J.C. PENNY BANK V TENNESSEE 1999

1
J.C. PENNY BANK V TENNESSEE 1999

• The bank is a subsidiary of J.C. Penny and is
  incorporated in Delaware. It has no presence in
  Tennessee which seeks to tax its income from its
  credit card operation.
• Tennessee claims the bank has nexus arising from
  the banks solicitation of customers, its
  services on credit cards, its extension of credit
  and the interest and fee income it realizes from
  customers in the state.

2
J.C. Penny Bank

• The court Tennessee Court of Appeals notes the
  distinction between due process and the commerce
  clause nexus considerations created in Quill, and
  finds due process nexus, i.e., there is minimum
  contact.
• But the court finds that nexus does not exist for
  commerce clause purposes, finding that this
  situation is very like Quill and Bella-Hess.
  Tennessee claimed a distinction for those cases
  since they involved the sales and use tax. The
  court finds that this difference in the type of
  tax is immaterial.
• I like the point Justice Highers makes p. 378
  that The problem is that phrases such as
  minimum contacts and substantial nexus do not
  really mean anything. He adds that decisions
  must be on a case by case basis.

3
(No Transcript)
4
J. C. PENNY BANK CONCLUDED

• Tennessee also claimed that nexus could be found
  through the banks ownership of the credit card
  carried around by Tennessee residents. The court
  found that the ownership of the card was
  immaterial since the card had no real value and
  that the important thing was the intangible
  account, which was located in Delaware.
• Finally, Tennessee claimed that the presence of
  the Penny stores in that state sufficed to create
  nexus, but there was no solicitation of credit
  cards, or payments made to or by the stores. The
  United States Supreme Court has never upheld a
  tax where the out-of-state taxpayer had no
  physical presence in the state. Tyler Pipe is as
  close as the Supremes have come to that result.

5
(No Transcript)
6
(No Transcript)
7
FOOTNOTE B, PAGE P. 384

• A state can levy a tax on a taxpayer if he is
  domiciled in the state, or if the state is the
  source of the income. This is the residence
  and source statement on p. 384.
• If both the state of domicile and the state from
  which the income flows tax the same income, the
  state of domicile normally yields to the source
  state to avoid double taxation. This is also an
  application of the credit for state taxes paid
  which is available only to individuals. Recall
  that the state of domicile will tax income from
  everywhere, but give a credit against that tax
  for taxes paid to another state.

8
(No Transcript)
9
GEOFFREY V SOUTH CAROLINA TAX COMMISSIONER

• Geoffrey is a sub of Toys-R-Us, and owns the
  trade-names and trademarks of the business. It
  licenses these intangibles to its parent for 1
  of sales. It has no presence in South Carolina
  and resists the states efforts to tax it on that
  income.
• The court followed the Quill requirements for
  nexus and found all of them present. On the
  commerce clause issue the court held that the
  intangibles, that is, the trade marks, were
  present in the state which the court claims
  satisfied nexus requirements.

10
GEOFFREYS PETITION FOR CERTIORARI

• In its petition Geoffrey posited that if Geoffrey
  is correct in holding that the presence of an
  intangible asset in a state provides nexus then
  the software company that licenses its product is
  taxable in all states where the software is used
  that a bank or investor buying a portfolio of
  loans is taxable wherever the security for the
  loan is located, and that Tiger Woods is taxable
  on his endorsements for Nike wherever the ad is
  published.
• Can this be true under Geoffrey? Does the
  location of an intangible asset create nexus?
  Maybe. Hellerstein wrote the petition for cert.
  in Geoffrey.

11
(No Transcript)
12
FOOTNOTE C, P. 394 REACTION TO GEOFFREY

• Note the split of authority on whether Quill
  requires a physical presence in the state for
  income taxes.
• Illinois and Ohio hold that Quill does not
  require physical presence for nexus for income
  tax purposes, while New Mexico and Texas say that
  Quill requires physical presence for income taxes
  since the type of tax should make no real
  difference in the nexus area.

13
Toys R Us involved a tax dodge

• The subsidiary corporation was created by Toys R
  Us in Delaware which does not tax income from
  intangibles the parent then transferred its
  trade marks in a tax free transaction to the
  subsidiary, signing a contract to pay the
  subsidiary 1 of sales for the use of the
  trademarks. Toys R Us deducts the payment in
  computing its state income tax. This scheme has
  no effect on the federal income tax .

14
(No Transcript)
15
(No Transcript)
16
A MASSACHUSETTS REVENUE RULINGp. 395

• Massachusetts announces that it will follow the
  logic of Geoffrey, and will apply it to the
  licensing of a trade name, income from the
  licensing of a patent, income from a franchise
  and the licensing of a patent together with a
  trade name.
• Note the absence of commerce clause protection
  for the taxation of insurance companies, pp.
  397-8.

17
(No Transcript)
18
NOTES AND QUESTIONS, P. 398

• 1. Same facts as Geoffrey, but Isnt this the
  same scenario as the Saks 5th Avenue and
  Bloomingdales cases and perhaps exempt for that
  reason, at least in Ohio and Pennsylvania?
• 2. Is 2 of sales de minimus? Perhaps.
• 3. Why should Dress Ship, Inc.s taxability
  depend on to whom Girl Town sells its goods?
• 4. Is there a foreign commerce clause problem,
  like Japan Lines? Besides, how could
  Massachusetts collect a tax from a Dutch company?

19
(No Transcript)
20
FOOTNOTE B, P. 398

• 1. This would be taxable under Geoffrey.
• 2. The data on the server is intangible property
  and might be taxable under Geoffrey. What if
  the server is in Bombay? What about the server
  used by Kazaa, the company that provides pirated
  songs, which is or was for a time on a ship in
  the North Sea.
• 3, 4 and 5. All three examples involve
  transactions involving the sale of tangible
  property and hence are protected by Public Law
  86-272 and are not taxable.

21
FOOTNOTE C, P. 400, MOBILE PROPERTY

• Oregon, Arkansas and Oklahoma have held that the
  presence of railroad rolling stock in the state
  provided nexus for taxation of the owner even
  though the railroad did no business there, The
  rail cars were swapped with other railroads.
• But Kentucky and Idaho find that since no
  business is done by the railroad in those states
  nexus is absent. The railroads claimed that they
  did not even know the cars were in those states.
  Yet another split of authority.

22
(No Transcript)
23
HEFTEL BROADCASTING, P. 400

• This decision by the Supreme Court of Hawaii may
  be the farthest stretch to establish nexus.
• Television films were licensed by CBS to Hawaiian
  TV stations. The films were made on the
  mainland. The contracts were governed by the law
  of mainland states, and the transfer of
  possession of the film and tapes occurred on the
  mainland.
• Nevertheless the court found nexus on the basis
  that CBS was doing business in Hawaii by
  permitting its films to be broadcast there.

24
PUBLIC LAW 86-272, 15 U.S.C. 381-384

• This is congresses response to Northwestern
  here we see the statute and examine its scope.
• It forbids a state from taxing a foreign person
  merely because it solicits orders from inside the
  state, but is limited to income taxes and income
  from tangible property.
• The statute excludes the telecommunication and
  transportation industries as well as
  broadcasters. P. 404.

25
(No Transcript)
26
REMEMBERINGTYLER PIPE

• Public Law 86-272 prohibits a state from
  assessing an tax on net income on an out of state
  business merely because it solicits orders within
  the state. The law is very clear that the
  prohibition covers solicitation by an independent
  contractor.
• That is just what Tyler pipe did. So why is is
  still liable for Washingtons Business and
  Occupation tax? Because Washingtons Business
  and Occupation tax is a tax on gross income, not
  net income.

27
WISCONSIN DEPT. OF REVENUE V WRIGLEY

• Wrigley sells gum into Wisconsin but has no
  office or property there. It employs local
  salesmen to do a number of things, all of which
  Wrigley claims amount to solicitation which is
  protected by P.L. 86-272.
• The court finds that calling on customers,
  supplying display racks, the distribution of
  promotional materials, the recruitment and
  training of employees, and mediating customer
  disputes are all solicitations. Hence, those
  activities are protected from taxation by P.L.
  86-272.

28
(No Transcript)
29
MORE WRIGLEY

• However, the salesmen also replace stale gum
  with fresh stock, will supply a dealer if his
  stock is low so he doesnt have to order from
  Illinois, which enables the retailer to keep a
  supply of gum on hand. To accomplish the first
  two activities the salesmen carry a stock of gum.
  The court holds that these activities are not
  within the term solicitation, nor are they
  ancillary to solicitation, so nexus exists and
  P.L. 86-272 does not apply. Wrigley is taxed.

30
WRIGLEY AGAIN

• Wisconsin contended that three other activities
  were outside the scope of solicitation, but the
  Supremes sided with Wrigley on those items.
• The three activities described above that
  Wisconsin said were outside of the term
  solicitation were recruiting and training
  salesmen in Wisconsin, the use of hotels and
  homes for sale related activities and mediating
  credit disputes with customers to ingratiate the
  buyer with the Wrigley salesmen.

31
(No Transcript)
32
THOUGHTS ON WRIGLEY

• Doesnt filling an order for a dealer lead to
  more sales, as does replacing stale, old, rotten
  gum with good new stuff?
• What will Wrigley will do if it wishes to
  eliminate the Wisconsin tax? It seems all they
  need to do is to not furnish the salesmen with
  gum.
• If the non-solicitation sales were de minimus
  they would be ignored. Such sales were 7/100,000
  of the total business Wrigley did in Wisconsin.
  What does it take to be insignificant?

33
(No Transcript)