Crack Taxes and the Dangers of Insidious Regulatory Taxes

An unheralded weapon in the War on Drugs can be found in state tax codes: many states impose targeted taxes on individuals for the possession and sale of controlled substances. These “crack taxes” provide state officials with a powerful means of sanctioning individuals without providing those individuals the protections of the criminal law. Further, these taxes largely escape public scrutiny, which can contribute to overregulation and uneven enforcement. The controlled substance taxes highlight the allure to lawmakers of using tax law to regulate behavior, but also the potential dangers of doing so. Surprisingly, the judiciary has an underappreciated role in creating the allure of regulatory taxes. Because courts apply less scrutiny to taxes than to other types of laws, regulatory taxes get a blank check when challenged, incentivizing their use. Courts must reconfigure the way they approach regulatory taxes to remove the judicially-created incentive for insidious regulatory taxes like controlled substance taxes

Individual Home-Work Assignments for State Taxes

The surge in work-from-home arrangements brought on by the COVID-19 pandemic threatens serious disruptions to state tax systems. Billions of dollars are at stake at this pivotal moment as states grapple with where to assign income earned through these remote work arrangements for tax purposes: the worker’s home or the employer’s location? Some states—intent on modernizing their income tax laws—have assigned such income to the employer’s location, but have faced persistent challenges on both constitutional and policy grounds in response. This Article provides a vigorous defense against such challenges. The Supreme Court has long interpreted the Constitution to be deferential to state tax actions; new laws for the age of remote work surely satisfy constitutional demands. Moreover, assigning income from remote work to the employer’s location is more equitable than assigning the income to the worker’s home, justifying modernization efforts from a policy perspective. The solution to this homework assignment problem is evident: the states must revise their tax laws to face the evolving nature of work

Congress Should Sprinkle Some SALT on the Federal Courts

Observers of the state and local tax world regularly note the seemingly irresponsible actions so often taken by state revenue agencies, by state courts, and by state legislatures — a few recent examples of states acting badly are set forth below. In many ways federal law has encouraged these types of actions by placing limited checks on the states. The federal Tax Injunction Act (TIA) and the common law comity doctrine keep federal courts off the states’ backs. Also, the Supreme Court’s South Dakota v. Wayfair Inc. decision and its Murphy v. National Collegiate Athletic Association decision, in which state legislatures were freed from congressional restraints regarding the enactment of state gambling statutes, will likely encourage states to push back on virtually any federal effort in the interstate tax arena. Adding fuel to this fire, most of the states are now, in Franchise Tax Board v. Hyatt, seeking freedom from another check on their actions, by asking the Supreme Court to overturn precedent allowing state government actors to be sued in sister state courts (this is similar to Massachusetts’s efforts in Crutchfield Corp. v. Harding). State victories in these cases would surely fan the flames of unchecked state behavior into a veritable conflagration. There is, however, the glimmer of a fire extinguisher at the end of the tunnel — Congress could establish stronger federal checks on state tax actions by opening the federal courts to interstate taxpayers

Taking Tax Due Process Seriously: The Give and Take of State Taxation

As the Internet has increased the ease and amount of interstate transactions, the states have struggled to require “remote vendors”—vendors without a physical presence in the taxing state—to collect or pay taxes. The states are attempting to overcome these struggles by lowering Commerce Clause limitations on their jurisdiction to tax, but meaningful limitations on such jurisdiction imposed by the Due Process Clause await the states. The Due Process Clause requires that state actions be fundamentally fair, and to meet this standard a state must provide a person with a benefit and the person must indicate acceptance of that benefit before the state can require the person to collect or pay taxes. These requirements limit the states’ jurisdiction to tax certain remote vendors; thus, the states must take the Due Process Clause seriously if they wish to fully solve their remote vendor issues

Individual Home-Work Assignments for State Taxes

The surge in work-from-home arrangements brought on by the Covid-19 pandemic threatens serious disruptions to state tax systems. Billions of dollars are at stake at this pivotal moment as states grapple with where to assign income earned through these remote work arrangements for tax purposes: the worker’s home or the employer’s location? States intent on modernizing their income tax laws by assigning such income to the employer’s location have faced persistent challenges on both constitutional and policy grounds.This Article provides a vigorous defense against such challenges. The Supreme Court has long interpreted the Constitution to be deferential to state tax actions; new laws for the age of remote work surely satisfy constitutional demands. Moreover, assigning income from remote work to the employer’s location is more equitable than assigning the income to the worker’s home, justifying modernization efforts from a policy perspective. The solution to this home-work assignment problem is evident: the states must revise their tax laws to face the evolving nature of work

The Unexpected Role of Tax Salience in State Competition for Businesses

Competition among the states for mobile firms and the jobs and infrastructure they can bring is a well-known phenomenon. However, in recent years, a handful of states have added a mysterious new tool to their kit of incentives used in this competition. Unlike more traditional incentives, these new incentives — which this Article brands “customer-based incentives” — offer tax relief to a firm’s customers rather than directly to the firm. The puzzle underling customer-based incentives is that tax relief provided to the firm’s customers would seem more difficult for the firm to capture than relief provided directly to the firm — strange, as a state’s primary goal is to subsidize the firm’s investment in the state.After examining the emergence of this new form of incentive, this Article offers a novel explanation for their use and potential for success. Specifically, it argues that the effects of predictable consumer biases, particularly with respect to the salience of the tax relief provided by the incentives to consumers, cause customer-based incentives to differ substantively from traditional incentives in ways that are beneficial to both firms and states. Customer-based incentives thus present an example of how taxpayer behavior can influence the substantive effects of tax provisions, even causing two provisions with the same substantive goal to differ on the ground. Taking these behavioral effects into account provides opportunities to increase the effectiveness of tax provisions

Questioning Quill

The physical presence rule of Quill Corp. v. North Dakota is under increasing attack from the “Kill Quill” movement — a consortium of state tax administrators, industry leaders, and academics opposed to the decision. The physical presence rule prohibits states from requiring many out-of-state vendors to collect taxes on goods sold into the states. Kill Quill states have grown increasingly aggressive, and litigation is well underway in South Dakota and Alabama over those states’ direct disregard for the rule. As a petition to the Supreme Court for certiorari grows closer, the case for overturning the physical presence rule remains cloudy.Technology and the economy have changed in the 25 years since Quill was decided, but are these changes enough to convince the Court to reexamine the rule? This Article argues that more will be needed; attention must be drawn to the analytical gaps in the cases endorsing the physical presence rule. These cases have failed to explain the basis for requiring any connection between a taxing state and a taxpayer under the Commerce Clause (under which the physical presence rule originates) and have reflexively blended together the substance of sales taxes and use taxes. Through unpacking these issues, the Article exposes principles to guide the development of fundamentally sound rules for sales and use tax jurisdiction

Price Includes Tax: Protecting Consumers from Tax-Exclusive Pricing

This Note contributes to the debate regarding the behavioral effects of the salience of taxes on taxpayers by examining the impact of including the value of sales taxes in the displayed prices of goods. The Note concludes that consumers should make more beneficial decisions regarding consumption when the value of sales taxes is included in or with displayed prices

The Case for Preempting SALT Cap Workarounds

In late 2017 the Tax Cuts and Jobs Act (P.L. 115-97) was passed into law. Controversy instantly ensued. One major controversy revolves around the capping of the Internal Revenue Code section 164 state and local tax deduction at $10,000 per taxpayer (the SALT cap). Viewed by many blue states as an attack on their citizens, the SALT cap has spurred counterattacks in the form of state legislation designed to provide taxpayers with an avenue to counter the effects of the SALT cap (the SALT cap workarounds). While others have and are considering the effectiveness of the SALT cap workarounds, this essay explores a more basic question: do the states have the power to lob such counterattacks and facilitate taxpayers’ federal tax avoidance? The answer is more nuanced than it might first appear; unlike individual tax avoidance actions, the states’ actions raise the specter of federal preemption

Navigating 21st Century Tax Jurisdiction

Hailed as a massive victory for the states, the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. brought dated state tax jurisdiction standards into the twenty-first century, freeing the states to tax internet vendors. However, the decision left the larger state tax jurisdiction doctrine undertheorized and at a crossroads: Should the doctrine concern itself only with notice and fairness is-sues akin to those found in the due process personal jurisdiction realm, or should it also concern itself with protecting interstate commerce from undue state tax burdens? This Article will argue for the latter path by developing a robust theory of state tax jurisdiction that focuses on the potential undue burdens of tax compliance costs, burdens a threshold jurisdictional standard is uniquely able to address. From this compliance burden theory emerges a jurisdictional standard which would protect interstate commerce—particularly the activities of small businesses and entities that facilitate the commerce of others, such as online marketplaces, payment intermediaries, and common carriers—from the chilling effects of heavy state tax compliance costs. This Article will conclude by demonstrating how unanswered ques-tions from Wayfair provide opportunities to incorporate the pro-posed standard into the state tax jurisdiction doctrine, detailing the way forward from Wayfair