Weekly SSRN Tax Article Review And Roundup: Layser Reviews Erbsen's The Constitutional Connection Between State Tax Authority And Personal Jurisdiction

This week, Michelle Layser (Illinois) reviews Allan Erbsen (Minnesota), Wayfair Undermines Nicastro: The Constitutional Connection Between State Tax Authority and Personal Jurisdiction, 128 Yale L.J.F. __ (2019).

With the holiday season in full swing, most people tax professors have spent at least some time shopping on the internet and contemplating the impact of South Dakota v. Wayfair. By now, we’re all well versed in the basics. Wayfair is a milestone tax law case that sets forth a new interpretation of the Commerce Clause that permits states to enforce sales and use tax collection obligations against out-of-state online merchants. Right? Well, sort of.

According to Professor Allan Erbsen, labels like “tax law case” aren’t particularly helpful, and the doctrinal impact of Wayfair may extend well beyond the territorial borders of tax law—or even Commerce Clause jurisprudence. Erbsen argues that Wayfair’s Commerce Clause holding justifies reconsideration of the Court’s 2011 decision in J. McIntyre Machinery v. Nicastro, a Due Process case that had nothing to do with tax.

The Nicastro case arose when a New Jersey scrap-metal recycling worker lost four fingers in a machine and sued the out-of-state manufacturer in New Jersey. The manufacturer defended on the basis that it had never targeted New Jersey for sales. It had merely targeted the national market in the United States. Not only that, but it had never even sold its product directly to anyone in New Jersey. It had always used a distributor intermediary.

The Court ruled in favor of the manufacturer, deciding that its contacts with New Jersey were not purposeful and, therefore, did not establish personal jurisdiction under the Due Process clause. Thus, under Nicastro states’ ability to assert personal jurisdiction over out-of-state sellers is relatively narrow.

In contrast, Wayfair opened the door for states to assert broad tax enforcement jurisdiction over out-of-state sellers. The case arose when the online merchants Wayfair, Overstock and Newegg sued to block South Dakota’s enforcement of its sales tax collection obligations. None of the merchants had any physical presence in South Dakota, which was required under the controlling Commerce Clause precedent. Rather than rule for the merchants, though, the Court opted to overturn the precedent.

Erbsen argues that Nicastro should be reconsidered in light of Wayfair. Never mind that Nicastro was exclusively a Due Process clause case and Wayfair was exclusively a Commerce Clause case. The two cases aren’t nearly as distinct as they appear, according to Erbsen. The “tax jurisdiction” and “personal jurisdiction” distinction isn’t all that meaningful, either. Here’s why.

For starters, Commerce Clause and Due Process doctrines are closely related, generate parallel inquiries, and share a similar intellectual history. And tax jurisdiction and personal jurisdiction doctrines have also developed along parallel tracks. So in many ways, these lines of doctrines are based in similar reasoning and have developed in sync. But even more importantly, Erbsen argues, there is a way that these doctrines overlap entirely within Constitutional Law frameworks.

Both Wayfair and Nicastro are part of “an overlapping web of constitutional provisions governing horizontal federalism.” Horizontal federalism is “the body of law that considers how the existence of multiple states limits the power of each.” These provisions, Erbsen argues, are best understood together—not in isolation. Unfortunately, says Erbsen, the Court and commentators tend to view horizontal federalism problems in isolation. 

This leads to inconsistent reasoning, like that used in Wayfair and Nicastro. Erbsen identifies five inconsistencies between the cases. He argues in detail that Wayfair “extolls state interests, tries to craft rules that recognize how markets work and avoid distorting behavior, promotes fairness, and does not allow outlier scenarios to drive the analysis.” In contrast, he argues that Nicastro “impugns state interests, ignores how markets actually work while incentivizing inefficient behavior, rejects fairness, and emphasizes outlier hypotheticals.”

Erbsen sets forth a compelling argument that, in each case, the Wayfair reasoning should prevail, and Nicastro should be reconsidered. The two cases are, after all, conceptually similar: both involved the conduct of an out-of-state entity that motivated the state to respond by compelling the entity to take a particular action.

But he concludes with his larger point, stating that “the Court should be wary of its tendency to construct doctrinal silos that obscure similarities between horizontal federalism problems.” The same warning could be given to the legal academy, which he says “reinforces these distinctions by addressing personal jurisdiction and tax law in separate courses and separate fields of scholarship.”

This article contains insights relevant to any tax scholar interested in state and local taxation, tax enforcement, Constitutional Law, or the language of law.

Here’s the rest of this week’s SSRN Tax Roundup:

• John Manuel Barrios (Chicago) and John Gallemore (Chicago), Tax-Related Human Capital: Evidence from Employee Movements (November 2018)
• Johannes Becker (Muenster), Joachim Englisch (Muenster) and Deborah Schanz (Munich), How Data Should (Not) Be Taxed (November 22, 2018)
• Nadja Braun Binder (Zurich), AI and Taxation: Risk Management in Fully Automated Taxation Procedures (October 1, 2018)
• Marcus Doxey (Alabama), James Lawson (Alabama) and Shane Stinson (Alabama), The Effects of Prefilled Tax Returns on Taxpayer Compliance (October 31, 2018)
• Clifton Fleming (BYU), To What Degree Does Customary International Law Require Accommodation of a Source Country's Right to Tax High, Tax Low, or Not Tax at All?, A Commitment to Excellence: Essays in Honor of Emeritus Professor Gabriel A. Moens (2018)
• Clifton Fleming (BYU), Robert J. Peroni (Texas - Austen) and Stephen E. Shay (Harvard), Expanded Worldwide Versus Territorial Taxation after the TCJA, Tax Notes, Vol. 161 (2018)
• Jason Furman (Harvard Kennedy School), The 2017 Tax Law: A Boost to Growth or a Missed Opportunity? Capitalism and Society: Vol. 13: Iss. 2, Article 2 (December 28, 2018)
• Shivam Goel (Independent), Whether Recovery of ‘Arrears of Lease Rent’ Can Be Claimed As ‘Operational Debt’ Within the Meaning of Section 5(21) of the I&B Code, 2016? (December 18, 2018)
• Philip Hackney (Pittsburgh), Written Testimony of Philip Hackney for the Hearing on Oversight of Nonprofit Organizations: A Case Study on the Clinton Foundation (House of Representatives Committee on Oversight, December 13, 2018), Hearing Before the U.S. House of Representatives, Committee on Oversight and Government Reform’s Subcommittee on Government Operations of the United States House of Representatives, U. of Pittsburgh Legal Studies Research Paper No. 2018-40 (December 18, 2018)
• Charles Edward Andrew Lincoln IV (BU), The OECD and the U.S. Regarding Risk Allocation, Practical Guide to U.S. Transfer Pricing, 3rd Edition (2018)
• Charles Edward Andrew Lincoln IV (BU), Porter Analysis: A Business Strategy of Amazon.Com Through a Value Chain and Comparative Advantage Analysis of Amazon’s Trademarks and Intangibles, Practical Guide to U.S. Transfer Pricing, 3rd Edition (2018)
• Leopoldo Parada (Turin), Hybrid Entities and Conflicts of Allocation of Income Within Tax Treaties: Is New Article 1(2) of the OECD Model (Article 3(1) of the MLI) the Best Solution Available?, British Tax Review, Issue 3 (2018)
• Katerina Pantazatou (Luxembourg), Funds and EU Tax Directives, Investment Fund Taxation, W. Haslehner (Ed.) (2018)