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July 30, 2018

States Should Conform to -- and Improve -- the New Federal Tax Provisions Meant to Counter Base Erosion

By Darien Shanske

[Cross-posted from Medium]

The United States used to tax multinational corporations (MNCs) on the basis of their worldwide income, except that most foreign source income would only be taxed when actually repatriated to the United States. This structure naturally created considerable incentive to strip income out of the United States and then not to repatriate it.

Now, thanks to the TCJA, the United States is ostensibly only going to tax MNCs on their US source income. This shift to a so-called territorial system means, of course, that MNCs will continue to have incentive to shift income abroad in order to avoid US tax. The TCJA has two separate provisions meant to counter this: GILTI and BEAT. One question for the states is whether they should conform to these provisions. I think the answer is yes. I also think it is clear that states should improve these provisions when they adopt them.

There is a preliminary question as to whether states can — as a matter of federal constitutional law — conform to these provisions. I think the answer is again yes, but the details of the state law will matter a great deal.

Not everyone agrees. For instance, the STAR Partnership, argues here that:

“Under the prior federal tax system, States generally did not include foreign income in their own tax bases, for both policy reasons and Constitutional limitations. States should continue to respect these policy and Constitutional rationales and avoid taxation of foreign income by excluding these provisions from their business tax bases.”

In short, according to a group of top state and local tax lawyers and policy wonks — who are quite explicitly representing the “business community” — states should not and cannot conform to the federal provisions meant to prevent base erosion. It is true that states do not tax foreign source income (in general) and that it is a tricky policy and constitutional question whether they can and/or should, but is it true that this is what states would be doing if they tax the repatriation or conform to GILTI or BEAT?

Consider some well-known and curious facts about the income of MNCs. First, there are some jurisdictions that are just unbelievably profitable for corporations. As Torslov, Wier and Zucman put it: “Foreign corporations . . . have extremely high profitability ratios in tax havens, e.g., 800% in Ireland. . . . By contrast, and strikingly, in almost all non-haven countries foreign firms are less profitable than local firms. Thus, there is a clear trace in global macro data of shifting from high- to low-tax affiliates, in such a way that profitability is systematically over-stated in tax havens and under-stated elsewhere.”

Many of those some super-profitable jurisdictions also house profits worth many multiples of their GDP, which would seem to be a real head scratcher. For example, the profits of US controlled subsidiaries in the Cayman Islands represented over 1000% of that island’s GDP in 2014. It is of course not possible for firms to earn profit in a jurisdiction many times the size of the jurisdiction’s economy.

We know why this money is taking a Caribbean vacation and we also know which legal structures got it there — see here for example.

In short, there was already a great deal of base erosion, and the two new provisions of federal law we are discussing are meant to counter it. (Indeed, there is a good argument that these provisions are roughly consistent with the anti-base erosion principles championed by the OECD.)

If a state were to conform to these base protection provisions or tax the repatriation, then a state is not — counter to the STAR Partnership — trying to tax “foreign” income, but trying to protect domestic income from being stripped out of their tax base.

This fact has an important legal implication. Again, it is true that the legal questions would be trickier for states looking explicitly to tax foreign income. Matters are different if a state is trying to tax domestic income and is simply trying to craft rules that lead to a better reflection of domestic income. As to designing their own tax systems to tax domestic income, states have a lot of leeway.

So, states can conform to these federal backup taxes and they should, but it is important to note that they should and could also improve these taxes. For more on how states should tax the repatriation, see here and kudos to NJ for doing so.

Here are a couple of examples of possible improvements to the backup provisions that are drawn in particular from Rebecca Kysar and Dan Shaviro. GILTI stands for “global intangible low taxed income” and the intuition behind the provision, consistent with the evidence above, is that certain low-tax jurisdictions are suspiciously profitable. Therefore, GILTI income is income that is earned beyond the normal expected return on an investment. There are numerous complexities involved in GILTI, many of which are not resolved, but for our purposes we can note that GILTI assumes a normal rate of return of 10%, which is rather high. A straightforward fix that a states could adopt would be conform to GILTI but use some lower rate tied to actual normal returns — perhaps a long-term corporate bond rate +2%. That would make the rate 6% at the moment.

As for the BEAT, the “Base Anti-Erosion Tax,” this is a minimum tax much like the Alternative Minimum Tax (AMT) for individuals. The idea is that a primary way of shifting income abroad is for MNCs to take large deductions for payments to related foreign corporations — say a US corporation paying a foreign affiliate in a low-tax jurisdiction for the use of intellectual property. The BEAT requires an MNC to add such payments back into the tax base; that broader base is then subject to a 10% rate. If the resulting tax liability is greater than the regular liability, then the taxpayer pays the minimum. As with GILTI, the BEAT has many design flaws. For instance, the BEAT only kicks in for relatively large corporations ($500 mn plus in gross receipts); it would make a lot of sense for states to adopt the BEAT, but at a lower threshold.

The TCJA emerged from such a flawed process that even its most reasonable ideas, like GILTI and the BEAT, are deeply flawed. (Again, don’t take my word on it, ask Kevin Brady.) And the states will be negatively impacted if the TCJA encourages MNCs to strip out even more income because the GILTI and the BEAT are ineffective. So, at a minimum, states should conform to these provisions and ideally they should improve them, but it should be remembered that improvements need not be through tinkering with the mechanics of these provisions.

The states pioneered an anti-income stripping regime that I would argue is simpler and likely more effective than even an improved GILTI and BEAT: mandatory worldwide combination using the single sales factor. This approach does not require the government to identify a particularly problematic form of income or deduction, which can have unexpected and undesired consequences. Instead, all income is income, and income is apportioned according to where an MNC makes its sales. We know that it is unlikely that an MNC makes many sales to final consumers in tax haven jurisdictions. Currently, no states require mandatory worldwide combination, but many permit taxpayers to choose it. If a state is unwilling to require worldwide combination, then an appealing option would be to conform to GILTI and the BEAT, with improvements, and then permit MNCs to choose if they would not prefer the simplicity of worldwide combination.

 

July 30, 2018

Back to the Future?

By Kevin R. Johnson

[Cross-posted in Frank Essays]

As I wrote in 2009, race and class permeate U.S. immigration law and enforcement. This taint stems in large part from the critically important roles of race and class in the formation and maintenance of the American national identity.  Immigration law reinforces and maintains that identity by determining who is admitted to the United States.  A history of exclusion of poor and working people of color from the United States reveals both how we as a nation see ourselves and our aspirations for what we want to be. 

Through aggressive immigration enforcement like that seen in no other administration in modern U.S. history, President Trump has taken race and class in immigration to the next level.  Indeed, his administration has embraced a policy akin to the infamously discriminatory Chinese exclusion laws of the late 1800s. Moreover, his attacks on Mexican immigrants, Muslims, and migrants from “s---hole countries” expressly invoke race and class of migrants as the reason for their harsh treatment.

Immigrants from Latin America

Because of their perceived negative impacts on U.S. society, Mexican and other Latino immigrants, particularly those who are undocumented, are among the most disfavored immigrants of modern times.  President Trump has made no bones about his view that Mexico does not “send their best” to the United States and has labeled Mexican immigrants as a group as criminals.  Although not mentioning “Operation Wetback” by name, President Trump has endorsed the now-discredited deportation campaign of President Eisenhower that removed hundreds of thousands of persons of Mexican ancestry from the Southwestern portion of the United States in 1954.  President Trump also has disparaged Salvadorans, tying them to members of the violent gang MS-13 who are no less than “animals” warranting the harshest of treatment. 

President Trump’s raw demonization of Latinos fits into a long history of discrimination against immigrants from Mexico and, more generally, all persons of Mexican ancestry in the United States.  The demonization is not limited to “aliens” or “illegal aliens” but today affects Latinos in this country of all immigration statuses.

Anti-Mexican sentiment, often combined with class-based bias, has long been prevalent in American social life.  Persons of Mexican ancestry are often stereotyped as little more than peasants who undercut the wage scale of “American” workers because of their willingness to work for “inhuman” wages.  The debates over the ever-expanding fence along the U.S.-Mexico border that President Trump champions and border enforcement generally, the proliferation a few years ago of state and local immigration-enforcement measures such as Arizona’s infamous S.B. 1070, and the popularity of immigration enforcement, reveal both anti-Mexican and anti-immigrant sentiment, as well as legitimate concerns with lawful immigration and immigration controls.  President Trump has fully embraced and amplified these sentiments. 

The difficulty of disentangling lawful from unlawful motivations does not change the real influence that invidious motives have in both the substance and enforcement of U.S. immigration law and policy.

An often-expressed public concern is with the magnitude of the flow of immigrants from Mexico. Some contend that the United States is being inundated – “flooded” is the word frequently employed - with poor, racially and culturally different Mexican immigrants (often referred to as “illegal aliens”) and that this flood is corrupting the national identity of the United States as well as resulting in economic and other injuries to U.S. society.  Consistent with that sentiment, President Trump has tweeted that immigrants “pour into and infest out country.” 

The alleged failure of immigrants to assimilate into American society also is a related, oft-expressed concern and is presumably what motivated the President to say that we need more immigrants from Norway than El Salvador and Haiti. 

As President Trump’s comments about immigrants suggest, recent developments reveal the unmistakable influence of race and class on immigration law and its enforcement.  Consider a few contemporary examples.

Deportations

The Obama administration deported in the neighborhood of 400,000 noncitizens a year during his first term.  Removal numbers were widely publicized.  Not widely publicized was that more than 95 percent of the persons removed were from Mexico, El Salvador, and other Latin American nations.  The harsh effectiveness of the Obama removal campaign, which devastated Latino families and communities, resulted from the U.S. government’s focus on noncitizens arrested by state and local police, with whom Latinos are disparately targeted due to racial profiling and other practices.

Announcing a “zero tolerance” policy, President Trump has sought to ramp up removals of Mexicans, Salvadorans, Hondurans, Guatemalans, and Haitians, many of whom are poor and seeking asylum in the United States.  This strategy, seen clearly in the administration’s responses to the migrant “caravan” and the Central American mothers and children in 2018, likely will continue to disproportionately affect poor and working class Latinos.

Raids

At various times in U.S. history, the U.S. government has employed raids as a device for enforcement of the immigration laws.   Employers as well as immigrants have been affected.

As Congress debated comprehensive immigration reform, the Bush administration increasingly employed immigration raids in the interior of the United States in an effort to demonstrate the federal government's commitment to immigration enforcement. 

These raids have had racial and class impacts on particular subgroups of immigrant workers, namely low-skilled Latina/o immigrants.

For example, the May 2008 raid of a meatpacking plant in Postville, Iowa, constituted one of the largest raids on undocumented workers at a single site in American history.  In the raid's aftermath, the U.S. government did not simply seek to deport the undocumented, but pursued criminal prosecutions of the workers for immigration and related crimes, such as for identity fraud.  The raid involved a massive show of force that included helicopters, buses, and vans as federal agents surrounded the Agriprocessors plant in Postville, the nation's largest kosher slaughterhouse.  According to news reports, immigration authorities arrested 290 Guatemalan, 93 Mexican, 4 Ukrainian, and 2 Israeli workers. 

President Trump has employed well-publicized workplace raids at 7-11 stores and, more recently, meatpacking and landscaping companies in Ohio.  Those raids specifically targeted workplaces of working class immigrants and Latinos.  We can expect the same types of disparate impacts on Latino working class immigrants as we have seen with past immigration raids.

Detention

Immigration detention has been in the news, with vivid pictures of desperate mothers and children who fled the rampant violence of Central America catching the national imagination.  Ending “catch and release” of noncitizens apprehended in the U.S./Mexico border region, President Trump has used a variety of policies, such as family separation and family detention, in the administration’s efforts to deter Central Americans from coming to the United States to seek asylum – relief for which the law allows them to apply.  As the pictures make clear to the world, poor and working class Latinos are the most directly affected.  Given that the policies are directed at border crossers from Central America, it cannot be denied that the U.S. government is not targeting Latinos in the enforcement efforts.   

Border Enforcement

U.S. border enforcement historically has focused on Latinos, with racial profiling a well-known phenomenon in immigration enforcement.  Immigration enforcement officers often target Latinos for immigration stops.  President Trump has ramped up enforcement in the U.S./Mexico border region, with persons who “look” Latino/o the focus of those efforts.  President Trump’s rhetoric attacking Latinos cannot help but encourage immigration officers to focus on Latinos and to ultimately remove many of them from the United States.

Legal Immigration

The immigration laws through a variety of mechanisms historically have excluded poor and working people of color and continue to do so today.  The Trump administration has sought to make it harder to immigrate lawfully to the United States.  Put differently, he wants to limit legal as well as unauthorized immigration. 

The Trump administration has tightened visa requirements and is promising to do more.   President Trump’s travel ban denies entry into the United States of nationals from a number of predominantly Muslim countries.  In addition, the President has expressed support for the Reforming American Immigration for Strong Employment (RAISE) Act, which would cut immigration by half and redirect migration away from developing nations populated by people of color, including  Mexico, India, and China, the three nations currently sending the most immigrants annually to the United States.   

Conclusion

Race and class continue to permeate U.S. Immigration law and enforcement.  This is especially true in the Trump era.  Indeed, President Trump is focusing on policies that will directly affect working class Latinos. Judging by his incendiary rhetoric attacking Latinos and poor and working people of color generally, the Trump administration seems to have targeted Latinos for immigration enforcement.  For better or worse, my 2009 article analyzing the race and class impacts of immigration enforcement is more relevant today than when I wrote it.

Kevin R. Johnson is Dean and Mabie-Apallas Professor of Public Interest Law and Chicana/o Studies at the University of California, Davis School of Law.

July 23, 2018

Maryland’s Generic Drug Pricing Law Is Constitutional: A Recent Decision Misunderstands The Structure Of The Industry

By Darien Shanske and Jane Horvath

[Cross-posted from Health Affairs]

Maryland’s price gouging law, a first-in-the-nation state law, would protect consumers from egregious price hikes of certain generic and off-patent brand drugs made by three or fewer manufacturers. Bills based on the Maryland template are moving through a number of other state legislatures. On April 13, 2018, a split three-judge panel of the US Court of Appeals for the Fourth Circuit ruled that the Maryland law, HB 631, enacted in 2017, is unconstitutional based on the court’s interpretation of case law concerning the Dormant Commerce Clause (DCC).

However, the decision is wrong for numerous reasons, many of which were very cogently explained in a lengthy dissent. The Maryland attorney general has requested an en banc review, which is when all judges in the circuit review a decision made by a single three-judge panel. With luck, the entire circuit will get it right.

We will focus here on how this decision is based on a misunderstanding of how the US drug market and supply chain operate.

The Constitutional Doctrine At Issue: Dormant Commerce Clause

The Commerce Clause of the Constitution gives the US Congress the power to regulate commerce between the states. The DCC places limits on a state’s ability to disrupt interstate commerce. The primary focus of DCC doctrine is preventing state discrimination against out-of-state businesses. A secondary concern is preventing state laws that unduly burden interstate commerce. A tertiary concern is preventing states from regulating activity occurring out-of-state—extraterritorially. (For more information about these, the DCC, and state drug cost policy, please see this white paper.)

The Maryland price gouging law (HB 631) addresses generic and off-patent brands that are on the World Health Organization list of essential medicines and manufactured by three or fewer companies. When a drug is produced by only a few manufacturers, the producers can easily launch drugs at high prices, maintain high prices, and increase prices dramatically. High prices of important essential medicines that become unaffordable leave consumers with few, if any, treatment alternatives. This deeply problematic scenario is not just imagined, as both the Government Accounting Office and the US Senate Special Committee on Aging wrote reports detailing the problem. This is the problem the Maryland law addresses.

The generic drug industry sued based on two DCC issues. The first is that the HB 631 law violates the DCC by regulating industry financial transactions outside of Maryland—that is, the charge is that Maryland is regulating extraterritorially. Second, the industry claims that the Maryland law places an “undue burden” on interstate commerce.

Note that there was no argument that the Maryland law would somehow protect the Maryland drug industry, preventing such protectionism is the core concern of the DCC. Nevertheless, the majority of the Fourth Circuit panel found that the Maryland law failed on the secondary and tertiary aspects of the DCC—undue burden and extraterritoriality, respectively. As we will now explain, the court decision seems to have not considered how the pharmaceutical market works.

The Maryland Law Does Not Impose An Undue Burden On Interstate Commerce

The majority opinion found that the Maryland law placed an undue burden on interstate commerce. In the classic cases of undue burden, a state places a heavy burden on interstate commerce of a company or industry for a trivial reason. For instance, in one case, a state required trucks to use an unusual type of mud flap when driving in the state. The Maryland law is nothing like this. First, most obviously, the law is regulating something extremely important—namely generic drug prices—when no one else is doing so, and there is clearly a consumer health and safety issue.

Second, what Maryland is asking the generic drug industry to do is nothing as burdensome as stopping their trucks at the border and making them change their mud flaps. Rather, drug prices are already a product of an enormously complicated set of financial transactions that cross geographies. These financial transactions already vary based on where the product is made and the geography into which it will be sold.

For example, drug manufacturers will negotiate discounts with specific hospitals, health systems, or health plans. Who negotiates with whom depends on the importance of the payer/purchaser in the national or regional market, the product market competition, the importance of the product to company revenue, and other factors. If the negotiation with a hospital results in an on-invoice discount, the manufacturer has to have a financial process to ensure that the wholesaler does not lose money since the wholesaler buys the product from the manufacturer and distributes it nationally or regionally to different buyers (including more local distributors that would get the product to the hospital).

So manufacturer discount negotiations at a very local level—the hospital for instance—drive multiple financial transactions in distant geographies. Manufacturer discount rebate agreements (as distinct from on-invoice discounts) with a health plan also result in financial transactions in a state other than the corporate office of the health plan. This is all part of the business model, and these are only some of the interstate financial transactions required for individual companies to compete in the market. The necessity of working directly in many markets would be particularly important for products with three or fewer competing manufacturers—these are the products subject to the Maryland law—because this is a scenario in which price competition can move market share and profits.

Thus, given the structure of the pharmaceuticals market, and particularly the market for the regulated products, the Maryland law would hardly impose a burden, much less an undue one.

The Maryland Law Does Not Regulate Extraterritorially

The Fourth Circuit also found that the Maryland law violated the extraterritoriality doctrine. This doctrine is a bit variable, but the core rule is simple: A state cannot regulate conduct in another state. Clearly, Maryland was not trying to do this but trying to secure essential drugs at a reasonable price for its citizens. It is true that in so attempting to protect its citizens, there would possibly be a small impact on current transactions wholly out of state, but if this is the test for whether a state can regulate in our interconnected economy, then states cannot regulate much of anything. And, indeed, the decision was wrong on the law of extraterritoriality for just this reason, namely that it would undermine virtually all state regulations. For more on the doctrine, see here.

But perhaps one could defend the Fourth Circuit decision by noting that an effect on interstate pricing was especially likely because of the structure of the drug industry. This analysis, though superficially appealing, has to be rejected because, once again, Maryland is not creating a new or unique effect on interstate pricing. Even in the absence of the HB 631 law, the industry responds to the various limits that different payers put on reimbursement to generic drug dispensers. For example, each and every health plan and all Medicaid programs set their own maximum allowable costs (MACs) for generics and off-patent brands. MAC is just a term for setting dispenser reimbursement limits; it is the average of the prices among the competitors. Maryland health plans and Maryland Medicaid each set their own MACs for their own set of generic products. Furthermore, these various payment limits in Maryland are different from what each health plan in Virginia and Delaware set, all of which can require manufacturers to adjust prices for any one geography through financial transactions that likely occur out of state. This is day-to-day activity in the industry, indeed, it could be very difficult to sort out any small impact of the Maryland law because it would be completely in the mix of the current interstate pricing activity in response to payer limits on pharmacy and provider drug reimbursements—limits that can change weekly or monthly at a payer’s discretion.

So, if the Fourth Circuit’s analysis were correct, then any industry with a complicated business model that crosses state lines could not be regulated by the states. Even more peculiar, if an industry were not so organized, all an industry would need to do is tie itself in knots to escape regulation by the states. It can’t be that the constitutional power of states to protect the health of its citizens diminishes because a firm’s business model produces interstate ripples whenever a state tries to regulate its actions.

In the analogous area of state taxation, it is well-established that a state cannot subject an interstate business to double taxation (relative to an instate business) on account of how the state organizes its own tax system. However, if an interstate firm suffers from double taxation because of permissible decisions made by two states individually, then that is just a necessary byproduct of living in a federation where subnational units have substantial taxing and regulatory power.

But perhaps it makes a difference that part of the complexity here is a result of federal law? If the argument is that a federal law relating to generic drug prices preempts state regulation of prices charged to its citizens, then that is indeed a serious argument. The generic drug industry did not raise this issue precisely because there is no such federal law. Therefore, the court’s finding must rest on the argument that when a federal regulatory regime that does not regulate the prices of drugs that are available in Maryland and other states (because there is no federal law regulating generic drug prices) but does indirectly create possible interstate price linkages (because of federal programs such as Medicaid), then the states are not allowed to regulate those drug prices as if the federal government had preempted state regulation directly. Stating the argument clearly is to reveal how little sense it makes and also, not coincidentally, why it is not the law. There is an entire body of law—preemption—that considers when a federal law preempts a state law, and there is a presumption against preemption. Federal courts are not supposed to be in the business of finding creative ways to prevent states from protecting their citizens.

The structure of the pharmaceuticals market is opaque, as is US Supreme Court case law about the Dormant Commerce Clause. However, knowledge of the market is absolutely key to assessing state laws relative to the DCC. We do not think their decision will stand the test of time once it is understood how this complex market actually functions. 

 

July 23, 2018

Wayfair as a Federalism Decision

By Darien Shanske

[Cross-posted from Medium]

Some first impressions, including pondering how this decision intersects with NCAA v. Murphy

In the end, not a single justice would stand up for the rule of Quill, which rule was that a state can only impose a use tax collection obligation on a vendor if it has a physical presence in the state. All the justices agreed that it was the wrong rule, even apparently, when first imposed in 1967. So then why was this a 5–4 decision?

The four dissenters argued that stare decisis should protect the Quill rule nevertheless because it is an old rule that Congress can change. I take the key part of the majority response to be the following:

While it can be conceded that Congress has the authority to change the physical presence rule, Congress cannot change the constitutional default rule. It is inconsistent with the Court’s proper role to ask Congress to address a false constitutional premise of this Court’s own creation. Courts have acted as the front line of review in this limited sphere; and hence it is important that their principles be accurate and logical, whether or not Congress can or will act in response. It is currently the Court, and not Congress, that is limiting the lawful prerogatives of the States.

This seems exactly right to me and I have argued as much (see here and here). And it is of course not surprising that Justice Kennedy is arguing that federalism values establish a pro-state power default and that it is untenable for a federal court to erect a barrier to state power based on a mistake.

But note that the dissent in Wayfair was written by Chief Justice Roberts, who, in another context wrote: “The dormant Commerce Clause is not a roving license for federal courts to decide what activities are appropriate for state and local government to undertake …” The issue in that case, United Haulers, was whether a public utility could force local users to use its services, and Chief Justice Roberts held for the majority that it could. Justice Alito wrote a powerful dissent in that case and was joined by Justice Kennedy. Justice Alito again joined Justice Kennedy in Wayfair. Thus, according to these two justices, a pro-state constitutional default does not protect local flow control ordinances, but does protect the ability of states to impose a use tax collection obligation. For Chief Justice Roberts, the reverse is apparently true, though in his case he would note that stare decisis was what weighed against the states in the use tax context. (The counter to this is that United Haulers also essentially overturned a precedent, a point well made by Justice Alito in his dissent.)

So Wayfair did hinge on federalism values, I believe, but in a quite complicated way that will require additional unpacking, especially in light of NCAA v. Murphy. This decision, authored by Justice Alito, and joined by Justices Roberts, Kennedy, Thomas, Kagan and Gorsuch, struck down a federal law that made it unlawful for states or their subdivisions to authorize betting on sporting events. The majority thought that this decision followed from the anti-commandeering principle, namely that Congress cannot “issue orders directly to the States.”

As was immediately noted, a broad interpretation of NCAA v. Murphy puts into question numerous federal laws that also restrict the kinds of laws that state legislatures can pass. Such laws are particularly numerous in the field of taxation, where Congress has imposed special rules relating to mobile phones, railroads, pensions etc. And yet both sides in Wayfair seem to agree that Congress could step in and regulate how states can impose a use tax collection obligation. But would not the relevant federal law be, in effect, a prohibition on state legislative power?

This question has been very ably debated by Daniel Hemel, Brian Galle, Rick Hills, Jeff Schmitt and Ilya Somin among others. It seems to me Wayfair is a pretty strong indication that the Court did not mean to undermine the ability of Congress to restrict state taxing power — within limits. Still, Murphy says what it says and so I will add one more way that the Court — and first courts — can reasonably limit Murphy.

In Murphy, Congress was weighing in on a contentious policy matter involving regulating individual conduct on which there is a limited federal interest. The majority in Murphy signals as much in its first line: “Americans have never been of one mind about gambling…” I think that Justices like Kennedy and Alito, relative hawks in other dormant Commerce Clause cases, would argue that preventing balkanization of the national marketplace is a very different matter from imposing a one-size fits all rule about sports betting. Protecting the national marketplace is a core concern of the Commerce Clause and indeed of our whole constitutional order, a point made particularly well by Brain Galle. I know that this kind of analysis is mushy and that the Court in Murphy instead focused on the issue of whether or not the federal government is regulating a private actor, but that rubric does not work to explain how and why Congress can act to limit state taxing power post Wayfair.

Focusing on the importance and centrality of the federal interest means, in effect, that the Court is applying a kind of proportionality analysis, a very common method of deciding constitutional cases, though not in our tradition (at least not explicitly). I think applying some form of the proportionality principle is the right answer not only to the question posed by Murphy, but also to the question posed by Quill/Wayfair. The Court in Wayfair does not explicitly shift to a kind of balancing test (in particular, Pike balancing), but its retention of a “substantial nexus” standard without much further guidance seems to invite the states to engage in balancing. Clearly, a remote vendor can now be asked to collect the use tax even without a physical presence, but, just as clearly, remote vendors can only be asked to do so if there is sufficient nexus. Thoughtful balancing of the legitimately opposing interests is therefore the way forward.

July 23, 2018

State Options After Wayfair


By Darien Shanske (with David Gamage and Adam Thimmesch)

[Cross-posted from Medium]

In Wayfair, the Supreme Court overturned the bright-line physical presence rule imposed by Quill. A state can now require an out-of-state vendor to collect the use tax even if that vendor does not have a physical presence within the state. The underlying standard governing when states can impose a use tax collection obligation remains the same: there must be a “substantial nexus.” But what constitutes a substantial nexus? The Court does not give any general guidance, but does make it clear that this standard was satisfied in this case. Alas, the Court’s reasoning as to this case is reasoning is ambiguous. Here is the key paragraph:

Here, the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State. The Act applies only to sellers that deliver more than $100,000 of goods or services into South Dakota or engage in 200 or more separate transactions for the delivery of goods and services into the State on an annual basis. S. B. 106, §1. This quantity of business could not have occurred unless the seller availed itself of the substantial privilege of carrying on business in South Dakota. And respondents are large, national companies that undoubtedly maintain an extensive virtual presence. Thus, the substantial nexus requirement of Complete Auto is satisfied in this case.

The first sentence of this paragraph suggests that two inquiries are relevant to nexus: (1) a taxpayer’s economic returns from a state and (2) its activities directed toward a state. The second and third sentences of this paragraph suggest that the South Dakota thresholds require sufficient “economic contacts” for substantial nexus. The fourth sentence, emphasizing the size of respondents, focused on the so-called “virtual contacts” that large, national e-commerce vendors create through their extensive marketing and web presences.

What this paragraph does not do is to address precisely when small sellers have a substantial nexus. What if a small seller has exactly 200 sales, worth $20,000? Given this uncertainty, our advice for states at the moment would be to put in place thresholds similar to South Dakota’s. If they wanted to be better insulated from challenges from very small sellers, and likely at minimal revenue loss, we would suggest adopting even higher thresholds. This would be especially true for non-SSUTA states.

Alas for states looking for guidance, there is more ambiguity in the next paragraph of the opinion. The Court remanded the case to the lower courts to consider other possible challenges to the South Dakota law, including, apparently Pike balancing, which is odd considering that the substantial nexus test is a test for taxes and Pike balancing is a test for regulations. Here is the paragraph:

South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce. First, the Act applies a safe harbor to those who transact only limited business in South Dakota. Second, the Act ensures that no obligation to remit the sales tax may be applied retroactively. S. B. 106, §5.Third, South Dakota is one of more than 20 States that have adopted the Streamlined Sales and Use Tax Agreement. This system standardizes taxes to reduce administrative and compliance costs: It requires a single, state level tax administration, uniform definitions of products and services, simplified tax rate structures, and other uniform rules. It also provides sellers access to sales tax administration software paid for by the State. Sellers who choose to use such software are immune from audit liability.

Though we agree that Pike balancing should apply, we wish the Court would have explained why it should apply. Furthermore, and more importantly for states, the Court does not offer any guidance as to which of these aspects of South Dakota’s law is the most important. Crucially, it may not be too difficult for a state to emulate South Dakota’s thresholds, but it might be very difficult for a state to join the SSUTA or otherwise simplify its tax system in a comparable manner.

Our advice here is that states that cannot engage in substantial simplification — and perhaps even states that can — should offer meaningful vendor reimbursement for compliance costs and/or offer free compliance software that immunizes vendors who rely upon it. (One of us discussed this first approach at length in a prior article here; and two of us discussed this second approach in a prior essay here.)

We do not think that these approaches are necessarily required by the Court’s opinion; substantial enough simplification of a state’s sales and use tax, roughly equivalent to that required by the SSUTA, should suffice. But we do think that adopting one of these approaches makes for good, sensible policy. If, for whatever reason, a state wants to retain a more complicated sales and use tax system or simply does not wish to conform their sales and use tax system with that of other states, then it is only fair that states compensate vendors for the costs they incur in collecting sales and use taxes.

July 17, 2018

Eps. 24, 25: 'Taking the Fifth,' 'Justice Kennedy'

By Elizabeth Joh

Anthony M. Kennedy's announcement in late June that he was retiring from the U.S. Supreme Court merited a special edition of the podcast "What Trump Can Teach Us About Con Law." Episode 25, "Justice Kennedy," is devoted to Kennedy, the mostly conservative justice who delivered swing votes in key decisions on abortion, LGBTQ rights and affirmative action.

The special episode followed closely on the heels of episode 24, "Taking the Fifth." President Trump says it makes people look guilty. Yet he and people associated with him have done it. This episode traces the practice of pleading the Fifth back to the Cold War and the Hollywood Ten, who probably should have invoked the Fifth instead of the First Amendment.

July 11, 2018

The travel ban in numbers: Why families and refugees lose big

By Raquel Aldana

[Cross-posted from The Conversation]

On June 16, the U.S. Supreme Court lifted the 9th Circuit’s nationwide injunction against the third version of President Donald Trump’s travel ban. This ruling marks Trump’s first court victory since he issued the original travel ban back in January 2017.

Thousands now face indefinite separation from family members from the affected countries. Thousands more will be denied safe harbor from persecution.

Trump asserts the travel ban is necessary to protect national security. This claim is contested by many, including 26 retired generals and admirals, who filed an amicus brief urging the U.S. Supreme Court to invalidate the travel ban.

As a researcher who studies the effect of U.S. immigration laws and policies on human rights, I consider it important to explain the significant numeric scale of the ban’s impact on refugees and U.S. families.

Refugees and family members are not the only categories of foreign nationals from the enumerated countries in the travel ban who will be denied entry. Students, tourists, business travelers and workers will also be turned back. But refugees and fa-

mily members raise the most compelling human rights and humanitarian reasons for people to care.

Travel restrictions vary by country. The least restrictive measures apply to Venezuela. Only certain government officials and their immediate family members are indefinitely suspended from travel on short-term business or tourism. The effect of these unusual restrictions are likely to be minuscule and will not impact family unification or refugee admissions. For this reason, I didn’t include Venezuela’s numbers in my analysis.

All other nations are subject to indefinite bans on travel for permanent immigration to the U.S. This ban applies to immigrants who want to unite with family in the U.S. and refugees. Each nation also faces different travel restrictions for temporary immigration. The most restrictive travel restrictions apply to North Korea and Syria. All temporary immigration from these countries is suspended indefinitely. For Libya and Yemen, only temporary travelers for business and tourism are suspended indefinitely. For Iran, all temporary immigration is suspended except students and exchange visitors. Finally, for Somalia, all temporary migration is not suspended but subjected to additional scrutiny.

The travel ban does allow case-by-case exemptions for certain people if admission is found to be in the national interest. This includes lawful permanent residents, asylum-seekers, refugees and students, among others. In his dissent, however, Justice Stephen Breyer attempted to document how many waivers to the travel ban had been granted, concluding that the government applied the waiver in such a tiny percentage of eligible visas as to render it meaningless.

The measurable impact on family immigration

Family immigration to the U.S. from any single nation is determined by two factors. First, the demand for such visas from existing family members already in the U.S. who can sponsor certain family members. Second, for those visas that are numerically restricted, the availability of those visas to that nation in a given year.

In general, a nation’s patterns of family immigration tend to remain fairly steady over the years. So it’s possible to estimate, based on recent data from the seven (excluding Venezuela) travel ban nations, approximately how many immigrants seeking to unite with their families will be banned indefinitely from entry into the U..

During each of the last three years for which detailed profiles are publicly available – 2014 through 2016 – Iran, Libya, North Korea, Somalia, Syria and Yemen sent between 8,000 and over 15,000 parents and children of U.S. citizens.

These same nations also sent between 3,000 and over 7,000 other eligible family members, such as siblings of U.S. citizens and spouses of lawful permanent residents.

Combined, in just three years, more than 35,000 family members from these nations came to unite with their families in the U.S. Among these nations, Iran and Yemen sent the most, followed by Syria and Somalia.

The travel ban also significantly affects family members’ ability to even visit each other in the U.S. Even when the ban was stalled by the courts, the overall number of nonimmigrants, or temporary migrants, from these nations significantly decreased.

Iran, for example, has sent by far the largest share of nonimmigrants of any of the travel ban countries in the last decade. In 2016, nearly 30,000 nonimmigrants came to the U.S. from Iran. In 2017, fewer than 20,000 came.

What this means for refugees

According to United Nations, the travel ban affects nations in significant humanitarian crises with substantial flows of refugees.

Syrians are the most affected. This group represents a total 5.5 million refugees, the largest share by far of the world’s overall 25.4 million refugees. But Iran and Somalia each also have nearly 1 million refugees, while Yemen has nearly 300,000 and Libya nearly 100,000. Four of these nations – Iran, Somalia, Syria and Yemen – face protracted refugee crises. Only North Korea reports a low figure of 2,245, although this likely reflects North Koreans’ fear of escaping or reporting their presence when they do.

A high supply of refugees doesn’t necessarily translate to high numbers of refugees admitted into the U.S. Still, over the past decade, the U.S. has consistently offered refugee protection to Iran and Somalia. The peak for both these nations was in 2016, when the U.S. admitted more than 9,000 refugees for each nation.

Since 2015, Syrians also began to receive refugee protection in substantial numbers, with 2016 also being the highest number of 12,587 refugees admitted.

President Trump has reduced the levels of refugee flows into the U.S. to historic lows. This will affect all refugees. Venezuela, for example, which today reports 1.5 million refugees, is unlikely to find safe harbor for most of its refugees in this current climate.

Not unlike family immigration, the indefinite ban on temporary visas will affect the ability of nationals from all of these nations to travel to the U.S. to seek asylum.

The U.S Supreme Court’s ruling forecloses judicial oversight over much of President Trump’s immigration policies, at least those affecting the entry of foreign nationals. This includes those facing high stakes at the border: family separation or lack of safe harbor from persecution. For now, the nations included in the travel ban face an indefinite iron locked door, with no hope that their knocking will be answered.