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Justices show interest in Staples’ challenge to Maryland tax

The U.S. Supreme Court has shown some interest in hearing office supply giant Staples Inc.’s argument that Maryland’s tax assessment on fees that the Massachusetts-based company collects from its Maryland franchisees violates the Constitution’s Due Process and Interstate Commerce clauses.

The justices in August asked the Maryland comptroller’s office to respond to Staples’ argument that the royalty and franchise fee payments received from its Maryland franchises do not qualify as income earned within the state — and are thus not constitutionally taxable in Maryland. The comptroller’s office earlier had waived its right to respond to Staples, unless the justices specifically requested a reply after reading the company’s petition that the high court hear its appeal.

The comptroller’s office, in its written response, urged the Supreme Court Sept. 20 to reject Staples’ request for review, saying the company’s payments from its Maryland franchises have a “substantial nexus” with the state and thus qualify as income earned in Maryland.

“Maryland, like other states, has concluded that a physically remote corporation’s exploitation of Maryland’s markets, i.e., economic nexus, satisfies the constitutional requirements of substantial nexus for purposes of income taxes on business activity,” wrote Assistant Maryland Attorney General Brian L. Oliner, the comptroller’s counsel of record before the high court.

“Maryland’s economic nexus standard is a permissible approach for ascertaining whether the facts in a case support a finding that a taxpayer has sufficient economic nexus with the taxing state to subject the taxpayer’s income to the state’s taxing authority,” Oliner added. “It satisfies the substantial nexus required under the Constitution and is neither unusual, novel, nor far reaching.”

The justices have not said when they will vote on Staples’ request that they hear the company’s appeal. The case is docketed at the Supreme Court as Staples Inc. et al. v. Maryland Comptroller of the Treasury, No. 19-119.

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.

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 request for Supreme Court review.

“Petitioners Staples and Superstore conduct no meaningful business within Maryland,” Joseph R. Palmore, the company’s counsel of record before the justices, wrote in Staples’ petition for Supreme Court review. “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.


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