Geoffrey, Inc., petitioner, v. Commissioner of Revenue, respondent. On petition for a writ of certiorari to the Massachusetts Supreme Judicial Court.

BRIEF OF TAX EXECUTIVES INSTITUTE, INC. AS AMICUS CURIAE IN SUPPORT OF THE PETITIONER

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 more than 7,000 members who represent more than 3,200 of the leading corporations in the United States, Canada, Europe and Asia, including many domiciled or doing business in Massachusetts. TEI members represent a cross-section of the business community whose employers are, almost with-out exception, engaged in interstate commerce. 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.

Summary of Argument

The issue presented in this case is whether the Commerce Clause precludes Massachusetts and other States from taxing the income of a corporation whose presence in the State is not physical, but involves only the use of its trademark (or other intangible property) by a licensee. For the past 40 years, taxpayers have relied upon the bright-line constitutional principle that an enterprise must have physical presence in a State before being subject to tax in that State. In National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753 (1967), the Court held that an interstate business without any physical presence in Illinois did not have a sufficient connection, or nexus, with the State to require the business to collect and remit use taxes on sales made to Illinois customers. Twenty-five years later, it affirmed that holding in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). There, the State of North Dakota challenged the continuing validity of the Court's holding in National Bellas Hess arguing that a physical presence standard no longer reflected the realities of an evolving marketplace so altered by changes in technology and other commercial innovations. This Court was unpersuaded. Noting the importance of adhering to precedent, the Court in Quill upheld the physical presence test, vindicating the Commerce Clause and simplifying tax administration for business taxpayers and tax administrators. The intervening decade and a half has brought numerous challenges to the physical presence standard, the most recent one being this case.

1. The Massachusetts Supreme Judicial Court concluded that "substantial nexus can be established where a taxpayer domiciled in one State carries on business in another State through the licensing of its intangible property that generates income for the taxpayer." Geoffrey, Inc. v. Massachusetts Department of Revenue, 453 Mass. 17, 23 (2009). The lower court based that decision on its opinion earlier that same day in Capital One Bank v. Commissioner of Revenue, 453 Mass. 1 (2009), where it construed the "substantial nexus" standard in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977), to vitiate the physical-presence standard articulated in National Bellas Hess and reaffirmed in Quill. (2)

2. Concluding that Complete Auto Transit and Quill establish differing nexus standards--with the former overruling the latter--is simply wrong. In formulating its four-prong test for determining whether a state tax statute violates the Commerce Clause, the Court in Complete Auto Transit harmonized its decisions from earlier cases. Indeed, the first prong of the Complete Auto Transit test requiring substantial nexus was expressly based on the Court's previous holdings, which include National Bellas Hess. The Court's later holding in Quill did not produce a new or different standard; it affirmed and vivified the existing standard--physical presence in a State.

3. The Massachusetts court misapprehended this Court's decisions in Quill, Complete Auto Transit, and National Bellas Hess in other important respects: First, it erroneously concluded that the bright-line, physical presence test embraced by the Court for Commerce Clause purposes has no application in respect of income taxes. Moreover, by conjuring nexus between a licensor and the State from a licensee's use of a trademark the lower court set forth a standard so open-ended--so untethered to principle--that it can only subvert the core purpose of the Commerce Clause.

   Massachusetts is not alone in its attempt to expand its tax base by chipping away at the physical presence test. Numerous other States have striven to legislatively, judicially, or administratively diminish Quill and National Bellas Hess by asserting that they apply solely to sales and use taxes. They make this claim even though this Court has never permitted the imposition of a state tax upon a nonresident enterprise without some in-state physical presence.

4. Making matters worse, the amorphous nexus standards conjured by the States provide near complete discretion to the States in making nexus determinations. This growing lack of clear and objective standards threatens the ability of all businesses--no matter how small and no matter where located--to engage in interstate commerce without the imposition of undue burdens. If the reliance interests of multistate businesses are to be reordered by a standard other than that defined in Quill and National Bellas Hess, that change should be effected by Congress exercising its plenary power under the Commerce Clause.

   Background

   In 1984, Toys "R" Us, Inc. formed the petitioner, Geoffrey, Inc., under Delaware law as a wholly owned subsidiary to hold several trade names, service marks and trademarks, including "Toys 'R' Us" and the Geoffrey the Giraffe character. Geoffrey, Inc. ("Geoffrey") licensed those intangible assets to affi-liated companies and to certain third parties located throughout the United States. The license agreements provided for market-rate royalties for the use of Geoffrey's intangible assets.

   In Massachusetts, Geoffrey licensed its trade names and trademarks to two affiliated entities: Toys "R" Us-Mass, Inc. ("TRUMI") and Baby Superstore, Inc. TRUMI operated retail stores located in Massachusetts and Baby Superstore operated retail stores across the United States including Massachusetts through its Babies "R" Us division. In return for the right to use its intellectual property, TRUMI and Baby Superstore remitted royalty payments to Geoffrey based on their net sales.

   Geoffrey itself had no property or employees located in Massachusetts. Additionally, Geoffrey never used state or federal courts...