It is well-established that the Due Process and Commerce Clauses of the U.S. Constitution impose limits on the taxing powers of the several States. E.g., Bellas Hess v. Illinois, 386 U.S. 753 (1967); Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Under the Due Process Clause, there must be some minimum connection between a state and a corporation before such state may tax that corporation. E.g., Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45 (1954). Under the Commerce Clause, the corporation must have a "substantial nexus" with the taxing state. See Quill Corp. v. North Dakota, supra (citing Complete Auto v. Brady, 430 U.S. 274 (1977). In addition, the tax must be fairly apportioned, non-discriminatory, and fairly related to the services provided to the corporation by the taxing state. Id.
Of course, a corporation will typically know where its property and employees are located. Thus, to the extent a corporation has property or employees in a given state, it can be said to be on notice of its potential exposure to tax in that state, and the requirements of the Due Process Clause are, therefore, satisfied. In addition, the substantial nexus requirement of the Commerce Clause will likely be satisfied assuming that the tax is fairly apportioned, non-discriminatory, and fairly related to the state services provided to the corporation.
But what about corporations engaged in the leasing business (e.g., rental car businesses, equipment leasing businesses)? Can nexus be established with a state solely by virtue of a lessee's transportation of the leased property into that state?
The current trend suggests that the answer is yes.
In Geoffrey v. South Carolina, 437 S.E. 2d. 13 (S.C. Sup. Ct. 1993), the South Carolina Supreme Court rejected a corporation's argument that a licensor must have knowledge that its license is being used in a state before that state can impose a tax consistently with the Due Process Clause. Similarly, in Truck Renting and Leasing Ass'n, Inc. v. Commissioner, 746 N.E. 143 (Mass. 2001), the Supreme Judicial Court of Massachusetts held that Commerce Clause nexus was satisfied by virtue of the physical presence of rental vehicles in Massachusetts.
Constitutional due process has been described as a standard of "fundamental fairness" the touchstone of which is notice or fair warning. This raises a very interesting question: how can the requisite level of due process notice and fair warning be found in a case where the corporation being taxed is without knowledge of its presence in the taxing state?
On the surface, there appears to be a blatant violation of the traditional notions of fair play and substantial justice that the Due Process Clause has come to represent. But a closer look reveals that the due process violation (if any) is not as blatant as it initially appears. Perhaps the current trend reflected by the Geoffrey and Truck Renting cases can be reconciled with the Due Process Clause on the ground that the nature of leased goods is inherently mobile such that a leasing corporation must necessarily be on notice of the possibility that the property will be transported across state lines. It's possible. But many leasing contracts specifically prohibit the transportation of the leased property across state lines. And to constructively impute notice in a case where a leasing corporation specifically prohibits the interstate transportation of its leased property raises serious due process questions.
