U.S. Supreme Court won’t hear KFC tax dispute

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Since the Court’s 1992 decision in Quill Corp. v. North Dakota, which sustained a taxpayer challenge under the Commerce Clause, states and taxpayers have been left unassisted in their efforts to interpret and apply these limits. The resulting clutter of vague and inconsistent standards has undermined the protections of the Commerce Clause.

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Finally, we think taxation of the income here is most consistent with the now prevailing substance-over-form approach embraced in most of the modern cases decided by the Supreme Court under the dormant Commerce Clause. When a company earns hundreds of thousands of dollars from sales to Iowa customers arising from the licensing of intangibles associated with the fast-food business, we concluded that the Supreme Court would engage in a realistic substance-over-form assessment that would allow a state legislature to require the payment of the company’s fair share of taxes without violating the dormant Commerce Clause. …

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In fact, “physical presence” in today’s world is not “a meaningful surrogate for the economic presence sufficient to make a seller the subject of state taxation.” … “Physical presence” often reflects more the manner in which a company does business rather than the degree to which the company benefits from the provision of government services in the taxing state. Does it really make sense to require Barnes and Noble to collect and remit use taxes, but not impose the same obligation on Amazon.com, based on the difference in their business methods? …

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Further, extension of the “physical presence” approach in [the earlier SCOTUS ruling] would be an incentive for entity isolation in which potentially liable taxpayers create wholly owned affiliates without physical presence in order to defeat potential tax liability. … We doubt that the Supreme Court would want to extend such form-over-substance activity into the income tax arena where substance over form has been the traditional battle cry.