State + Local Tax Insights: Spring 2014

Edited by Nicole L. Johnson and Rebecca M. Ulich

WHERE'S WALDEN? FINDING PROTECTION UNDER THE DUE PROCESS CLAUSE

By R. Gregory Roberts and Rebecca M. Ulich

In the aftermath of Quill, and the seemingly low threshold to satisfy the Due Process Clause articulated by the U.S. Supreme Court, many practitioners and taxpayers essentially abandoned the Due Process Clause as a tool to challenge assertions of nexus, preferring instead to focus on the Commerce Clause. However, several recent Supreme Court decisions should cause practitioners and taxpayers to rethink that strategy.

The Court's decisions in Goodyear, J. McIntyre Machinery, Daimler and Walden not only show the Court's renewed emphasis on the Due Process Clause as a limitation on assertions of jurisdiction under state long-arm statutes, but also provide taxpayers with a framework to challenge the ever-increasing assertions of nexus for tax purposes by state legislatures and taxing authorities.1

This article begins with an overview of the Due Process Clause, including a discussion of the distinction between "specific" and "general" jurisdiction that was central to the Court's recent due process decisions. This article then discusses the Court's due process analyses in Goodyear, J. McIntyre Machinery, Daimler and Walden and concludes with insights into the potential impact of these cases in the state tax arena.

The Due Process Clause: Specific and General Jurisdiction

The Due Process Clause sets the outer boundaries of a state's jurisdiction over an out-of-state entity.2 In determining whether the exercise of jurisdiction is permissible under the Due Process Clause, the Supreme Court has explained that "[i]t is evident that the criteria by which we mark the boundary line between those activities which justify the subjection of a corporation to suit and those which do not cannot be simply mechanical or quantitative."3 The Court stated that "[t]he test is not merely, as has sometimes been suggested, whether the activity, which the corporation has seen fit to procure through its agents in another state, is a little more or a little less."4 Rather, the Court explained that "[w]hether due process is satisfied must depend . . . upon the quality and nature of the activity in relation to the fair and orderly administration of the laws which it was the purpose of the due process clause to insure."5 To satisfy due process, a state may only exercise jurisdiction over an out-of-state defendant that has certain "minimum contacts" with the state, such that the maintenance of the suit does not offend "traditional notions of fair play and substantial justice."6

The distinction between "specific" and "general" jurisdiction evolved from the Supreme Court's decision in International Shoe Co. v. Washington, in which the Court elaborated on the concept of "fair play and substantial justice" by recognizing that jurisdiction may be found over an out-of-state corporation where (i) the suit arises out of or relates to the corporation's contacts with the forum state ("specific" jurisdiction), or (ii) the corporation's continuous corporate operations within the forum state are so substantial and of such a nature as to justify suit against it on unrelated causes of action ("general" jurisdiction).7

After its decision in International Shoe in 1945, the Court's opinions focused primarily on circumstances involving specific jurisdiction. Prior to Goodyear and Daimler, the Court had issued only two decisions since International Shoe that considered whether an out-of-state corporate defendant's in-state contacts were sufficiently "continuous and systematic" to justify the exercise of general jurisdiction, which the Court has acknowledged requires a "higher threshold" showing than specific jurisdiction.8

The Court's recent decisions involving specific jurisdiction are particularly relevant in the state tax context, as indicated by the Court's decision in Quill, which followed a specific jurisdiction analysis.9

General Jurisdiction: Goodyear and Daimler

Goodyear involved a wrongful death suit filed in North Carolina state court by North Carolina residents whose sons had died in a bus accident in France, allegedly due to tires manufactured by the foreign subsidiaries of Goodyear.

The North Carolina Court of Appeals held that it could exercise general jurisdiction over the foreign corporations because their products had reached the State through "the stream of commerce," despite the fact that they had no presence in North Carolina and did not take any affirmative action to cause their tires to be shipped to the State.10 In rejecting this "sprawling view of general jurisdiction," the Court found that "a connection so limited between the forum and the foreign corporation" was an "inadequate basis for the exercise of general jurisdiction" and would result in "any substantial manufacturer or seller of goods . . . be[ing] amenable to suit, on any claim for relief, wherever its products are distributed."11 In reaching its decision, the Court concluded that "mere purchases made in the forum State, even if occurring at regular intervals, are not enough to warrant a State's assertion of general jurisdiction over a nonresident corporation in a cause of action not related to those purchase transactions."12

Elaborating on the distinction between...