US Supreme Court Turns Down Ford's Business Activities Tax Appeal

by Glen Shapiro LawAndTax-News.com, New York

21 February 2008

The United States Supreme Court has upheld a ruling by a lower court that the cities of Seattle and Tacoma can tax all of Ford's wholesale sales within their boundaries, despite the fact that the transactions are handled out of state.

The Supreme court declined to hear Ford's appeal of a ruling by the Washington state Supreme Court in April 2007 that allowed the cities to impose their "business and occupation tax" on 100% of the motor company's sales to dealers in Seattle and Tacoma.

The ruling means that Ford will be unable to reclaim approximately USD1.3 million in back taxes, interest and penalties paid to Tacoma, assessed for a 12-year period to 2003, and subsequently challenged in court. Similarly, the company also cannot reclaim USD400,000 paid to Seattle for sales between 1998 and 2002.

The company had argued that the business activities tax imposed by the two cities was unconstitutional on interstate commerce grounds, because vehicle sales to dealers involve a wholesale transaction that occurs outside the state.

According to Ford, while it sends representatives to the cities to meet with retailers, the majority of the car sales took place in Michigan.

The case has once again highlighted the effects of state and local taxation on interstate commerce, and in particular the difficulties that companies face with business activity taxes, which vary considerably from one state to the next.

The latest ruling is also likely to increase calls for Congress to clarify business activity tax rules from business lobby groups such as the National Association of Manufacturers, which, along with the Council on State Taxation and the Chamber of Commerce, had urged the Supreme Court to take on the Ford case.

The NAM is supporting legislation introduced into the House of Representatives earlier this month, which proposes a physical presence nexus standard.

“With manufacturers facing strong headwinds during the current economic downturn, the last thing companies need is to be hit by random and unfair state taxes,” commented Monica McGuire, the NAM’s senior policy director for taxation, upon the introduction of the Business Activity Tax Simplification Act.

“By establishing a bright-line physical presence test of when a state can tax an out-of-state company, the legislation prevents arbitrary taxation without jeopardizing the ability of states to legitimately tax businesses with in-state operations,” she concluded.

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