The Supreme Court will decide in January 2022 whether it wants to hear a New Jersey tax case that could have wide implications for partnerships across the nation.
The case, Ferrellgas Partners, L.P. v. N.J. Division of Taxation, involves a partnership “filing fee” that is not restricted to a partnership’s in-state activities. The fee is $150 per partner and settles in at a maximum of $250,000 per partnership. It is imposed on every partnership doing any amount of business in the state. The petitioners who want the Supreme Court to take up the case (or “grant certiorari,” in legalese) argue that it violates the Commerce Clause requirement to be fairly apportioned among the states where the commerce takes place.
Under the levy in question, a publicly traded partnership with tens of thousands of partners all over the country, such as the petitioner, pays $250,000 annually, regardless of whether it does 1% or 100% of its business in the state. The levy was part of a comprehensive state tax reform law intended to raise about $1 billion in general fund revenue each year. It was enacted because the New Jersey Legislature was concerned that partnership income might be escaping New Jersey taxation. The levy was labeled a “fee,” with the stated intent being to “compensate the state for the large volume of return processing and compliance enforcement from such entities.”
“This is an important case due to the whittling away that courts — and legislatures — have been engaged in on unapportioned revenue sources,” said Kyle Sollie, a partner at Reed Smith and the lead attorney on the petition for certiorari. “They label it a ‘fee’ and then they don’t have to worry about the Commerce Clause.”
Four amicus, or “friend of the court,” briefs have been filed.
If a state imposes a fee or tax on interstate commerce, the Commerce Clause requires it to be fairly apportioned among the states where the commerce takes place. Under Supreme Court precedent, a levy is fairly apportioned only if it is “internally consistent.” Under the internally consistent test, if the levy were hypothetically enacted by every state, a multistate business must pay no more, in the aggregate, than a business conducted wholly within a single state. The exception to this is that if the levy is a regulatory fee that is “locally focused,” internal consistency is not required.
“The American Trucking case 30 years ago [American Trucking Associations v. Scheiner, 483 U.S. 266] was the apex of the right of taxpayers — or fee payers — on the apportionment issue, on whether a tax or a fee had to be apportioned. A later American Trucking case sustained an unapportioned revenue source but it was a fee,” said Sollie. “It was explicitly limited to activities within the state — point-to-point deliveries in Michigan.”
The law was left in a state of considerable uncertainty because the later American Trucking case put enormous pressure on the meaning of the word “local,” according to the petition. “Consequently, some state courts have interpreted ATA-Michigan as if it completely undermines the internal consistency test as applied to flat-dollar fees and taxes,” the petition states. “In fact, in petitioner’s case, the Tax Court of New Jersey discussed ATA-Michigan at length and, in that discussion, favorably cited dissenting opinionsin ATA-Scheiner. As a result of that analysis, the Tax Court of New Jersey in petitioner’s case determined that the hypothetical test of internal consistency ‘is certainly not not the law.’ Indeed, the state court implied that it believed this court’s internal consistency test is ‘a judicial fraud.’”
This is emblematic of the confusion generated by the two ATA cases, according to Sollie: “State Supreme Courts have waffled on whether fees need to be apportioned, and that ambiguity gave a base to states, where they have a quarter-of-a-million-dollar fee that the state slaps a label on and calls a fee. They’re basically saying, ‘We don’t care if you do 1% or 100% of your business here, you owe a quarter of a million dollars.”
Sollie believes this case presents the Supreme Court with an opportunity to decide what kind of fees do not need to be apportioned and what fees do: “The court has said if a fee is ‘locally focused’ it doesn’t need to be apportioned. Our view is that a fee such as a local ambulance fee of $100 a year toward funding dispatchers is a true local fee that doesn’t need to be apportioned. But we think the court can lay out general principles as to when an activity is like that. Our taxpayers are engaged in the propane business all over the country by the tens of thousands, and that isn’t local.”
In an amicus brief, the Council On State Taxation agreed. “This case provides this court with an ideal opportunity to clarify when levies on a business (regardless of whether labeled a tax or a fee) are intrastate in nature or impact interstate commerce invoking Commerce Clause protection,” it wrote. “Regardless of the label a state uses to impose an exaction on an entity to raise revenue, this court needs to provide guidance for distinguishing between a state using the label of a ‘fee’ that is truly regulatory and imposed on local activity versus a ‘fee’ that is interstate in nature and requires scrutiny under the Commerce Clause.”
COST urged the granting of cert here because “state courts’ failure to apply the Commerce Clause is troubling in state tax cases where access to federal courts is extremely limited.”
“The New Jersey Superior Court, Appellate Division, failed to adequately apply the Commerce Clause of the United States Constitution as interpreted by this court,” it stated. “It is not only a circumvention of this court’s precedents, but constitutes an unacceptably narrow approach given the unique procedural requirements imposed upon state tax controversies that are decided almost exclusively by state courts,” citing the Tax Injunction Act and the Comity Doctrine, which both act to “constrain taxpayers’ access to lower federal courts in state tax litigation.”
Despite the merits of the case, getting certiorari is an uphill battle, observed Jamie Yesnowitz, leader of Grant Thornton’s SALT team in the Washington national tax office.
“It is significant because of its ‘unapportioned’ component,” he said. “We’ll have to watch and wait. The amount of the levy is not an insignificant amount just to do business in the state.”
The greatest likelihood of certiorari is when two or more courts of appeals are split on an issue, observed David De Jong, a CPA and tax attorney at Rockville, Maryland-based Stein Sperling.
“Here, it’s tougher because New Jersey’s highest court wouldn’t give cert but they could be so prejudiced in favor of their own position. Petitioners did an excellent job of saying, ‘It’s not just our state, there are 16 other states that have similar levies.’ They appear to have very good arguments, pointing out that the statute does not meet three of the four criteria on the leading case on the Commerce Clause.”
