in context, since a phrase
gathers meaning from the surrounding words.
Hibbs, 542 U.S. at 101.
In Hibbs,
Respondents sought an injunctive relief prohibiting the Director from allowing taxpayers
to utilize a tax credit on Establishment Clause grounds. Similarly, Gwynne is seeking to
enjoin Momentum’s Notice and Reporting Obligations. The Obligations require out-ofstate retailers to perform the following tasks: notify Momentum purchasers that sales or
use tax is due on certain purchases; file tax returns; provide annual notices for purchasers
who purchased more than $200 in goods; and file annual reports to the MRA. R. at 7. It
15
is an “assessment” under 28 U.S.C. § 1341, analogous to Arizona’s tax credit for
payments to school tuition organizations in Hibbs. Assessment involves a recording of
the amount the taxpayer owes the Government—a bookkeeping notation. Hibbs, 542
U.S. at 100.
As in Hibbs, federal jurisdiction is appropriate. Gwynne is not attempting to
avoid paying taxes to Momentum because the taxation burden rests on the consumers.
He is challenging the constitutionality of the Obligations under the Commerce clause
because they discriminate against and impose undue burdens upon interstate commerce.
R. at 8.
However, the Tenth Circuit disregarded this Courts interpretation on the purpose
and scope of the TIA in Hibbs. The issue in Brohl was whether Appellee’s attack on
Colorado’s Obligations would “restrain” Colorado’s tax collection. Direct Mktg. Ass'n,
735 F.3d at 912. Every statutory or regulatory obligation that may aid the State’s ability
to collect a tax is not immune from attack in federal court because of the TIA. R. at 18.
Hence, the TIA does not provide a safe haven for tax statutes that may violate the
Commerce Clause.
In United Parcel Service, Inc. v. Flores-Galarza, the non-taxpayer challenged
Puerto Rico’s notice and reporting regime. 318 F.3d 323, 330 (1st Cir. 2003). UPS did
not contest either the validity of the underlying tax or the Secretary’s authority to collect
the tax. Id. Instead, UPS challenged whether the Butler Act barred federal jurisdiction.
Id. The court held that the Butler Act does not bar federal jurisdiction when there is a
violation of interstate commerce. Id.; reaffirmed in Pleasures of San Patricio, Inc. v.
Mendez-Torres, 596 F.3d 1 (1st Cir. 2010). The Butler Act is analogous to the TIA in its
16
application. Not every statutory or regulatory obligation that may aid the Secretary’s
ability to collect a tax is immune from attack in federal court.
B. A plain, speedy, and efficient remedy is unavailable for Gwynne
in Momentum’s court.
A state-court remedy is “plain, speedy and efficient” only if it “provides the
taxpayer with a ‘full hearing and judicial determination’ at which she may raise any and
all constitutional objections to the tax.” Hibbs, 542 U.S. at 108; Rosewell v. LaSalle Nat.
Bank, 450 U.S. 503 (1981).
Nowhere does the history announce a sweeping
congressional direction to prevent federal-court interference with all aspects of state tax
administration. Hibbs, 542 U.S. at 90. The TIA was designed expressly to restrict “the
jurisdiction of the district courts of the United States over suits relating to the collection
of State taxes. Id. at 104. Therefore, the district court was correct granting Gwynne’s
motion for summary judgment.
In Wells, the court found that Congress’ central purpose in enacting the TIA was
to restrict jurisdiction over suits brought by taxpayers challenging their liability for state
taxes. Wells v. Malloy, 510 F.2d 74, 77 (2nd Cir. 1975); reaffirmed in Luessen-hop v.
Clinton County, N.Y., 466 F.3d 259, 268 (2nd Cir. 2006). In the instance of constitutional
challenges, Momentum is incapable of providing the proper remedy, since the courts are
not properly equipped to answer constitutional matters. A literal reading of the TIA
provides for federal district courts to stand at the ready for when litigants encounter legal
or practical obstacles to challenging state tax credits in state courts. Hibbs, 542 U.S. at
121.
C. The TIA does not bar Gwynne, as a third party, from challenging
the MRA for being unconstitutional in federal court.
17
The TIA does not stop third parties “from pursuing constitutional challenges to
state tax benefits in a federal forum.” Hibbs, 542 U.S. at 91.
“Further, numerous
federal-court decisions—including decisions of this Court reviewing lower federal-court
judgments—have reached the merits of third-party constitutional challenges to tax
benefits without mentioning the TIA.” Id. at 91; See, e.g., Byrne v. Public Funds for
Public Schools of New Jersey, 442 U.S. 907 (1979); Griffin v. School Bd. of Prince
Edward Cty., 377 U.S. 218 (1964). Similar to the respondents in Hibbs, Gwynne is a
third-party.
resident.
This creates jurisdictional uncertainty because he is not a Momentum
This Court has read harmoniously that the TIA has conditioned the
jurisdictional bar on the availability of “a plain, speedy and efficient remedy” in state
court. Hibbs, 542 U.S. at 91. Momentum’s remedy in state court is designed for
Momentum taxpayers, not for out-of-state plaintiffs who sue.
D. The comity doctrine fails to remove Gwynne’s claim from federal
jurisdiction.
Momentum does not prevail under the comity doctrine. In order for comity to
dictate dismissal, the totality of the circumstances demands deference to the state
adjudicative process. Levin v. Commerce Energy, Inc., 560 U.S. 413, 431-32 (2010). Of
key importance is whether the claims in question afford alternative forms of possible
relief by a reviewing court. Id. at 426-28.
The comity doctrine also determines if a taxpayer’s suit seeks to enlist federalcourt aid in an endeavor to improve its competitive position. Id. at 431. However,
Gwynne seeks assistance of the federal court to prevent Momentum from imposing
unconstitutional regulatory requirements.
He does not seek to shield himself from
competition with in-state retailers that collect Momentum use tax.
18
Retention of federal court jurisdiction is appropriate in cases involving economic
rights that employ classifications subject to heightened scrutiny or impinge on
fundamental rights. Id. at 426. The Momentum Act, on its face, imposes different
obligations on out-of-state retailers than it imposes on in-state retailers, thus triggering
strict scrutiny under established commerce clause jurisprudence. Oregon Waste Sys.,
Inc., 511 U.S. at 99 (facially discriminatory laws are subject to scrutiny so stringent that
facial discrimination may itself be a fatal defect). Federal courts need not give deference
to state courts when reviewing state laws that discriminate against interstate commerce on
their face. Here, the Obligations are inapplicable to in-state retailers. MTC Sec. 14051(e).
Based on a plain reading of the Obligations, the requirements are facially
discriminatory.
Accordingly, we ask this Court to reaffirm the lower courts holding that federal
jurisdiction is appropriate and that the Obligations are in violation of interstate
commerce.
III.
IN THE ALTERNATIVE, MOMENTUM’S NOTICE AND REPORTING
OBLIGATIONS IMPOSED ON FRED GWYNNE IN AN ATTEMPT TO
COLLECT USE TAX FROM PURCHASERS IN ITS STATE VIOLATES THE
COMMERCE CLAUSE.
In the alternative, this Court should reaffirm the lower court’s decision that the
Obligations violate the Commerce Clause. The Dormant Commerce Clause “prohibits
certain state actions that interfere with interstate commerce.” Quill Corp. v. North
Dakota, 504 U.S. 298, 309 (1992). It “denies the States the power unjustifiably to
discriminate against or burden the interstate flow of articles of commerce.” Oregon
Waste Systems, Inc., 511 U.S. at 98.
19
The Obligations violate the Commerce Clause because (1) it discriminates
impermissibly against interstate commerce, and (2) it imposes undue burdens on
interstate commerce.
A. The notice and reporting requirements are discriminatory
towards out-of-state retailers.
Under the Dormant Commerce Clause, a state law is discriminatory if it
discriminates against interstate commerce either facially or in practical effect. Hughes v.
Oklahoma, 441 U.S. 322, 336 (1979). This Court has adopted a two-tier approach to
analyzing discrimination claims. Brown-Forman Distillers Corp. v. N.Y. State Liquor
Auth., 476 U.S. 573, 578-579 (1986). First, where a state law, “directly regulates or
discriminates against interstate commerce, or when its effect is to favor in-state economic
interests over out-of-state interests, it is struck down without further inquiry.” Id. at 579.
Momentum imposes the Obligations only on out-of-state retailers. This discriminates
against interstate commerce by not regulating in-state retailers in the same fashion as outof-state retailers.
The purpose of the Obligations is to collect use tax.
However,
Momentum fails to account for in-state retailers that may operate mainly on a cash basis,
having little to no documentation of purchases, thus weakening the State’s ability to
collect taxes. Additionally, the burdens placed on Gwynne are so cumbersome that instate retailers indirectly benefit.
Secondly, if a legitimate local purpose is found, the extent of the burden that will
be tolerated depends on the nature of the local interest involved and on whether it could
be promoted with a lesser impact on interstate activities. Pike v. Bruce Church, 397 U.S.
137, 142 (1970). In Gwynne’s case, the local interest is minimal at best. It forces out-ofstate retailers to arduously record purchases and send out notifications to consumers who
20
may or may not pay the use tax. Alternatively, Momentum could simply notify in-state
consumers of their duty to pay the tax either through the mail or when filing their taxes.
Here it is unreasonable to force Gwynne to perform a duty that is essentially
Momentum’s responsibility.
These requirements are inapplicable to in-state retailers, hence creating a benefit
for them. In Oregon Waste Systems, Inc., this Court found the statute in question was
facially discriminatory. 511 U.S. at 100. Oregon’s statute had a cost-based surcharge on
the in-state disposal of solid waste generated in other states. Id. at 96. The surcharge was
$2.50 per ton on in-state disposal of solid waste generated in other states and $0.85 per
ton fee on disposal of waste generated within Oregon. Id. This had a discriminatory
effect on in-state and out-of-state commerce by discouraging interstate waste disposal
within Oregon.
A law discriminates against interstate commerce if it imposes “different treatment
of in-state and out-of-state economic interests that benefits the former and burdens the
latter.” Oregon Waste Systems, Inc., 511 U.S. at 99. The Obligations impose substantial
penalties on retailers that fail to comply fully with the requirements. R. at 7. Momentum
imposes a $50 penalty for each sale for which the retailer has failed to satisfy fully the
Obligations. Id. There is no partial relief for notifying purchasers of a qualifying sale if
the retailer has not also reported such sale to the MRA. Id. Again, these provisions are
not imposed on in-state retailers. Hence, creating a disparity in treatment that benefits instate retailers.
A state may not impose any duty to collect sales and use taxes on out-of-state
retailers that do not have a physical presence in the state. Quill Corp., 504 U.S. at 309.
21
In Quill, a North Dakota statute required every retailer maintaining a place of business in
the state to collect tax from consumers and forward it to the state. Id. at 299. A mailorder house incorporated in Delaware, with offices and warehouses in three other states,
had no offices or warehouses in North Dakota and no employees who worked or resided
in North Dakota. Id. The mail-order house made annual sales of almost $1,000,000 from
customers in North Dakota, but refused to collect the use tax. Id. at 300. The Court held
that a vendor whose only connection with customers in a taxing state is by common
carrier or mail, is free from state-imposed duties to collect sales and use taxes because
they lack the substantial nexus with the taxing state required by the Commerce Clause.
Id. at 312. Gwynne also lacks a substantial nexus to Momentum because he does not
have a physical presence in the state. Gwynne only conducts business via mail-order and
Internet sales.
Under Quill, a state cannot enact a law that places different burdens on in-state
and out-of-state retailers. R. at 20. The alternative for Gwynne is to pay a substantial
penalty for non-compliance. However, in-state retailers are not subject to the obligation
and cannot be penalized.
It is within the state’s power to lay nondiscriminatory taxes by placing no greater
burden upon interstate commerce than the state places upon competing intrastate
commerce of like character. Quill, 504 U.S. at 300; Complete Auto Transit Inc., 430 U.S.
at 282. However, this is not present here. The Obligations do not serve legitimate state
purposes and offer no reasonable nondiscriminatory alternatives.
This Court should
reaffirm the lower courts holding that the Obligations directly regulate and discriminate
against Gwynne. R. at 21.
22
B. The Notice and Reporting requirements place an undue burden
on Gwynne.
The Obligations impose an undue burden on Gwynne. A tax against a Commerce
Clause challenge survives if it:
(1) applies to an activity with a substantial nexus with the
taxing state;
(2) is fairly apportioned;
(3) is not discriminatory towards interstate commerce; and
(4) is fairly related to the services provided by the State.
Complete Auto Transit, 430 U.S. at 279. As discussed in the previous section, Gwynne
does not have a substantial nexus with Momentum because he does not have a physical
place of business in the State.
Further, the Obligations are discriminatory towards
interstate commerce because they treat in-state and out-of-state retailers differently,
which leads to a benefit for the in-state retailers.
The tax must be fairly apportioned to the taxpayers’ activities in the taxing state.
See Container Corp. V. Franchise Tax Board, 463 U.S. 159 (1983) (This Court expanded
on the apportionment formula.) In Container Corp, it was explored whether the formula
had external consistency, reflecting a “reasonable sense of how income is generated.” Id.
Here, the Obligations are unreasonable. The burden it imposes on out-of-state retailers is
unnecessary because the consumer is ultimately responsible to pay the tax.
The tax must be fairly related to the services provided by the State. Quill, 504
U.S. at 302. The purpose is to ensure that a state’s tax burden is not placed upon persons
who do not benefit from services provided by the state. Goldberg, 488 U.S. at 266.
Here, Gwynne does not benefit by complying with the Obligations. His only benefit is
not being penalized.
23
The burden imposed by the Obligations is inextricably related in kind and purpose
to the burdens condemned in Quill. R. at 22. They impose burdens on out-of-state
retailers who have no physical presence in Momentum and no connection with
Momentum customers other than by common carrier, mail, and Internet. Id.
Accordingly, we ask this Court to reaffirm the lower courts holding that the
Notice and Reporting Obligations impose an undue burden on interstate commerce and
are unconstitutional under the Commerce Clause.
CONCLUSION
For the foregoing reasons, this Court should REVERSE the United States Court of
Appeals for the Fourteenth Circuit in regards to Gwynne v. Inertia Board of Revenue
and AFFIRM the United States Court of Appeals for the Fourteenth Circuit in regards
to Gwynne v. Momentum Revenue Agency.
24
Respectfully Submitted,
x Counsel for Petitioners x
25