Supreme Court Overrules Hall, Expanding State Sovereign Immunity

Stop me if you’ve heard this one before: This spring, the U.S. Supreme Court handed down a highly anticipated decision in a case that could have implications on state sales tax rules and enforcement in the coming years.

Although that description fits the Supreme Court’s historic South Dakota v. Wayfair ruling last year, I’m actually referring to the court’s May 13 ruling of the Franchise Tax Board of California v. Hyatt appeal. Although this case was not centered on sales tax issues, it means that post-Wayfair sales tax rules changes are less likely to be challenged.

Supreme Court

In its 2018 Wayfair decision, the court overturned Quill Corp. v. North Dakota, replacing that precedent’s condition that sellers must have a physical presence (or nexus) in a state before being required to collect sales tax with an economic nexus requirement more relevant for interstate e-commerce transactions. In this year’s Franchise Tax Board of California ruling (a 5-4 decision), the justices also overturned court precedent, Nevada vs. Hall, that generally served as a check on states’ taxing authority. While the Wayfair decision has far greater tax implications, the Franchise Tax Board of California decision’s repercussions are also noteworthy.

The Hyatt ruling is highly significant in application to various areas of the law, including civil procedure, the sovereign immunity of states, comity and reciprocity. It is also highly relevant to state sales taxes, especially in a post-Wayfair environment where states are still fine-tuning their regulations to reap the benefits. The Hyatt ruling provides both benefits and impairments to the states. On one hand, the ruling will make it easier to shield state businesses from out- of -state tax lawsuits. On the other hand, the ruling may make it very difficult for states to safeguard their own companies from the compulsory legal responsibility of collecting sales taxes in the other states where they are also doing business.

The Hyatt ruling also bolsters the advantages that South Dakota v. Wayfair provided to large companies that already had mature sales tax collection and remittance processes and supporting technology in place. Writing in Law360, University of Richmond School of Law Tax Professor Hayes Holderness notes, “Together, Wayfair and Hyatt mean that remote vendors are subject to new tax collection obligations and have to go to the imposing state to challenge misapplications of those obligations.” Cases like Hyatt are rare, so I don't mean to oversell it, but that result could be fairly burdensome for smaller taxpayers.

Consequently, the Hyatt ruling will have serious repercussions upon the nonresident remote sellers, as it permits states to enact more effective and wider tax regulations that apply specifically to nonresidents, without the risk of potential challenges in other sister states’ courts. This would make it more applicable to inbound foreign remote seller companies doing business in the U.S., thus, it could become problematic for non-U.S. remote sellers and vendors. Nevertheless, even with a tax judgment in hand, states will find it difficult to collect from foreign- remote sellers, if they do not already have assets, a permanent establishment (P.E.) or some type of physical presence within the U.S. More so now, as states or taxpayers can no longer bring legal claims in other states' courts, but taxpayers should beware, as states still must observe Full-Faith and Credit and give judicial enforcement effect to the judgments of other state courts.

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George L. Salis, Principal Economist and Tax Policy Advisor at Vertex Inc.  Vertex's Chief Tax Office (CTO) provides insight regarding the impact of tax regulations, policy, enforcement, and emerging technology trends on global tax department operations.

George L. Salis

Chief Economist and Senior Tax Policy Director

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George L. Salis is Chief Economist and Senior Tax Policy Director. He is an economist, lawyer, and tax professional with 29+ years’ experience in international taxation and trade compliance, tax planning and controversy, fiscal regulation, and tax economics consulting. He is responsible for analysis of economic, fiscal, legal, trade, and development issues in countries, as well as tracking and analyzing the rapid change in tax policies and regulations, and inter-governmental organizations, and tax administrations around the world.

George is the recipient of the Advanced Certificate in EU Law from the Academy of European Law, European University Institute in Florence, and the Executive Certificate in Economic Development from the Harvard Kennedy School of Government.

George received his BSc in economics and political science, an LLB (Honours), an MA in legal and ethical studies, and an LLM (Honours) in international tax law. He also holds the PhD in international law and economic policy, and the SJD in Taxation from The University of Florida, Levin College of Law. George is a Certified Business Economist (CBE- NABE).

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