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Conference Call summarizes the roughly 15 percent of all non-pauper petitions that are the most likely candidates for certiorari. The Supreme Court’s jurisdiction is almost entirely discretionary, and justices in recent years have annually selected roughly 80 petitions from the approximately 7,500 that are filed. Conference Call is prepared by the law firms Akin Gump Strauss Hauer & Feld and Howe & Russell, which together publish the Supreme Court weblog. Tom Goldstein, who is the head of Supreme Court litigation for Akin Gump, selects the petitions from the docket of non-pauper petitions. Various attorneys for the firms then prepare summaries of the cases. If either firm is involved in a case mentioned in this column, that fact will be disclosed.
Can the state tax man cometh even for companies that don’t actually come to the state? In its private conference on June 14, the Supreme Court will consider whether to grant review in No. 06-1228, MBNA America Bank N.A. v. Commissioner of the State of West Virginia, addressing the constitutionality of a state law that imposes income and franchise taxes on out-of-state companies that have customers — but not a physical presence — in the state. Banking giant MBNA America issues and services Visa and Mastercard credit cards for customers throughout the United States, including West Virginia. During 1998 and 1999, its gross receipts attributable to West Virginia customers totaled over $8 million per year, resulting in income and franchise tax bills for those years of over $200,000. After paying its bills, MBNA — arguing that the state lacked jurisdiction over it — unsuccessfully sought a refund from the state tax commissioner. MBNA appealed the denial to a state administrative law judge, who reversed. Relying on the Supreme Court’s 1992 decision in Quill v. North Dakota, the ALJ concluded that a state tax on interstate commerce passes constitutional muster only if the taxed activity has a “substantial nexus” with the taxing state, which in turn requires the company being taxed to have a physical presence in that state. Because MBNA lacked a physical presence in West Virginia, the ALJ ordered that MBNA’s tax payments be refunded. The state appealed to a state circuit court, which reversed. MBNA again appealed, this time to the state’s highest court, the West Virginia Supreme Court of Appeals, which affirmed. In the majority’s view, Quill‘s physical presence requirement applies only to use and sales taxes; it does not extend to business franchise and corporate income taxes. Moreover, the majority reasoned, not only did the Court’s decision in Quill rest primarily on stare decisis, but the franchise and income taxes at issue in this case impose far fewer compliance burdens than did the sales and use taxes at issue in Quill. Finally, the court emphasized, the physical-presence test “makes little sense in today’s world” because “the growth of electronic commerce now makes it possible for an entity to have a significant economic presence in a state absent any physical presence there.” A more appropriate test, the court explained, would focus on whether the company being taxed had a “significant economic presence” in the state. Here, MBNA had precisely the kind of “significant economic presence” that would result in a “substantial nexus” for commerce clause purposes. In closing, the majority acknowledged “the great challenge in applying the commerce clause to the ever-evolving practices of the marketplace.” Hypothesizing that the Framers “could not possibly have foreseen the complex and varied ways that commerce is conducted today, especially via the Internet and electronic commerce,” the majority concluded that “in applying the Commerce Clause we must eschew rigid and mechanical legal formulas in favor of a fresh application of Commerce Clause principles tempered with healthy doses of fairness and common sense.” While agreeing with the majority that the application of the “substantial nexus” test is “ripe for clarification” by the Supreme Court, Justice Brent Benjamin dissented. He criticized the majority’s opinion as lacking any “precedential support whatsoever”: “the United States Supreme Court has never held in any state tax case that the nexus requirements of the Commerce Clause can be satisfied in the absence of a taxpayer’s physical presence in the taxing state.” Channeling Justice Antonin Scalia, Benjamin described his feeling of “foreboding anytime a court evokes the �foreseeability of the Framers’ as a basis for a decision — fear not because the rule of stare decisis is about to be followed by the court, but rather because the court is about to engage in some form of legislative activism for which the only support is political, not legal.” Describing the petition as presenting “the single most important constitutional issue in state taxation of the last four decades,” MBNA — represented by former Acting Solicitor General Walter Dellinger, now with O’Melveny & Myers — urges the Court to grant certiorari to review the decision below. In its petition, MBNA first asserts that the physical presence rule “has long been the touchstone of state authority to tax out-of-state corporations.” And while it acknowledges the Court’s statement in Quill that it had not, “in [its] review of other types of taxes, articulated the same physical presence requirement . . . established for sales and use taxes,” MBNA downplays the significance of that statement, explaining that the Court in Quill did not “purport to abolish the physical presence rule outside the sales and use tax context.” Indeed, MBNA emphasizes, the basic issue in Quill was the general authority of the states to tax corporations at all; nothing in the Court’s opinion indicated that its holding hinged on the kind of tax in question. MBNA’s petition also details at some length the adverse effects that are likely to follow from the West Virginia decision — which, it asserts, conflicts with (among others) a decision of the Tennessee Court of Appeals, approved by the Tennessee Supreme Court, involving virtually identical facts. Specifically, MBNA explains, the decision not only “throws open the gates to direct state taxation of any and all out-of-state businesses in any and all circumstances, so long as those businesses have in-state customers,” but could also thwart the purpose of international tax treaties by allowing states to impose taxes on foreign corporations and impose “enormous — and enormously wasteful — litigation costs.” By contrast, the physical presence rule is “easy to apply” and “confers a strong measure of certainty and predictability on the limits of state taxation authority.” Opposing certiorari, West Virginia — represented by Managing Deputy Attorney General Barbara H. Fleisher-Allen — hotly disputes MBNA’s contention that only a physical presence in the taxing state can constitute a “substantial nexus” for commerce clause purposes. Business franchise and income taxes, the state explains, “are simply outside the scope of the precedents of this Court . . . that impose a physical presence requirement for sales and use taxes.” The state also rejects MBNA’s claim that the decision below conflicts with the decisions of other state courts, explaining that the only arguable conflict is with the Tennessee Court of Appeals decision — which, it contends, has subsequently been undermined by another decision of that court. Finally, the state dismisses what it characterizes as MBNA’s “doomsday predictions” regarding the impact of the decision below, emphasizing that “interstate commerce has continued to flourish under modern commerce clause jurisprudence, even in the absence of an overarching �physical presence’ requirement.” Even if such predictions were to come to pass, however, “Congress can readily intervene to protect the national economic interest, as it has already done on other occasions.” The Court already has one dormant Commerce Clause case on its plate for next term: No. 06-666, Kentucky Department of Revenue v. Davis, which was granted on May 21. The Court may announce as soon as June 18 whether it will hear this commerce clause case as well.
OTHER CASES UP FOR REVIEW INCLUDE THE FOLLOWING: • 06-888/06-1100, Coral Power v. California (and cross appeal) (9th Circuit) Whether the Federal Energy Regulatory Commission has the power to order retroactive refunds under � 205 of the Federal Power Act for sales made under a tariff that the commission accepted for filing without suspension or hearing. • 06-1254, Quarterman v. Nelson (5th Circuit) Whether the lower court erred when it held that, by failing to divine a full-effect rule from the majority holdings of this Court as of 1994, the state court unreasonably applied clearly established federal law in adjudicating the respondent’s Penry claim. • 06-1267, Tamashiro v. Department of Human Services (Supreme Court of Hawaii) Whether the interpretation of the federal Randolph-Sheppard Act by the Supreme Court of Hawaii that prohibits a state from authorizing blind vendors to sue that state in state court for violations of state laws that impose requirements on state agencies that are not contained in federal law must be reversed absent a clear statement by Congress. • 06-1281, Kentucky v. Krause (Supreme Court of Kentucky) Whether, under the Fourth Amendment, police may employ deception with regard to their purpose and obtain voluntary consent to search. Incoming Calls for Review by the Solicitor General: • 06-273, Cox v. DaimlerChrysler. SG recommends deny. • 06-856, LaRue v. DeWolff, Boberg & Associates. SG recommends grant.

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