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The “Major Questions Doctrine”: Another Tool to Challenge Tax Regulations?

Debates have raged in recent years over the future of Chevron deference, particularly given the change in the makeup and views of the Supreme Court of the United States. We have written extensively on Chevron deference in the past (see here, here and here, for example). Although the Court has not addressed the continuing viability of Chevron, it has recently found ways to avoid applying Chevron deference to questions involving the interpretation of agency regulations.

In West Virginia v. EPA, No. 20-1530 (June 30, 2022), the Supreme Court did not address Chevron deference directly. However, it reconfirmed and applied what is known as the “major questions doctrine.” Under this judicial doctrine, which originated in FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000), a federal agency must point to clear congressional authorization for the authority it claims. Meaning, when a statute confers authority upon an agency to promulgate rules, a court must determine whether US Congress wanted to give the agency the power to make decisions of vast economic and political significance. Accordingly, “[a]gencies have only those powers given to them by Congress and it must be presumed that major policy decisions are left with Congress, not agencies.”

The Supreme Court’s recent decision is not limited to a particular agency. Indeed, the major questions doctrine has been applied in a tax context before. In King v. Burwell, 576 U.S. 473 (2015), for example, the Court applied the major questions doctrine in declining to defer to tax regulations interpreting the Affordable Care Act (internal references omitted):

In extraordinary cases … there may be reason to hesitate before concluding that Congress has intended [] an implicit delegation [to the agency to fill in the statutory gaps]. … This is one of those cases. The tax credits are among the Act’s key reforms, involving billions of dollars in spending each year and affecting the price of health insurance for millions of people. Whether those credits are available on Federal Exchanges is thus a question of deep economic and political significant that is central to this statutory scheme; had Congress wished to assign that question to the agency, it surely would have done so expressly. It is especially unlikely that Congress would have delegated this decision to the IRS, which has no expertise in crafting health insurance policy of this sort.

Thus, it appears that the major questions doctrine is now firmly entrenched as another tool of statutory construction and should be considered in any analysis of whether tax regulations have been validly promulgated and are entitled to deference.

Practice Point: It will be interesting to see how the Supreme Court’s recent decision will impact future challenges to tax regulations. In the not too distant past, Administrative Procedure Act challenges to tax regulations and other published guidance were rare, but the Court’s 2011 decision in Mayo Found. for Med. Educ. & Research v. United [...]

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New Resource Center: Navigating Change in the US Administration

Pandemic relief, taxes, income inequality, climate change, infrastructure, healthcare and civil rights: the new US administration is moving forward rapidly on President Joe Biden’s stated priorities. So how are these new policies affecting your business? We’re here to keep you informed!

McDermott Will & Emery’s multidisciplinary team of industry-leading lawyers are monitoring key legal areas to help you navigate and gain perspective on the most critical impacts of changing US policies. Access the latest updates in our new resource center.




Trust Wins Due Process Challenge to North Carolina State Income Tax

Last week, the US Supreme Court ruled that North Carolina may not tax a trust’s income when the trust’s only contact with the state is the in-state residence of discretionary beneficiaries. The Due Process Clause requires a minimum connection between a state and the person it seeks to tax. The mere residency of the discretionary beneficiaries of a trust is not sufficient to satisfy this requirement.

Read the full article.




News of Wayfair Decision Breaks during Tax in the City® New York

The first New York meeting of McDermott’s Tax in the City® initiative in 2018 coincided with the June 21 issuance of the US Supreme Court’s (SCOTUS) highly anticipated Wayfair decision. Just before our meeting, SCOTUS issued its opinion determining that remote sellers that do not have a physical presence in a state can be required to collect sales tax on sales to customers in that state. McDermott SALT partner Diann Smith relayed the decision and its impact on online retailers to a captivated audience. Click here to read McDermott’s insight about the decision.

The event also featured a CLE/CPE presentation on the ethical considerations relative to tax reform by Kristen Hazel, Jane May and Maureen O’Brien, followed by a roundtable discussion on recent tax reform insights led by Britt Haxton, Sandra McGill, Kathleen Quinn and Diann Smith. Below are a few takeaways from last week’s Tax in the City® New York:

  • Supreme Court Update: Wayfair – Jurisdiction to Tax – The 5-4 opinion concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992’s Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority. Click here to read McDermott’s insight about the decision.
  • Tax Reform: Ethical Considerations – Because of tax reform, taxpayers face increased uncertainty and will likely face increased IRS/state scrutiny for their 2017 and 2018 returns. Therefore, it’s crucial for taxpayers to be intentional about post-reform planning and compliance by coordinating among various departments (federal tax, state and local tax, employee benefits, treasury, operations, etc.). Taxpayers should understand the weight of various IRS and state revenue authority guidance, the IRS’s authority to issue retroactive regulations within 18 months of passing legislation, and how to take reasonable positions in the absence of guidance. They should also understand that the IRS is allowed more than three years to assess tax, even when there is an omission of global intangible low taxed income (GILTI) or when the tax relates to the Section 965 transition tax.
  • Tax Reform Changes to Employee Compensation and Benefit Deductions – Post-tax reform, all employees of US public companies, private companies with US publicly traded debt, and foreign issuers with ADRs traded on the US market are covered employees subject to the $1 million limit for deductible compensation. Though a grandfather rule applies if existing contracts are not materially modified, key questions about how to apply this rule remain. Tax reform eliminated the employer deduction for transportation subsidies (other than bicycle subsidies). It also reduced employers’ ability to deduct meal and entertainment expenses, and removed employers’ and employees’ ability to deduct moving expenses.
  • False Claims Act and Starbucks – False Claims Act actions involving state tax issues are becoming more and more [...]

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US Supreme Court Overrules Quill

On June 21, 2018, the US Supreme Court issued its highly-anticipated decision in South Dakota v. Wayfair, Inc., et al., No. 17-494. The 5-4 opinion was authored by Justice Kennedy and concluded that the physical presence requirement established by the Court in its 1967 National Bellas Hess decision and reaffirmed in 1992 in Quill is “unsound and incorrect” and that “stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power.” This opinion will have an immediate and significant impact on sales and use tax collection obligations across the country and is something every company and state must immediately and carefully evaluate within the context of existing state and local collection authority.

Summary of Opinions

The majority opinion was authored by Justice Kennedy and was joined by Justices Thomas, Ginsburg, Alito and Gorsuch. In reaching the conclusion that the physical presence rule is an incorrect interpretation of the dormant Commerce Clause, the opinion states that the Quill physical presence rule: (1) is flawed on its own terms because it is not a necessary interpretation of the Complete Auto nexus requirement, creates market distortions and imposes an arbitrary and formalistic standard as opposed to the case-by-case analysis favored by Commerce Clause precedents; (2) is artificial in its entirety and not just at its edges; and (3) is an extraordinary imposition by the Judiciary. The majority went on to conclude that stare decisis can no longer support the Court’s prohibition of a valid exercise of the States’ sovereign power, noting that “[i]t is inconsistent with this Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation.” The majority noted that the South Dakota law “affords small merchants a reasonable degree of protection” and “other aspects of the Court’s [dormant] Commerce Clause doctrine can protect against any undue burden on interstate commerce.” The majority opinion specifically notes that “the potential for such issues to arise in some later case cannot justify an artificial, anachronistic rule that deprives States of vast revenues from major businesses.” Finally, the majority decision provides that in the absence of Quill and Bellas Hess, the first prong of Complete Auto simply asks whether the tax applies to an activity with substantial nexus with the taxing State and that here, “the nexus is clearly sufficient.” Specifically, the South Dakota law only applies to sellers that deliver more than $100,000 of goods or services into the State or engage in 200 or more separate transactions, which “could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota.” With respect to other principles in the Court’s dormant Commerce Clause doctrine that may invalid the South Dakota law, the majority held that “the Court need not resolve them here.” However, the majority opinion does note that South Dakota appears to have features built into its law that are “designed to prevent discrimination against or undue burdens upon interstate commerce” [...]

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Read the October Issue of Focus on Tax Strategies & Developments

The October 2017 issue of Focus on Tax Strategies & Developments has been published. This issue includes five articles that provide insight into US federal and international tax developments and trends across a range of industries, as well as strategies for navigating these complex issues.

Republican Leaders Release Tax Reform Framework
By David G. Noren Alexander Lee

M&A Tax Aspects of Republican Tax Reform Framework
By Alexander Lee, Alejandro Ruiz and Timothy S. Shuman

State and Local Tax Aspects of Republican Tax Reform Framework
By Peter L. Faber

Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest
Kristen E. Hazel, Sandra P. McGill and Susan O’Banion

The IRS Attacks Taxpayers’ Section 199 (Computer Software) Deductions
Kevin Spencer, Robin L. Greenhouse and Jean A. Pawlow


Read the full issue of Focus on Tax Strategies & Developments




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