WHERE’S WALDEN? FINDING
PROTECTION UNDER THE DUE
PROCESS CLAUSE
By R. Gregory Roberts and Rebecca M. Ulich
In the aftermath of Quill, and the seemingly low threshold to satisfy
the Due Process Clause articulated by the U.S. Supreme Court,
many practitioners and taxpayers essentially abandoned the Due
Process Clause as a tool to challenge assertions of nexus, preferring
instead to focus on the Commerce Clause. However, several recent
Supreme Court decisions should cause practitioners and taxpayers
to rethink that strategy.
The Court’s decisions in Goodyear, J. McIntyre Machinery, Daimler
and Walden not only show the Court’s renewed emphasis on the Due
Process Clause as a limitation on assertions of jurisdiction under
state long-arm statutes, but also provide taxpayers with a framework
to challenge the ever-increasing assertions of nexus for tax purposes
by state legislatures and taxing authorities.1
Attorney Advertising
Spring 2014
INSIGHTS
STATE+LOCAL TAX
STATE + LOCAL TAX GROUP
Co-Editors
Nicole L. Johnson and
Rebecca M. Ulich
1Where’s Walden? Finding Protection under the Due Process Clause
By R. Gregory Roberts and Rebecca M. Ulich
3Upcoming Speaking Engagements
7CFCs and Subpart F Income in a California Water’s-Edge Election and What’s
Wrong with the Apple Decision
By Eric J. Coffill
13 Income Tax Withholding: Framework of the Issues
By Mitchell A. Newmark and Richard C. Call
17 California Franchise Tax Board Provides New Regulatory Guidance on Deferred
Intercompany Stock Accounts
By Eric J. Coffill
19 The Arbitrary Trend in Favor of Single-Sales Factor Apportionment
By Andres Vallejo and Daniel L. Eggerman
IN THIS ISSUE
New York
Craig B. Fields cfields@mofo.com
Paul H. Frankel pfrankel@mofo.com
Hollis L. Hyans hhyans@mofo.com
Mitchell A. Newmark mnewmark@mofo.com
R. Gregory Roberts rroberts@mofo.com
Irwin M. Slomka islomka@mofo.com
Open Weaver Banks obanks@mofo.com
Amy F. Nogid anogid@mofo.com
Michael A. Pearl mpearl@mofo.com
Richard C. Call rcall@mofo.com
Eugene J. Gibilaro egibilaro@mofo.com
Michael J. Hilkin mhilkin@mofo.com
Nicole L. Johnson njohnson@mofo.com
Rebecca M. Ulich rulich@mofo.com
Kara M. Kraman kkraman@mofo.com
San Francisco
Thomas H. Steele tsteele@mofo.com
Andres Vallejo avallejo@mofo.com
Peter B. Kanter pkanter@mofo.com
James P. Kratochvill jkratochvill@mofo.com
Daniel Lee Eggerman deggerman@mofo.com
Lisa Ma lma@mofo.com
Sacramento
Eric J. Coffill ecoffill@mofo.com
Jenny Choi jennychoi@mofo.com
Washington, D.C.
Linda A. Arnsbarger arnsbarger@mofo.com
Philip M. Tatarowicz ptatarowicz@mofo.com
Denver
Thomas H. Steele tsteele@mofo.com
continued on page 2
2State + Local Tax Insights, Spring 2014
This article begins with an overview of the Due Process Clause,
including a discussion of the distinction between “specific”
and “general” jurisdiction that was central to the Court’s recent
due process decisions. This article then discusses the Court’s
due process analyses in Goodyear, J. McIntyre Machinery,
Daimler and Walden and concludes with insights into the
potential impact of these cases in the state tax arena.
The Due Process Clause: Specific and General
Jurisdiction
The Due Process Clause sets the outer boundaries of a state’s
jurisdiction over an out-of-state entity.2 In determining
whether the exercise of jurisdiction is permissible under the
Due Process Clause, the Supreme Court has explained that
“[i]t is evident that the criteria by which we mark the
boundary line between those activities which justify the
subjection of a corporation to suit and those which do not
cannot be simply mechanical or quantitative.”3 The Court
stated that “[t]he test is not merely, as has sometimes been
suggested, whether the activity, which the corporation has
seen fit to procure through its agents in another state, is a
little more or a little less.”4 Rather, the Court explained that
“[w]hether due process is satisfied must depend . . . upon the
quality and nature of the activity in relation to the fair and
orderly administration of the laws which it was the purpose
of the due process clause to insure.”5 To satisfy due process,
a state may only exercise jurisdiction over an out-of-state
defendant that has certain “minimum contacts” with the
state, such that the maintenance of the suit does not offend
“traditional notions of fair play and substantial justice.”6
The distinction between “specific” and “general” jurisdiction
evolved from the Supreme Court’s decision in International
Shoe Co. v. Washington, in which the Court elaborated
on the concept of “fair play and substantial justice” by
recognizing that jurisdiction may be found over an out-of-
state corporation where (i) the suit arises out of or relates
to the corporation’s contacts with the forum state (“specific”
jurisdiction), or (ii) the corporation’s continuous corporate
operations within the forum state are so substantial and of
such a nature as to justify suit against it on unrelated causes
of action (“general” jurisdiction).7
After its decision in International Shoe in 1945, the Court’s
opinions focused primarily on circumstances involving
specific jurisdiction. Prior to Goodyear and Daimler, the
Court had issued only two decisions since International Shoe
that considered whether an out-of-state corporate defendant’s
in-state contacts were sufficiently “continuous and systematic”
to justify the exercise of general jurisdiction, which the Court
has acknowledged requires a “higher threshold” showing than
specific jurisdiction.8
The Court’s recent decisions involving specific jurisdiction
are particularly relevant in the state tax context, as indicated
by the Court’s decision in Quill, which followed a specific
jurisdiction analysis.9
General Jurisdiction: Goodyear and Daimler
Goodyear involved a wrongful death suit filed in North
Carolina state court by North Carolina residents whose sons
had died in a bus accident in France, allegedly due to tires
manufactured by the foreign subsidiaries of Goodyear.
The North Carolina Court of Appeals held that it could exercise
general jurisdiction over the foreign corporations because
their products had reached the State through “the stream
of commerce,” despite the fact that they had no presence in
North Carolina and did not take any affirmative action to
cause their tires to be shipped to the State.10 In rejecting this
“sprawling view of general jurisdiction,” the Court found that
“a connection so limited between the forum and the foreign
corporation” was an “inadequate basis for the exercise of
general jurisdiction” and would result in “any substantial
manufacturer or seller of goods . . . be[ing] amenable to suit, on
any claim for relief, wherever its products are distributed.”11 In
reaching its decision, the Court concluded that “mere purchases
made in the forum State, even if occurring at regular intervals,
are not enough to warrant a State’s assertion of general
jurisdiction over a nonresident corporation in a cause of action
not related to those purchase transactions.”12
Elaborating on the distinction between specific and general
jurisdiction, the Court in Daimler reversed the Ninth Circuit
and held that California could not exercise general jurisdiction
over a foreign corporation based solely on the presence in
the State of a subsidiary.13 Daimler involved Argentinian
residents who filed a complaint against DaimlerChrysler
Aktiengesellschaft (“Daimler”), a German company, based
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Foerster LLP informs you that, if any advice concerning one or more U.S.
federal tax issues is contained in this publication, such advice is not intended
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recommending to another party any transaction or matter addressed herein.
The distinction between “specific” and
“general” jurisdiction evolved from the Supreme
Court’s decision in International Shoe Co. v.
Washington, in which the Court elaborated on
the concept of “fair play and substantial justice.”
Elaborating on the distinction between specific
and general jurisdiction, the Court in Daimler
reversed the Ninth Circuit and held that
California could not exercise general jurisdiction
over a foreign corporation based solely on the
presence in the State of a subsidiary.
