In the Supreme Court at the United States KFC Corporation, Petitioners, v. Iowa Department of Revenue, Respondents. On a Petition for a Writ of Certiorari to the Supreme Court of Iowa: Brief of Tax Executives Institute, Inc. as amicus curiae in support of the petitioner.

On June 1, 2011, Tax Executives Institute filed the following "friend of the court" brief with the Supreme Court of the United States in an Iowa case involving the propriety of using "economic nexus" to establish jurisdiction to tax an out-of-state business. The brief was prepared under the aegis of TEI's State and Local Tax Committee, whose chair is Linda H. Dickens of Texas Instruments, Inc. TEI Tax Counsel Daniel B. De Jong, staff liaison to the State and Local Tax Committee, coordinated the preparation of the brief.

Interest of Amicus Curiae

Pursuant to Rule 37 of the Rules of this Court, Tax Executives Institute, Inc. respectfully submits this brief as amicus curiae in support of the petition for a writ of certiorari. (1) Tax Executives Institute (hereinafter "TEI" or "the Institute") is a voluntary, nonprofit association of corporate and other business executives, managers, and administrators who are responsible for the tax affairs of their employers. TEI was organized in 1944 under the laws of the State of New York and is exempt from taxation under section 501(c)(6) of the Internal Revenue Code (26 U.S.C.). The Institute is dedicated to promoting the uniform and equitable enforcement of the tax laws, reducing the costs and burdens of administration and compliance to the benefit of both the government and taxpayers, and vindicating the Commerce Clause and other constitutional rights of all business taxpayers.

TEI has approximately 7,000 members who represent more than 3,000 of the leading corporations in the United States, Canada, Europe, and Asia, including many domiciled or doing business in the State of Iowa. Because TEI members and the companies by whom they are employed will be materially affected by the Court's disposition of the constitutional issues raised by this case, the Institute has a special interest in this matter.

The core issue in this case is whether the Commerce Clause of the United States Constitution prohibits a State from imposing its corporate income tax on businesses with no connection to the State other than having customers located there. The Iowa Supreme Court says yes, contending that taxpayers cross the Commerce Clause's jurisdictional threshold merely by licensing intangible property to unrelated persons in the State--by its so-called economic presence in the State. Amicus Tax Executives Institute disagrees, believing the decision below is flawed and casts an ominous shadow over the protections accorded interstate businesses by the Commerce Clause.

This difference of view; while undesirable, is not surprising because the contours of the Commerce Clause have grown increasingly unsettled as state tax authorities and state courts have distended controlling precedent in the absence of dispositive guidance from this Court. Nearly two decades have passed since the Court last addressed the limits the Constitution imposes on the States' authority to impose tax on out-of-state businesses. Since the Court's 1992 decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), which sustained a taxpayer challenge under the Commerce Clause, States and taxpayers have been left unassisted in their efforts to interpret and apply these limits. The resulting clutter of vague and inconsistent standards has undermined the protections of the Commerce Clause.

Varying state definitions of what constitutes a taxable presence, and palpable uncertainty over their constitutional validity, are at odds with "the national interest in keeping interstate commerce free from interferences which seriously impede it." Southern Pacific Co. v. Arizona, 325 U.S. 761, 776 (1945). Businesses having no presence in a State other than customers now have the unenviable choice of engaging in expensive legal battles to vindicate their Commerce Clause rights or expending significant resources to comply with complex, burdensome tax systems that vary widely from State to State.

More than six decades ago, the Court recognized that, from time to time, "[t]here is a 'need for clearing up the tangled underbrush of past cases' with reference to the taxing power of the States." Northwestern States Portland Cement Co. v. State of Minnesota, 358 U.S. 450, 457 (1959). The need for periodic judicial intervention springs from the dramatic evolution of interstate commerce, the aggressive actions of the States, and the lack of action by Congress to regulate taxation by the States. Amicus TEI respectfully submits that the time has come for the Court to intervene to resolve this issue of transcendent importance.

Argument

The Evolving Economy Requires a Clear Standard Identifying the Limits of States' Taxing Powers

The Court's intercession in this case is required because the U.S. economy has evolved considerably since the founding of the Republic and, indeed, since the Court's seminal decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Nation has moved from an agricultural and manufacturing base to one that depends increasingly on the value added by services and intangible property. What's more, advances in technology permit ever-greater amounts of services and intangibles to be delivered remotely (and electronically) through private networks or over the Internet. This trend shows no sign of abating as consumers across the country make purchases or otherwise participate in the economy through personal computers and portable devices such as smartphones, iPads, and other tablet computers.

The emergence and growth of electronic commerce is not the only area in which the economic marketplace has changed. The franchise industry, in which petitioner KFC conducts business, provides another example. Across the United States, business owners have sought to capitalize on established trademarks and processes of nationally recognized brands to generate local business through franchise agreements. Generally, these agreements feature the licensing of trademarks, know-how, and business processes (collectively "intangible property") by the owners of that intangible property to independent business owners in exchange for a royalty. At bottom, the franchisor/ franchisee relationship at issue in this case reflects arrangements common throughout the modern economy: the use by...