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Staples files last plea for justices’ review of Md. tax

A Staples Office Store on Goucher Boulevard in 2000. (The Daily Record file)

A Staples Office Store on Goucher Boulevard in 2000. (The Daily Record file)

In a final plea that the Supreme Court hear its appeal, office supply giant Staples Inc. has argued states will seek to tax more business conducted outside their borders if the justices do not void as unconstitutional Maryland’s taxation of fees the Massachusetts-based company collects from its Maryland franchisees.

Staples filed its argument last week as the high court weighs whether to hear the company’s contention that the royalty and franchise fee payments received from its Maryland franchisees do not qualify as income earned within the state – and are thus not taxable in Maryland under the Constitution’s provisions barring states from interfering in interstate commerce and ensuring due process.

Staples stated the constitutional questions raised are too important and far-reaching for the justices to pass up.

“(W)hether states may stretch their taxing authority beyond their borders in this fashion is a question of critical importance to businesses nationwide, one implicating fundamental principles of our federal system,” wrote Joseph R. Palmore, Staples’ lead attorney before the justices. “Absent this court’s intervention, states will push even further past the constitutional limits on their powers, and taxpayers will suffer the uncertainty and duplicative taxation that results.”

Palmore is with Morrison & Foerster LLP in Washington.

Staples’ filing was in response to Maryland Comptroller Peter Franchot’s request that the justices not hear the company’s appeal of a state court’s decision that the tax passes constitutional muster. The comptroller said Staples’ payments from its Maryland franchisee 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 scheduled for Nov. 1 their consideration of and likely vote on Staples’ request for their review. The appeal 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.

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