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Remembering the MTC's Hotly Debated Nexus Bulletin

Posted on May 13, 2019

Retro SALT is a new State Tax Notes series revisiting noteworthy articles from the publication’s past. This first installment is a reprint of a 1996 commentary on the Multistate Tax Commission’s National Nexus Program Bulletin 95-1 by Richard D. Pomp of the University of Connecticut School of Law and the late Michael J. McIntyre of Wayne State University Law School. Michael Mazerov of the Center on Budget and Policy Priorities, who was the MTC’s director of policy research at the time, provides context in an introduction.

The first article in this new State Tax Notes feature revisiting key articles of the past is the third in a series of three (a reply to a reply) that addressed the substance of and controversy over the Multistate Tax Commission’s December 1995 issuance of National Nexus Program Bulletin 95-1. (Full disclosure: I was the MTC’s director of policy research at the time. For the original article, see State Tax Notes, Aug. 12, 1996, p. 487.) Bulletin 95-1 articulated the position of roughly half the states that remote sellers of computers that contracted with independent third parties to provide post-sale, on-site warranty service had sales/use tax nexus and were not protected by Public Law 86-272 from corporate income taxation.

Coming three years after Quill, Bulletin 95-1 represented the first coordinated attempt by states to chip away at that decision’s holding by affirming the continuing relevance and validity of such pre-Quill decisions as Scripto and Tyler Pipe. “Firestorm of controversy” is overused, but it can be fairly applied to the response to the bulletin. Among other things, its issuance generated a concerted, ultimately unsuccessful effort to shoot the messenger by having California withdraw from the Multistate Tax Compact.

It is still difficult to understand the claim that the bulletin’s legal position was radical and invalid. In 2008, with much less controversy, New York applied the same attributional nexus theory to an in-state, third-party presence with arguably much less effect on a remote seller’s ability to “establish and maintain” a market within the state: the presence of members of the sellers’ affiliate programs. Nonetheless, New York successfully defended the constitutionality of its click-through-nexus law in its own high court. The U.S. Supreme Court’s denial of review of that decision encouraged the emulation of the law by many states and 10 years of agitation over the ever-more-damaging consequences of Quill. Bulletin 95-1 can rightly be viewed as the spark that led to South Dakota v. Wayfair Inc. almost 25 years later.

Michael Mazerov

Richard D. Pomp is the Alva P. Loiselle professor of law at the University of Connecticut Law School and a member of State Tax Notes’ Advisory Board. Michael J. McIntyre is professor of law at Wayne State University Law School.

On December 20, 1995, 26 states through the Multistate Tax Commission issued National Nexus Program Bulletin 95-1.

The bulletin has inspired considerable controversy. Pomp and McIntyre wrote a defense of the bulletin, “State Taxation of Mail-Order Sales of Computers After Quill: An Evaluation of MTC Bulletin 95-1,” which appeared in State Tax Notes, July 15, 1996, p. 177. Eric J. Miethke, a partner with Nielsen Merksamer, Sacramento, Calif., wrote a response, “Man the Pumps! A Response to Pomp and McIntyre’s Analysis of Bulletin 95-1,” which ran in State Tax Notes, July 29, 1996, p. 307. This article responds to Miethke’s comments.

In what must be a first in both nautical and tax annals, Eric Miethke announced to one of the authors (Pomp) in the midst of sailing a 30-foot sloop in 40-knot gusts on San Francisco Bay: “I’ll be writing a response to the piece that you and McIntyre wrote on 95-1.” Safe seamanship discouraged further discussion at the time, but Miethke soon thereafter did fire his broadside.1 It was filled with nautical metaphors, and was directed primarily at the Multistate Tax Commission (MTC) and its staff. The wild cannonade sprayed us (Pomp and McIntyre) as well, however, and we are now glad for the opportunity to respond — from land.2

Readers who saw Miethke’s recent Viewpoint piece but did not see our original report might be misled into thinking that we had — or should have — written an essay on California tax law or on California politics. According to Miethke, “It is . . . tragic that Pomp and McIntyre chose not to consider the substantive or procedural law of California before evaluating the debate over Bulletin 95-1, because to criticize the California debate without reviewing California law is like playing Hamlet without the prince.”3 Miethke should stick to nautical metaphors — he runs aground with his reference to Hamlet.4

Our report was not about California law or California politics.5 It was an analysis of the federal constitutional law issues presented in MTC Bulletin 95-1. That bulletin concluded, inter alia, that, in general, it is constitutional for a market state to require an out-of-state computer vendor to collect the use tax on its sales in that state if the vendor is providing warranty repair services in that state through a contractual arrangement with a third party. We explained in great detail that the conclusion reached in Bulletin 95- 1 has strong support in Supreme Court cases preceding Quill6 and that Quill cannot be fairly read as having devitalized those precedents.7 Miethke touches only tangentially on our discussion of the Court’s nexus jurisprudence. Instead, he uses our report as an excuse to attack the MTC and to present his perspective on the heated California political battle that he participated in after the promulgation of Bulletin 95-1.

We had no need to consider the substantive or procedural law of California in our report because the law of California is irrelevant to the federal constitutional issues raised by Bulletin 95-1. Nor do we “criticize the California debate” over Bulletin 95-1. Our piece was over 8,600 words long, with 53 footnotes. The only substantive reference to California is in one footnote, in which we quoted Ernie Dronenburg, a member of the State Board of Equalization (BOE).8 The text accompanying that footnote noted that 26 states had signed on to the legal position set forth in Bulletin 95-1. The purpose of the footnote was to alert readers to events in California following the promulgation of the bulletin.

Because this footnote is the only substantive reference to the Board of Equalization, it must be the intended support for Miethke’s reference, without citation, to our “criticiz[ing] the California debate,” as well as his further statement that “Pomp and McIntyre seem to suggest . . . that the Board of Equalization really agreed with the substance of Bulletin 95-1, but withdrew their support for political or other reasons.”9 All we thought we were doing in that brief footnote was referencing an authoritative statement by a member of the BOE about the status of the bulletin.10

According to Miethke, we should have recited the views of those members of the Board of Equalization who he claims were opposed to the bulletin for substantive reasons. Our obvious reason for quoting Ernie Dronenburg was that he was the only board member authorized to communicate the board’s views on Bulletin 95-1 to the MTC.11 Miethke does not assert that Dronenburg was speaking out of school. His apparent complaint is that Dronenburg, with the apparent concurrence of the BOE, did not deliver the type of hostile message he would have preferred. The addition of quotations from other board members, however, would not have changed the substance of our report one iota.12

Miethke states that he is leaving to others the task of giving detailed comments on the substance of our report.13 In the same spirit, we are leaving to others the job of regaining America’s Cup from the Kiwis. Miethke does, however, offer “two thoughts” on what he claims is the substance of our report.

First, he characterizes us as having “conceded” that Bulletin 95-1 was not a statement of “settled law,” by which he means that there are no decided cases directly on point.14 To state the obvious, however, is hardly a “concession.” We emphasized the obvious in our report because

[s]ome criticism of 95-1 reduces to nothing more than the observation that the bulletin does not establish its position by citing any case directly on point. Everyone acknowledges, however, that the Court has not directly addressed a case like the one presented in Bulletin 95-1. If it had, there would have been little point in issuing the bulletin.15

That there is no case directly on point explains the need for Bulletin 95-1 and is the logical starting point in any dispassionate analysis of the issues raised therein.

Although no case is directly on point, the Supreme Court has addressed many analogous sitations, as we discussed in our report. The Court has held, for example, that an out-of-state corporation has a physical presence, and thus nexus, in a state if the person acting on its behalf has performed activities significantly associated with the corporation’s ability to establish and maintain its in-state market. Nexus also exists if such person has made possible the realization and continuation of valuable contractual relations between the corporation and its customers, has resolved problems regarding the use of the corporation’s product after its receipt by the customer, has obtained or retained the good will of the customer, or has assisted a local service department in repairing the corporation’s products.16 These precedents strongly support the conclusion reached in Bulletin 95-1.

Second, Miethke offers a series of hypotheticals to suggest that treating independent contractors as creating nexus for out-of-state taxpayers would present some difficult cases for the Court. We certainly agree that cases can arise which would test the limits of the Court’s current nexus standards. Not for nothing has the Court characterized its Commerce Clause jurisprudence as a “quagmire.” Whether the Court would find nexus under the facts of Miethke’s hypotheticals, however, has little to do with the merits of Bulletin 95-1.

Because Miethke asserts that our “analysis really doesn’t add anything new to the debate,”17 it is useful to review what we actually attempted. Our report first rejected the position asserted by some critics that the MTC should refrain from issuing nexus bulletins unless it can demonstrate beyond reasonable challenge that its position would be upheld by the courts. We rejected this “beyond-reasonable-challenge” standard as especially inappropriate when the issue involves an interpretation of the Supreme Court’s Commerce Clause jurisprudence.18 For the same reasons, we obviously would reject a rule limiting nexus bulletins to “settled law.”

We next analyzed the Quill case and noted that the Court had reluctantly reaffirmed Bellas Hess, resting its decision primarily on the reliance interests of the mail-order industry and principles of stare decisis. We stated:

There is not even a hint in Quill that the Court, in [preserving the physical presence test of Bellas Hess,] was repudiating all of its many cases that gave content to that test. Indeed, to read Quill as some radical decision — a voyage into uncharted waters — is to treat the Court’s stated concern for stare decisis as claptrap. A court concerned with preserving existing expectations and providing a bright-line test for nexus should not be read as having discarded existing nexus jurisprudence unless it has made an explicit statement to that effect.19

Our ultimate opinion was that the position taken by the MTC in Bulletin 95-1 is supported by Supreme Court precedent and by cogent legal analysis. As we explicitly stated in that report, we did not attempt to determine the audit policies or substantive or procedural laws of any state or to determine whether the bulletin should have been published without a prior hearing. Our assigned mission was limited to an analysis of federal constitutional matters.

Although our mission had limits, we did set for ourselves an ambitious agenda. Our report attempted to develop the appropriate standard to apply in evaluating Bulletin 95-1, to place Quill in its proper historical context, to discern the teachings of Quill, to provide a conceptual framework for thinking about the concept of physical presence, to analyze the relevant precedents, and to apply the principles we developed in our analysis to the facts of Bulletin 95-1.

In addition to describing our approach as not adding anything new to the debate, Miethke also accuses us, because we do not discuss California law as part of our federal constitutional analysis, of “seem[ing] to miss the whole point of the Bulletin 95-1 dispute, at least as that dispute has played out in California.”20 We think that Miethke is dragging his anchor in criticizing us for following our agenda rather than his.

Part of Miethke’s rhetorical style is to intimate that we are “pedantic”21 and out-of-touch “academics.”22 He also chastises us soundly for describing the opposition to Bulletin 95-1 as “shrill and angry.”23 In fact, we characterized only a portion of the debate in such fashion, explicitly complimenting various individuals with opposing views who had stuck to the legal issues without engaging in personalities. Miethke’s response to us, and particularly his ad hominem attack on the MTC, may strike some readers as “shrill and angry.” We leave it to them to decide.

One of our aspirations in preparing our report on Bulletin 95-1 was to direct the discussion toward a constructive analysis of the important constitutional issues at stake. Our disappointment at this first response to our report does not discourage us. Nor are we inclined to keelhaul Miethke or cut his ration of grog for his political posturing and overheated rhetoric, although those in the direct line of his broadside may feel differently. When it comes to his discussion of our report, nevertheless, Seaman Miethke appears to be adrift without a rudder. We are happy to have the opportunity to throw our matey a lifeline.

FOOTNOTES

1 “Man the Pumps! A Response to Pomp and McIntyre’s Analysis of Bulletin 95-1,” State Tax Notes, July 29, 1996, p. 307 (hereinafter Miethke).

2 The log should note that McIntyre prefers to enjoy his sailing vicariously through Patrick O’Brian novels, despite the best efforts of Pomp and Miethke to convince him that actual sailing also has its charms. As this goes to press, Pomp is off to sail the San Juan Islands; McIntyre is still at sea with Capt. O’Brian.

3 Miethke, supra note 1, at 308.

4 For a succinct summary of Shakespeare’s venture into Danish politics — which may rival the politics of California — see Stanley J. Sharples, “Hamlet”:

Rather than Hamlet, Miethke apparently would prefer a morality play with the MTC as the Devil.

5 Our report, nevertheless, might have some political implications. Opponents of the MTC in California were characterizing Bulletin 95-1 as representing some far-out extension of current nexus standards under the U.S. Constitution. The conclusion of our report, if accepted, would take the wind out of their sails.

6 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).

7 For the unexpurgated version, see Pomp and McIntyre, “State Taxation of Mail-Order Sales of Computers After Quill: An Evaluation of MTC Bulletin 95-1,” State Tax Notes, July 15, 1996, p. 177 (hereinafter Pomp and McIntyre).

8 Pomp and McIntyre, supra note 7, at 177 n. 1.

9 Miethke, supra note 1, at 307.

10 We quote Dronenburg as explaining that the BOE vote “was not a rejection of the bulletin’s contents, but a reflection of concerns that the document was being treated as if it had the weight of a regulation.” Pomp and McIntyre, supra note 7, at 177, n. 1.

11 See Minutes of Business Taxes Committee Report, California Board of Equalization, March 14, 1996.

12 In our view, the personal opinions of various board members without supporting legal analysis are irrelevant to the public debate over the federal constitutional issues raised by Bulletin 95-1. There has been no legal analysis by the members because the BOE has not taken an official position on those issues nor has it heard a case involving them.

13 Miethke, supra note 1, at 308.

14 Miethke, supra note 1, at 308.

15 Pomp and McIntyre, supra note 7, at 178-79.

16 Pomp and McIntyre, supra note 7, at 181-83.

17 Miethke, supra note 1, at 308.

18 Pomp and McIntyre, supra note 7, at 178.

19 Pomp and McIntyre, supra note 7, at 181.

20 If limiting our analysis of Bulletin 95-1 to federal constitutional matters is missing the point, then we missed the point not only in California but also in the other 25 states whose law we did not examine.

21 One of his “less pedantic” views, however, that “the Court’s role [in Quill] was to remove any argument that Congress could not constitutionally resolve the issue,” Miethke, supra note 1 at 308, is on all fours with the point made in our article. See Pomp and McIntyre, supra note 7, at 178-79.

22 Miethke seems to have located our ivory towers east of “both the Beltway and the Hudson River.” Miethke, supra note 1, at 308. McIntyre would prefer an ivory tower somewhat closer to his home in Michigan.

23 Miethke, supra note 1, at 308.

END FOOTNOTES

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