In shocking similarity to the once-popular Amy Winehouse song “Rehab,” the U.S. Supreme Court denied certiorari in two nexus cases: KFC Corp. v. Iowa, 792 N.W.2d 308 (Iowa Dec. 30, 2010) and Lamtec Corp. v. Wash. Dep’t of Revenue, Docket No. 83579-9, en banc (Wash. Jan. 20, 2011) but left open the possibility to hear DIRECTV, Inc. v. Levin, 128 Ohio St.3d 68 (Ohio Dec. 27, 2010).
KFC is an economic nexus case involving the license of intangibles. KFC did not have any employees or property within Iowa; KFC licensed the use of trademarks and other intangibles to independent franchisees in the state in exchange for royalties. The Iowa Supreme Court held that KFC’s license of the intangibles was the “functional equivalent” of physical presence under Quill and that, in the alternative, physical presence was not required to find substantial nexus for corporate income tax purposes.
The Court also denied certiorari in Lamtec, where the taxpayer’s sole presence in the state was irregular employee visits to customers. The Washington Supreme Court determined that Lamtec had nexus with Washington for Business and Occupation (B&O) tax purposes and raised additional questions regarding how Washington views the physical presence test relating to the B&O tax, stating: “We conclude that to the extent there is a physical presence requirement, it can be satisfied by the presence of activities within the state.” (emphasis added).
The Court’s decision to deny certiorari in KFC and Lamtec is not surprising in light of the long line of nexus cases that the Court has declined to review in recent years (Capital One Bank v. Comm'n of Rev., 899 N.E.2d 76 (2009), cert. denied, 129 S. Ct. 2827 (2009); Geoffrey, Inc. v. Comm'n of Rev., 899 N.E.2d 87 (2009), cert. denied, 129 S. Ct. 2853 (2009);. Tax Comm'r v. MBNA Amer. Bank, N.A., 640 S.E.2d 226 (2007), cert. denied sub nom, FIA Card Services N.A. v. Tax Comm'r, 551 U.S. 1141 (2007); Lanco, Inc. v. Director, Div. of Tax., 879 A.2d 1234 (2005), aff'd, 908 A.2d 176 (2006), cert. denied, 551 U.S. 1131 (2007); A & F Trademark, Inc. v. Tolson, 605 S.E.2d 187 (N.C. Ct. App. 2004), cert. denied, 546 U.S. 821 (2005)). However, the Court’s decision is a disappointment, and we remain hopeful that the Court will provide additional guidance in this area, which so desperately is in need of clarity.
Although the Court dashed our hopes in the nexus arena, it invited the U.S. Solicitor General to submit a brief in DIRECTV v. Levin, rather than ruling on whether to accept the case. This case follows a string of defeats of DIRECTV’s claim that the satellite industry is discriminated against (e.g., DIRECTV v. Treesh, 487 F.3d 471, 480 (6th Cir. 2007) and DIRECTV, Inc. v. Tolson, 513 F.3d 119 (4th Cir. 2008)). Courts have rejected DIRECTV’s Commerce Clause claim by holding that sales tax statutes that apply to satellite television providers, but not cable television providers, do not discriminate. For instance, the Ohio Supreme Court reasoned that Ohio’s basis for differentiating between satellite and cable was not based on favoring an in-state enterprise over an out-of-state one. Stay tuned….