Office-supply giant Staples Inc. is urging the U.S. Supreme Court to review and strike down Maryland’s tax assessment on fees the Massachusetts-based company collects from its Maryland franchisees, saying such taxation of an out-of-state entity violates the Constitution’s Due Process and Interstate Commerce clauses.
In its written request for Supreme Court review, the company said the royalty and franchise fee payments received from its Maryland franchisees do not qualify as income earned within the state – and are thus not constitutionally taxable by Maryland.
Staples and Staples the Office Superstore LLC, its franchise operator, were hit with a Maryland tax bill — including penalties and interest — of $14.3 million for the tax years at issue in the case, 1999 through 2004, according to court documents. The penalties and interest were subsequently reduced by lower courts.
“Petitioners Staples and Superstore conduct no meaningful business within Maryland,” wrote Joseph R. Palmore, the company’s counsel of record before the Supreme Court. “But based entirely on the operations of their affiliates – separate corporate entities that had already fully paid any income taxes to the state – Maryland imposed millions of dollars of tax liability on Staples and Superstore.”
Palmore is with Morrison & Foerster LLP in Washington.
Staples’ constitutional challenge has failed in Maryland Tax Court, Anne Arundel County Circuit Court and the intermediate Court of Special Appeals.
In an unreported opinion last year, the appellate court said Staples had “substantial mutual interdependence” with its Maryland franchisees to permit the state’s taxation of the money paid to the Massachusetts company. For example, the franchisees were “wholly dependent” on Staples for their inventory and management, the Court of Special Appeals held.
Maryland’s top court, the Court of Appeals, declined to hear Staples’ appeal in February, setting the stage for the company’s pending request for Supreme Court review.
The Maryland Attorney General’s Office this month waived the state’s right to reply to the company’s request unless the justices ask for a response.
The Supreme Court is scheduled to consider Staples’ request for review Oct. 1.
The case is docketed at the high court as Staples Inc. et al. v. Maryland Comptroller of the Treasury, No. 19-119.