The U.S. Supreme Court sits primed and ready to decide two key state and local tax (SALT) cases that will have implications nationally, including for Pennsylvania, its residents and its businesses.

The first is Franchise Tax Board of California v. Hyatt, S.Ct. Dkt. No. 17-1299, in which the Supreme Court granted certiorari to revisit whether one state can be sued in another state's courts. The Hyatt litigation, which has been ongoing for two decades, has been before the Supreme Court twice before. The case involves damages sought by Gilbert P. Hyatt for several torts allegedly committed by the Franchise Tax Board (FTB)—a California state agency—in its audits of him.

During the 1990s, Hyatt moved from California to Nevada. Pursuant to an audit, the FTB claimed that he had misstated the date of his move and owed California millions in unpaid taxes, penalties and interest. Hyatt then brought a tort suit against the FTB in Nevada state court where he won a jury verdict of nearly $400 million. The Nevada Supreme Court ultimately set aside much of the award on appeal, but affirmed an award of $1 million for fraud, despite the fact that a Nevada statute would have capped damages at $50,000 if a similar suit had been brought against Nevada officials.

On appeal to the U.S. Supreme Court during April 2016, the court split 4-4 on whether it should overrule its 1979 decision in Nevada v. Hall,  440 U.S. 410 (1979), allowing states to be sued in the courts of other states. However, the majority held that Nevada was limited by its own laws when awarding damages against California. On remand, the Nevada Supreme Court reduced the damages awarded to Hyatt. The FTB filed a petition for certiorari seeking the U.S. Supreme Court's review of the state high court's Dec. 26, 2017, judgment on rehearing. According to the FTB, the court is permitted to revisit an issue previously affirmed by an equally divided court at a later stage of the case, before final judgment has been entered. Since there are now nine justices on the court, the FTB, 45 amici states (including Pennsylvania), and the Multistate Tax Commission are seeking a majority opinion overturning Hall.

The implications for Pennsylvania are important. From a policy perspective, Hyatt will determine whether states can be sued in the courts of other states without their consent. If Hyatt overturns Hall, individuals similarly situated to Hyatt would have no means of litigating this type of dispute outside of the state that has allegedly harmed them.

However, the implications are not just limited to individuals and tortious conduct similar to that in Hyatt; the case also has implications for cases in which the taxpayer challenges another state's policies. For instance, there is a case pending in Virginia challenging Massachusetts' imposition of sales tax collection obligation under Massachusetts' “cookie nexus” regulations, see Crutchfield v. Harding, Case No. CL17001145-00 (Va. Cir. Ct.). If Hall is overruled, the taxpayer would have no right to challenge the validity of Massachusetts' regulation in the Virginia court. Conversely, if Hall is upheld, Massachusetts could be responsible for defending its regulation in every other state's courts. Thus, this decision is not only important for the states themselves, but also for their citizens and businesses.

The second important SALT case that will be decided shortly by the U.S. Supreme Court is Kimberley Rice Kaestner 1992 Family Trust v. Department of Revenue, S.Ct. Dkt. No. 18-457. Therein the court agreed to review a North Carolina case involving whether an in-state beneficiary is sufficient under the due process clause of the Constitution for the state to impose tax on an out-of-state trust.

The Kimberley Rice Kaestner Trust was originally created in New York by Joseph Lee Rice III for the benefit of his three children, including Kimberley Rice Kaestner. Kaestner was a resident of North Carolina during the years at issue, but no trustee lived in North Carolina and the trust documents and custodians of the trust's assets were located in New York and Boston, respectively. The North Carolina Department of Revenue issued an assessed against the trust of more than $1.3 million in taxes for income accumulated during tax years 2005 through 2008, even though no income was distributed to the in-state beneficiary during those years. Pursuant to the statute,  N.C.G.S. Section 105-160.2, the income tax on an estate or trust “is computed on the amount of the taxable income of the estate or trust that is for the benefit” of a North Carolina resident. However, the North Carolina Supreme Court ruled that an in-state beneficiary does not give the state sufficient minimum contacts to tax an out-of-state trust under federal and state due process provisions. The department argued that cert should be granted to address the split among the states on whether the state taxation of trusts based solely on an in-state beneficiary violates the Constitution.

As with Hyatt, the implications of Kaestner Trust are plentiful. If the court affirms, trusts with similar fact patterns to Kaestner Trust that have been paying tax to any state based purely on the resident status of a beneficiary may be entitled to relief and such a ruling would trigger a flood of refund requests for open tax years. Alternatively, if the court overturns the decision of the North Carolina Supreme Court, trusts that have not been paying tax under similar circumstances could have exposure.

Thus, any trusts whose only contact with a state is the presence of in-state beneficiaries should pay particular attention to this case.

While Kaestner Trust deals with a trust, the heart of the case revolves around the due process clause of the Constitution and therefore the case has important implications outside of the trust arena for a “minimum contacts” analysis for purposes of Pennsylvania taxes and the reach of other states' taxing jurisdiction on Pennsylvania individuals and businesses. For instance, consider the use of limited liability companies (LLCs) to conduct multistate business operations—states routinely argue that the benefits and protections afforded to the LLCs accrue to the benefit of the members, thereby satisfying the due process clause. That argument may be upended by a decision in Kaestner Trust.

Further, the ruling may have implications for those selling through third parties like marketplace facilitators or national retailers, even where there is no activity directed specifically at the forum state. In a recent case involving the Ohio Commercial Activity Tax, Greenscapes Home and Garden v. Testa, Dkt. No. 17AP-593 (2019), an Ohio appeals court held that the due process clause is satisfied when a company “has purposefully taken advantage of the distribution ability of national retailers and knows that its products are shipped to Ohio.” Whether a court will uphold that finding on appeal may depend on the U.S. Supreme Court's ruling in Kaestner Trust.

Both Hyatt and Kaestner Trust have important implications for Pennsylvania and its taxpayers—individuals and businesses alike. Decisions in both cases are expected by the end of the Supreme Court's June session.

Jennifer Weidler Karpchuk is senior counsel with Chamberlain, Hrdlicka, White, Williams & Aughtry in the firm's Philadelphia office. Contact her at 610-772-2314 or [email protected].