Practical Application of Constitutional Limitations: A Road Map to Future Success.

• Author: Fields, Craig B.
• Position: ASK THE EXPERTS

The Experts: Craig B. Fields, Mitchell A. Newmark, and Eugene J. Gibilaro

In the wake of the U.S. Supreme Courts decision in South Dakota v. Wayfair, Inc., taxpayers have sought practical approaches to challenges under the significant remaining constitutional limitations on the authority of states to tax interstate commerce. In Wayfair, the U.S. Supreme Court put two large stakes in the ground. First, it held that the U.S. Constitution does not require a physical presence in a taxing state as a prerequisite to the state's imposition of a sales and use tax collection obligation on an out-of-state seller. (1) Second, the Court reaffirmed each of the constitutional limitations on the authority of states to tax interstate commerce under the Due Process Clause and the Commerce Clause. (2) This article examines these limits and provides practical considerations with respect to state and local tax controversy and litigation.

Question: What constitutional challenges remain for taxpayers to battle overreaching state taxing schemes post- Wayfair?

In addressing the constitutional limitations on state taxation, the Wayfair Court reaffirmed the "now-accepted framework for state taxation" that the Court previously explained in Complete Auto Transit, Inc. v. Brady. (3) Under the Complete Auto framework, a state tax will be sustained only if "the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." (4) These four independent constitutional requirements provide the goalposts for taxpayers seeking to challenge a state's taxing scheme on constitutional grounds.

The Substantial Nexus Limitation Post-Wayfair

The substantial nexus requirement is the only prong of the Complete Auto framework affected by the Wayfair decision, and that effect is muted. In Wayfair, the Court overruled its prior embrace of a bright-line physical presence rule and framed its decision as a natural progression away from "arbitrary, formalistic distinction(s)" and toward "a sensitive, case-by-case analysis of purposes and effects." (5) In stating the proper substantial nexus standard under the Complete Auto framework, the Court applied its due process standard that "nexus is established when the taxpayer [or collector] 'avails itself of the substantial privilege of carrying on business' in that jurisdiction." (6)

The Wayfair Court's application of that due process standard for the substantial nexus prong of the Complete Auto framework magnifies the importance of the Court's due process precedents in identifying the post- Wayfair limitations that the substantial nexus requirement imposes on states. The Court's due process precedents have focused on the issue of whether a person is subject to the jurisdiction of a state's courts. In this context, the Court has explained:

[The seller's] transmission of goods permits the exercise of jurisdiction only where the [seller] can be said to have targeted the forum; as a general rule, it is not enough that the [seller] might have predicted that its goods will reach the forum State.... The question is whether a [seller] has followed a course of conduct directed at the society or economy existing within the...