Return to State Tax Highlights Table of Contents
Brun v. Department of Revenue, No. C8-95-929 (Minn. Sup. Ct. 6/6/96). The Minnesota Supreme Court ruled that a Native American couple was properly assessed personal income tax for the period of time they resided off the reservation. The court noted that federal and Minnesota law accord Native Americans special tax status if they live and work on reservation lands. If so, they are exempt from personal income tax. However, the exemption is lost if the individual tribal member resides in the community at large. Here, the Native American family did not demonstrate that they resided on reservation lands during the entire period at issue. Thus, income earned while living off the reservation was subject to state income tax. The case was remanded to the Minnesota Tax Court to determine the tax due on income earned during the periods the taxpayers did not live on reservation land.
Apportionment -- Foreign Dividends
NCR Corporation v. Commissioner of Revenue, Nos. 147997, 168151 and 168152 (Mass. App. Tax Bd. 5/30/96). The taxpayer is a multinational Maryland corporation with its principal offices in Ohio. The taxpayer develops, manufactures, markets, installs and services business information processing systems. At all times during the period at issue, the taxpayer conducted part of its business in Massachusetts. The taxpayer's foreign operations are conducted through branches and foreign subsidiary corporations. Although none of these entities did business in Massachusetts during the period in question, it is undisputed that they are unitary with the taxpayer. The taxpayer's foreign operations developed, acquired, owned and used patents and patent rights registered and licensed in foreign countries, on which the taxpayer earned royalty and interest income. Some of the nations in which the taxpayer's subsidiaries did business subjected the taxpayer's royalty and dividend earnings to income tax, at rates determined by foreign statutes. These taxes were paid through a withholding mechanism, by which the taxpayer's subsidiaries withheld the tax due and paid the tax directly to the foreign government on the taxpayer's behalf. When the taxpayer filed its Massachusetts corporate excise tax return, it did not include in its apportionable net income the royalty, dividend and interest income paid to it by its subsidiaries. Upon audit, the Commissioner of Revenue determined that this income should have been included in the taxpayer's apportionable tax base, and redetermined the tax due.
The Board ruled that the Commissioner properly included the taxpayer's foreign income in its apportionable tax base, and that the taxpayer was not entitled to include its subsidiaries' payroll, property and sales figures in the apportionment formula. Rejecting the taxpayer's argument that including the foreign income in its apportionment base would result in double taxation, the Board noted that the U.S. Supreme Court decisions in this area stand for the proposition that the Foreign Commerce Clause does not preclude all instances of multiple taxation. For this reason, the Board said, the taxpayer's reliance on Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979) is misplaced. Japan Line involved a property tax levied on instrumentalities of foreign commerce owned by a foreign entity. The Court struck the tax on grounds that federal uniformity in international commercial relations require the U.S. Government to speak with one voice in such matters, and further, that the Japanese government, under the home port doctrine, has the primary right to levy an unapportioned tax on property owned by its nationals, wherever that property is located. Here, the tax is levied on the income of a domestic entity. Federal uniformity is simply not implicated in this case.
This case, the Board determined, is controlled by the U.S. Supreme Court's decision in Container Corporation v. Franchise Tax Board, 463 U.S. 159 (1983). First, this matter involves an income tax, not a property tax. Second, the Container Court explicitly upheld a state's right to tax, on an apportioned basis, the income of a parent corporation's foreign subsidiaries. That some double taxation may exist does not necessarily mean that the Commerce Clause is violated. Though there may exist in fact multiple taxation, the state's apportionment formula does not inevitably result in multiple taxation. Finally, the tax is levied on a domestic corporation, rather than a foreign entity, and the state clearly has the power and a right to tax the corporation's earned income, even though it may be taxed in a foreign jurisdiction.
Boral Gypsum, Inc. v. Leathers, No. 96-282 (Ark. Sup. Ct. 7/8/96). The Arkansas Supreme Court ruled that the taxpayer was not liable for use tax on its payment in-kind of compressor fuel as compensation for the cost of transporting the taxpayer's natural gas. The taxpayer manufacturers sheetrock, and uses natural gas to make its product. The taxpayer purchases gas from out-of-state natural gas companies, which deliver the gas to the taxpayer through the seller's interstate pipelines. When the gas is purchased, the supplier's invoice separately indicates the amounts of gas and compressor fuel purchased. As the gas and compressor fuel are being transported to the taxpayer, the supplier diverts and uses compressor fuel at its compressor stations. The compressor fuel is the taxpayer's payment in-kind to the supplier pursuant to a tariff authorized by the Federal Energy Regulatory Commission. The compressor fuel is received by the supplier from the taxpayer at the supplier's pipeline.
The Arkansas Department of Finance and Administration issued a use tax assessment on the taxpayer's payment in-kind of compressor fuel. The taxpayer paid the assessment under protest, and sued for a refund. The state supreme court ruled that the taxpayer was due a refund of the use tax paid. Arkansas law provides that a use tax liability arises when a taxpayer uses tangible personal property purchased out of state within Arkansas. Here, because the transfer of ownership of the compressor fuel took place outside Arkansas, no use tax was legally due. Additionally, the court noted that the taxpayer's payment in-kind of compressor fuel to the supplier was a direct payment as compensation for the supplier's cost in transporting the gas to the taxpayer's Arkansas facilities. Therefore, because of the nature of the transaction, even if the transfer of ownership of the compressor fuel took place in Arkansas, the taxpayer still would be liable for neither gross receipts (sales) tax nor use tax.
Waste Removal Fees
In Re Olin Corp., New York Division of Tax Appeals, No. DTA 813095 (Admin. Law Div. 5/30/96). An Administrative Law Judge ruled that New York is required to apportion the sales tax levied on waste removal, transportation and processing/disposal fees where the service was performed in more than one state. The taxpayer contracted to have its industrial waste removed and transported to an out-of-state disposal facility, an integrated service taxable by New York. However, the Division of Tax Appeals noted that if any portion of such services takes place outside the state, the Commerce Clause requires that the tax base be fairly apportioned between services rendered in-state and services rendered out-of-state. Because New York applied the tax without apportionment, the state taxed more revenue than was actually generated in-state.
Nexus
Technical Assistance Advisory, No. 96-003 (6/26/96). The West Virginia Department of Tax and Revenue issued a technical assistance advisory that a West Virginia printer's out-of-state customers were not subject to the state's sales/use tax, income tax, or business franchise tax. The querent is a commercial printer who acquired a site in West Virginia to operate a printing facility. Because the querent's out-of-state customers frequently buy and provide the paper the querent uses for printing, the querent will frequently store its customers' raw materials, works-in-progress and finished print products. The querent's facility has a distribution center for shipping the finished product to its customers, or directly to the customer's clients. The querent's customers also sends its personnel into West Virginia from time to time to oversee the printing production.
The Department ruled a customer's ownership of the paper inventory at the printing plant, the customer's occasional visits to the facility for the limited purpose of engaging in activities connected with the print jobs, and the customer's ownership of the work-in- progress or finished product held for a limited time at, or in transit to or from the querent's facility, were insufficient contacts with the state under the Commerce Clause to support a duty to file returns and pay state sales/use, income or business franchise tax, since the querent's customers did not regularly, systematically and purposefully direct their activities at their West Virginia customers for the purpose of selling goods or services.
Yellowstone County v. Pease, No. 95-36026 (9th Cir. 9/11/96). The 9th Circuit ruled that a tribal court did not have jurisdiction to adjudicate a taxpayer's challenge to the county's right to levy property tax on reservation lands held in fee by a tribal member. The court determined that the two exceptions to the general rule that the inherent sovereign powers of an Indian tribe do not extend over nonmembers does not apply in this case. The first exception permits a tribe to regulate (through taxation, licensing, etc.) the activities of nonmembers who enter into consensual agreements with the tribe or its members through commercial dealing, contracts, leases or other arrangements. The second exception permits a tribe to exercise civil authority over the conduct of non-Indians on fee lands within the reservation if the conduct threatens or has some direct effect on the political integrity, the economic security, or the health or welfare of the tribe. The first exception is not applicable because the Crow Allotment Act of 1920 was a legislative directive from Congress, rather than a consensual commercial activity. The second exception also does not apply because the present action concerned only the taxpayer's particular property and further, the taxpayer failed to show that the county's levy had a direct effect on the political integrity, economic security or the health and welfare of the tribe as a whole.
Interstate Trucking
Tri-State Motor Transit Co., v. Lohman, Nos. 20500, 20501 and 20502 (Mo. Ct. App. 5/7/96). The Missouri Court of Appeals ruled that the taxpayer, an interstate trucking firm, was due a refund of property taxes paid on its vehicles and trailers that had acquired a tax situs in other states under the illegal levy refund procedures available under Missouri law, which do not require the exhaustion of administrative remedies prior to filing suit in court. The trial court ruled, and the court of appeals affirmed, that the tax collector violated the Commerce Clause by failing to apportion the tax due on the taxpayer's property that had a situs in more than one state. Though not contesting the court's Commerce Clause finding, the tax collector contended that the matter should be dismissed because the taxpayer sought a refund under the state's protest statute, which required the taxpayer to exhaust its administrative remedies prior to filing suit in court. The protest statute waives the exhaustion requirement only where the taxpayer's challenge implicates the constitutionality of the assessment itself, the tax collector pointed out. While the tax collector's argument is accurate, the appeals court said, it does not take into consideration the fact that the taxpayer also filed for refund under Missouri's illegal levy provision, which does not contain an exhaustion requirement, allowing taxpayers to proceed directly to court to obtain relief. Moreover, the illegal levy provision is an alternative remedy separate and apart from the protest statute. Therefore, the lower court did not err in granting the taxpayer the relief sought.
42 U.S.C. §1983
Edward Valves, Inc. v. Wake County, No. 34PA95 (N.C. Sup. Ct. 6/13/96). The taxpayer, a manufacturer of valves for power plants, brought a §1983 action challenging the county's property tax assessment on engineer drawings the taxpayer owned. The county resisted the challenge, arguing that the taxpayer's claims should be barred because 1) adequate administrative and judicial remedies existed under state law; and 2) the taxpayer had not exhausted those remedies. The court of appeals found that the valuation methods the county used to assess the taxpayer's engineering drawings violated the taxpayer's federal equal protection rights because it effectively taxed intangible and self-created intellectual property only if the property was reflected on the owner's books. The appeals court also ruled favorably on the taxpayer's §1983 action. The North Carolina Supreme Court affirmed, ruling that the taxpayer's federal action was permitted even without exhausting state administrative remedies because it was based on a substantive federal equal protection claim. Exhaustion of state administrative remedies, the court said, is only relevant when the §1983 action is based on procedural due process grounds.
Priority of Liens
Whayne Supply Company, Inc. v. Revenue Cabinet, No. 95-SC-490-DG (Ky. Sup. Ct. 6/20/96). The Kentucky Supreme Court ruled that a purchase money security interest has priority over a state tax lien on the same property. Panbowl Energy Inc. purchased drilling equipment from Whayne. Panbowl made a down payment to Whayne, leaving an unpaid balance. Whayne retained a security interest in the property sold, and filed a financing statement with the county clerk, thus perfecting its security interest in the equipment. Prior to Panbowl's purchase of the equipment from Whayne, the Kentucky Revenue Cabinet filed a notice of state tax lien against Panbowl for unpaid taxes. Panbowl defaulted on its purchase, and surrendered the equipment to Whayne. Whayne sold the equipment at a public auction, and the Revenue Cabinet filed suit seeking the proceeds from the equipment sale. Reversing the lower courts, the Kentucky Supreme Court ruled that state law provides that a purchase money security interest in collateral other than inventory has priority over a conflicting security interest in the same collateral (such as a state tax lien), if the purchase money security interest has been perfected at the time the buyer receives possession of the collateral or within 20 days thereafter. The result is that a purchase money security interest is superior to all other encumbrances on the same collateral, even over prior filed encumbrances. In this case, Panbowl never acquired a sufficient equitable interest in the property to which the tax lien could attach, because when Panbowl took title to the equipment, it was already encumbered with Whayne's security interest. Therefore, the Revenue Cabinet was not entitled to the proceeds of the sale to satisfy Panbowl's tax debt.
Leasehold Interests - Tax Exemptions
Attorney General Opinion, No. 242 (2/9/96). The Mississippi Attorney General opined that a county board of supervisors will be shielded from personal or official liability if, relying on a Mississippi statute, the board removes a leasehold interest from the tax rolls in the event that the statute in question is later found by the state's highest court to be unconstitutional. Under Mississippi law, the Attorney General said, public officials may presume the constitutionality of a statute duly passed by the state legislature and may rely on the enactment to carry out their duties. If the statute is later found by the state supreme court to be unconstitutional or otherwise invalid, public officials are shielded from either personal or official liability for their actions.
Intergovernmental Tax Immunity
California Credit Union League v. City of Anaheim, No. 95-55205 (9th Cir. 9/9/96). The City of Anaheim imposes a 13% transient occupancy tax on all persons occupying a hotel room for 30 days or less. In 1993, a group of federal credit union employees lodged at the Disneyland Hotel for purposes of attending a credit union seminar, and were assessed the tax. The taxpayer challenged the levy on grounds that the tax violated 12 U.S.C. §1768, which immunizes federal credit unions from most federal, state and local taxes. The 9th Circuit found for the taxpayer, noting that even though §1768 confers broad immunity from federal, state and local taxes, federal credit unions have been generally considered to be instrumentalities of the federal government and therefore immune from taxation under the Supremacy Clause of the federal constitution. The City attempted to argue that the legal incidence of the tax fell on the credit union employees, rather than the credit union itself, and was therefore valid. Citing the U.S. Supreme Court's decision in U.S. v. New Mexico, 455 U.S. 720 (1982), the appeals court rejected this contention, stating that federal employees are constituent parts of the United States government and if carrying out official government duties, such employees are therefore federal instrumentalities and entitled to the same immunity from state and local taxation. Since federal employees on official business are not independent of the federal government, any state or local tax imposed is invalid because it constitutes a tax on the United States, and thus the question of where the legal incidence of the tax lies is moot. In the instant case, the credit union employees were attending a seminar in the City and were thus on credit union business. Since the employees were on official business, they were constituent parts of the credit union and were thus immune from the transient occupancy tax under §1768.
Vehicle Transfer Tax
Pawa v. Department of Taxation, No. 1:96CV11, (D.C. Vt. 4/2/96). The Vermont District Court ruled that the state's requirement that a vehicle must be registered in Vermont in order to qualify for the family transfer exemption to the Vermont motor vehicle purchase and use tax, violated both the Equal Protection and Commerce Clauses of the federal constitution. Under the statute, resident recipients of automobiles gifted by out-of-state family members were required to pay use tax to the state, while resident recipients of automobiles gifted by in-state family members were not required to pay the tax, courtesy of the statutory exemption. The requirement violated the taxpayer's right to equal protection of the laws by discriminating between the taxpayer and other similarly situated taxpayers based on the origin of the gifted vehicles. The requirement also contravenes the Commerce Clause because it imposes a greater tax burden on an interstate transfer than that imposed on an intrastate transfer.
Gross Premiums Tax
Associated Electric & Gas Insurance Services, Ltd. v. Clark, No. 94-706-M.P. (R.I Sup. Ct. 5/30/96). The Rhode Island Supreme Court ruled that Rhode Island was justified in subjecting the taxpayer to the state's gross premiums tax because the taxpayer created a purposeful economic presence in the state by selling insurance policies to Rhode Island clients. The taxpayer, a Bermuda insurance company, sold insurance via mail to four Rhode Island natural gas companies, but did not file a return for the gross premiums tax as required by Rhode Island law. Upon audit, the Division of Taxation assessed the 2% tax on the ground that the taxpayer's activities constituted taxable business transactions. The state supreme court upheld the assessment, finding that the taxpayer purposefully availed itself of the benefits of the Rhode Island economic market, and transacted business in the state. The court ruled that the under Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the taxpayer's negotiation and collection of premiums through the mail were constituted sufficient nexus with Rhode Island to subject it to taxation. The court further rejected the taxpayer's assertion that insuring risks in a state independent of any other activity is protected from state regulation by the Due Process Clause of the federal constitution. The court responded that Quill does not require a company to be physically present in a state to create a tax liability. In this case, the taxpayer could be subject to service of process in Rhode Island for disputes arising from its insurance contracts.
Note: It is interesting that the Rhode Island Supreme Court should have based its decision on Commerce Clause grounds, since the Commerce Clause historically has not been applied to the insurance industry, because it is not "interstate commerce" in the traditional sense.
Gross Receipts Tax
Pennsylvania v. Mercadante, No. 100 C.D. 1996 (Pa. Commw. Ct. 5/24/96). A commonwealth court ruled that a city ordinance that imposes a gross receipts tax on merchants but exempts other service providers, violates the Equal Protection Clause of the federal constitution because there was no rational basis for treating the two classes of taxpayers differently. The taxpayer owns a restaurant in Uniontown, Pennsylvania, and was convicted of failing to file a city tax return on his gross receipts. The taxpayer challenged the tax on equal protection grounds, claiming that the tax is imposed on restaurants, amusements and other businesses that sell goods, but not on other kinds of businesses. The classification, the taxpayer argued, was arbitrary because both classes of taxpayers received the same city services. The state contended that the distinction was based on "real world" business differences. The commonwealth court agreed with the taxpayer, finding that the city failed to present a legitimate rationale for the distinction between service providers and other businesses, especially since both classes receive city services to the same degree. Therefore, the court ruled, the distinction between the two classes was arbitrary, and the statute was struck.
Nexus -- Franchise Tax
Comptroller's Decision, Hearing No. 34,005 (Tex. Comp. of Pub. Accts., 5/17/96). The Texas Comptroller of Public Accounts ruled that independent contractors create constitutional nexus in the state for franchise tax purposes regardless of whether they actively or passively solicit business. The taxpayer is an out-of-state company that manufactures and sells shoes and accessories. Most of the taxpayer's sales in Texas are made via direct mail, but it employed independent contractors to "passively " promote and/or induce sales. The taxpayer argued that it was not doing business in Texas, and therefore could not be subjected to the state's franchise tax. An Administrative Law Judge found that under Texas law, activities that constitute doing business in the state include having independent contractors in Texas to promote or induce sales of a foreign corporation's goods or services. The ALJ further found that a "significant amount "of the taxpayer's Texas sales were due to the independent contractors' efforts, who placed orders and earned commissions on those orders. The contractors also sometimes made deliveries of customer purchases. These activities, the ALJ ruled, "clearly constitute doing business in Texas, and result in subjecting [the taxpayer] to franchise tax on its taxable capital."
Comptroller's Decision, Hearing No. 34,828 (Tex. Comp. of Pub. Accts. 7/22/96). A Texas Administrative Law Judge ruled that the taxpayer had sufficient nexus with the state to subject it to franchise tax liability. The out-of-state taxpayer commissioned a design consultant to work with independent Texas wholesalers to promote and induce sales of the taxpayer's products and services to the public. The consultant did not sell, take orders, or deliver the taxpayer's products to the wholesalers or to any other purchasers. The taxpayer challenged its franchise tax liability on the grounds that it did not have the requisite nexus with the state. The ALJ disagreed, finding that the taxpayer was doing business in the state through solicitation via independent contractors, which under Texas law creates the requisite substantial nexus to support the franchise tax liability.
Comptroller's Decision, Hearing No. 34,005 (Tex. Comp. of Pub. Accts. 5/17/96). An Administrative Law Judge ruled that the taxpayer had the requisite substantial nexus with Texas to subject it to franchise tax liability, even though the taxpayer did not actively solicit independent Texas wholesalers to promote the taxpayer's products. The taxpayer is an out-of-state manufacturer of leather goods with no real or personal property or personnel in the state. All of the taxpayer's sales are made via telephone or via orders accepted through the U.S. Mail. Orders are accepted by the taxpayer from either the ultimate consumer of the taxpayer's products, or from independent wholesalers. Ultimate customers and independent wholesalers receive information regarding the taxpayer's products through catalogues sent via U.S. Mail. Items sold are sent directly to the final purchaser by common carrier or through the mail, or are sent to the independent contractors for delivery to the customer. The ALJ ruled that under Texas law, an out-of-state enterprise is doing business in the state if it uses independent contractors to induce or promote sales of its products in the state. It does not matter, the ALJ continued, whether the contractors actively or passively solicit the taxpayer's goods. The point is that the independent contractors create the requisite constitutional nexus by promoting and inducing sales of the taxpayer's product, by whatever means, thereby subjecting the taxpayer to Texas franchise tax liability.
Note: It might be thought that Public Law 86-272 would prevent Texas from levying its franchise tax in the above matters, because the taxpayers were engaged in nothing more than solicitation in the state. However, it must be remembered that P.L. 86-272 only applies to income tax. A franchise tax is not an income tax, even if the tax is measured by net income. Franchise taxes are levied for the privilege of conducting business in a particular jurisdiction, rather than a direct tax on income earned. Therefore, P.L. 86-272 does not apply.
Franchise Tax -- Apportionment
QMS Inc. v. Department of Revenue, No. F. 95-487 (Admin. Law Div. 5/24/96). An Alabama Administrative Law Judge has ruled that the state Department of Revenue may not use a hybrid apportionment formula to apportion the taxpayer's capital for franchise tax purposes. The taxpayer is in the business of manufacturing and selling computer software and hardware. It has a printing plant, administrative and sales offices, research and development facilities in the state. The taxpayer manufactures some of its hardware at its Alabama facility, but mainly purchases pre-manufactured items from outside sources. The taxpayer then sells these products through its sales offices, located nationwide. In 1992, the taxpayer filed its Alabama franchise tax return and apportioned capital to the state as a corporation primarily engaged in manufacturing. In 1995, the taxpayer filed an amended return, characterizing itself as a corporation mainly engaged in selling, which resulted in a refund due the taxpayer for franchise tax paid in 1992.
Schedule D of the Alabama franchise tax return includes various broad business categories, such as sales, manufacturing, services, and so on. Each category requires the use of a specific apportionment formula using various factors listed in Schedule C (such as property, payroll, sales, cost of manufacturing, etc.). Foreign corporations are required to select the Schedule D category that best fits its primary business everywhere. Using the specific formula for that category, the taxpayer apportions its capital to Alabama for franchise tax purposes. In reviewing the taxpayer's 1992 amended return, the Department recalculated the taxpayer's franchise tax liability for that year by treating the taxpayer as a corporation engaged in manufacturing and selling. Using the combined factors from these two categories, the Department succeeded in substantially reducing the amount of the taxpayer's refund.
Foreign corporations had long argued that they should be permitted to use an alternative apportionment formula from those listed on Schedule D when circumstances warrant the use of such formulas. However, the Department has consistently held that the formulas set out on Schedule D are prima facie reasonable and must be followed. Thus, when it combined the factors for selling and manufacturing to redetermine the taxpayer's 1992 franchise tax liability, the Department violated its own rule, because combining the two categories resulted in a hybrid formula that was not specifically listed on Schedule D in the first instance. Therefore, the ALJ ruled, either the manufacturing formula or the selling apportionment formula must be used. Since the Department conceded that the taxpayer was engaged in selling in 1992, the taxpayer properly apportioned its capital employed in Alabama using the selling formula on Schedule D.
Business and Occupation Tax
Relton Corp. v. Department of Revenue, No. 93-38, Wash. Bd. of Tax App. (5/10/96). The Washington Board of Tax Appeals (BTA) ruled that the state was not prohibited by the Commerce or Due Process Clauses of the federal constitution from levying its B&O; tax on Washington sales made by an out-of-state manufacturer whose only contact with the state was via a non-resident independent contractor who solicited sales on the taxpayer's behalf. The taxpayer's sales representative solicited new customers, called on the taxpayer's existing customers three or four times per year asking for repeat orders, distributing product catalogues and other sales literature, promoted the sale of new products and product modifications, answered questions regarding product specifications and performance, and reported compliments and complaints about the taxpayer's products to the taxpayer's home office.
Due Process Clause nexus requires a person to have some minimal contact with a state to support the imposition of a tax. Thus, due process nexus exists if activities performed in a state are "significantly associated with the taxpayer's ability to establish and maintain a market...for sales [in the taxing state]." Commerce Clause nexus requires that a tax must be 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. Washington's B&O; tax satisfied both the Due Process and Commerce Clause nexus requirements, the BTA ruled. For purposes of the Due Process Clause nexus, there was no question that the activities of the taxpayer's independent representative were aimed at establishing and maintaining the taxpayer's market in Washington. As for the Commerce Clause, the BTA found that only the first (nexus) and fourth (fair relation) requirements for determining the validity of the B&O; tax were implicated. These conditions were fulfilled, the BTA ruled, because the taxpayer's activities in the state through the efforts of its independent representative constituted substantial nexus, and the incidence and measure of the B&O; tax were directly related to the taxpayer's business activities in Washington.
Native Americans -- Severance Tax
The Crow Tribe of Indians v. Montana Department of Revenue, No. 95-35093 and 95,35096 (9th Cir. 8/6/96). In a series of decisions, the 9th Circuit Court of Appeals ruled that an Indian tribe was entitled to a restitution for the state's coal severance and gross proceeds tax imposed on coal produced from the tribe's coal deposit. The court declared that the tribe successfully stated a claim for equitable relief despite the fact that no privity existed between the tribe and the tribe's coal lessee, and that the lessee paid the tax, not the tribe. The court further held that the state's severance tax was intentionally and illegitimately levied in order to appropriate most of the economic rent from the tribal coal on the ceded strip. Since coal production was vital to the economic development of the tribe and generated funds for essential tribal services, the state tax was therefore unlawful. The tribe was further harmed by the state's enrichment, because whether or not the tribe had the ability to impose its own tax on the extracted coal, the Montana tax had an adverse impact on the tribe's ability to market its coal, increased the costs of coal production, and reduced the royalty that the tribe could charge.
Native Americans -- Business and Occupation Tax
J&M; Smokehouse v. Department of Revenue, No. 45331 Wash. Bd. of Tax App. (5/24/96). The taxpayer, a member of a federally-recognized Indian tribe, owns and manages a state-charted corporation in the business of selling cured salmon caught by the owner and other tribal members. Washington attempted to impose its business and occupation tax on the gross receipts derived from such sales. The taxpayer resisted, claiming that the 1854 Treaty of Medicine Creek between the taxpayer's tribe and the federal government prohibited the state tax. The BTA agreed with the taxpayer. The 1854 Treaty, the BTA found, reserves to the tribe the right to take fish at all of their usual and accustomed fishing grounds and stations and permits them to erect temporary housing for purposes of curing the catch. Furthermore, these rights extend to fishing for commercial purposes. Therefore, the state has no authority to grant or permit the tribe or tribal members the privilege of engaging in the business of selling and curing fish caught under the auspices of the Treaty. Because the B&O; tax is a privilege tax imposed for revenue-raising purposes, the state is without authority for imposing the tax on Native American fishermen for the privilege of exercising their Treaty fishing rights. Moreover, that some of the taxpayer's curing activities took place outside reservation lands does not change the result, as there exists no authority for the proposition that a tribe's Treaty rights are limited to reservation boundaries.
The fact that the business was operated as a state-chartered corporation rather than by an individual Native American also does not result in a loss of the tax exemption. The question of tax immunity, the BTA said, does not turn on the particular form in which a Tribe chooses to conduct its business. If so, the BTA continued, then logic dictates that the choice of form should not impact on an individual Native American's tax immunity either. In any event, construing the language of the Treaty as it would be naturally understood by the Native American signatories, it would be ludicrous to conclude that they understood that the fishing rights reserved to them would be lost if they chose to exercise those rights through a state-chartered corporation. Such a construction would deny the Tribe and its members the benefit of modern-day business methods commonly employed by non-Indian fishermen, and would impede the full exercise of the Tribe's bargained-for commercial fishing rights under the Treaty.
Native Americans -- Tobacco and Motor Fuels Taxes
New York Association of Convenience Stores v. Urbach, No. 4895-95 (N.Y. Sup. Ct. 8/13/95). The New York Supreme Court gave the State Department of Finance and Taxation 120 days from the date of its decision in this case to begin equally enforcing the cigarette and motor fuel tax laws pertaining to on-reservation sales of cigarettes and motor fuels to non-Indian customers. The taxpayers are a group of off-reservation non-Indian retailers, who compete with Indian retailers of cigarettes and motor fuels. The taxpayers complain that New York is not enforcing the state's cigarette and motor fuels tax statutes and regulations on reservations sales made to non-Indians, causing the taxpayers economic injury by diminishing their ability to compete with reservation Indian retailers, and therefore depriving the taxpayers of their constitutional rights to due process and equal protection of the laws.
The state supreme court agreed with the taxpayers. To be fair, the court acknowledged the state's past legal difficulties with this issue, but noted that the latest set of statutes and regulations enacted by the state legislature had been upheld by the United States Supreme Court as a valid exercise of state power vis-a-vis reservation sales to non- Indian customers. That the issue is still politically difficult, the court continued, is no reason to indefinitely postpone the law's implementation, especially when the constitutional rights of others are affected.