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Iowa Department of Revenue shreds the Commerce Clause

March 08, 2012

If an Iowa Department of Revenue position on interstate income taxation stands, the limits set by Congress in 1959 on taxation of out-of-state corporations (PL 86-272) will become a dead letter. The Department is attempting to tax Jack Daniels -- whose only connection to Iowa is the sale of liquor to the Iowa state wholesale liquor monopoly -- based on the use of its trademarks in Iowa.

PL 86-272, enacted under the Constitutional authority given to Congress to regulate interstate commerce, prohibits states from taxing corporations whose only business in the state is the shipping of goods from out-of-state. The states are always trying to get around this, and Iowa gave itself a victory on this score when the Iowa Supreme Court ruled that KFC was taxable on royalties received from its Iowa franchisees even though KFC itself had no property, employees or operations in Iowa. Now the Department is turning this victory up to 11. From the Administrative Law Judge ruling in favor of the Department in an appeal by Jack Daniels Properties, Inc. and Southern Comfort Properties, Inc, members of the Brown-Forman group.

The department’s regulations are consistent with the supreme court’s interpretation of the statute. The regulations define “intangible property located or having a situs in this state” to include intangible property that “has become an integral part of some business activity occurring regularly in Iowa.” 701 IAC 52.1(1)(d), 52.1(4). The regulations expressly cite Geoffrey, which is the same case the department cited in the letters it sent to the protesters. The regulations go on to state that, if a corporation owns trademarks and trade names that are used in Iowa, a business situs for purpose of taxation may be present even though the corporation has no physical presence or other contact with Iowa.


It is, of course, impossible for anybody who sells anything in Iowa other than generic products to avoid having "trademarks and trade names that are used in Iowa." As long as this position stands, it means that Iowa has weaseled its way around legislation designed to prevent this very result.

The Department of Revenue is entirely out of line here, but they will keep it up as long as they can get away with it -- and the KFC decision shows that Iowa's courts will let them get away with plenty. Congress is way overdue in restricting these overly aggressive positions by state revenue departments. Of course these overly-aggressive decisions are harder on smaller businesses, who have fewer resources to spend on tax compliance than Brown-Forman does.

It's also time for Iowa to form an independent tax court. The next time an administrative law judge opposes the Department on a significant issue may be the first time.

Finally, the Supreme Court should take another state tax case. The states have eroded the 1991 Quill decision to irrelevance with positions like this. It appears that the Supreme Court has to slap the states every couple of decades to keep them within the law.

Related: Iowa ruling: No Quill for you; or, Supreme Court silence trumps Supreme Court rulings

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As usual, this is terrific commentary by you, Joe!

Mike, thank you!

Didnt the Supreme Court stated that Quill only applied to sales tax and not other state business taxes like corporate income? Also, I thought that PL 86-272 only applied to sales of tangible products--is my understanding correct?


While Quill was a sales tax case, the Supreme Court didn't limit its holding to only sales taxes.

While 86-272 applies to sales of goods, the Department is applying the "use of intangibles" argument as a back-door way of imputing nexus to otherwise exempt activities.

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