By: Leandra Lederman
I’m currently at the #SEALS2018 conference in Ft. Lauderdale, but I wanted to quickly note that the opinion of the 9th Circuit panel in Altera Corp. v. Commissioner was withdrawn today. This follows the replacement of Judge Reinhardt, who passed away on March 29, with Judge Graber. Recall that the July 24 opinion in this important case reflected a 2-1 decision, with the late judge in the majority, as Christopher Walker and others had noted. (For my previous coverage of Altera, see here and here.)
A screenshot of the court’s order appears below. It will be interesting to see what happens after the new panel confers!
In a 2-1 opinion, a panel of the Court of Appeals for the Ninth Circuit has reversed the U.S. Tax Court in Altera v. Commissioner. (I don’t have a link yet to the opinion because it just came out this morning, but will add it as a comment when I do.) The decision is great news for IRS rulemaking: the Court of Appeals upheld a Treasury regulation in the face of a procedural challenge that alleged that “although Treasury solicited public comments, it did not adequately consider and respond to those responses, rendering the regulations arbitrary and capricious under State Farm.” Altera, slip. op. at 27. The court found that Treasury’s approach to the regulation (a cost-sharing regulation under Code section 482) satisfied State Farm‘s requirements. Id. at 37. The Court of Appeals also accorded the regulation Chevron deference. Id. at 46.
In my view, this is the right outcome. (Full disclosure: Susan Morse and Stephen Shay spearheaded an amicus brief in the Ninth Circuit in favor of the Commissioner, in which I joined, along with Dick Harvey, Ruth Mason, and Bret Wells.) Treasury did consider and respond to the comments it received on the regulation; it simply had a different approach to the substance of the regulation than the taxpayers commenting did. The Court of Appeals explains:
“In short, the objectors were arguing that the evidence they cited—showing that unrelated parties do not share employee stock compensation costs—proved that Treasury’s commensurate with income analysis did not comport with the arm’s length standard. Thus, the thrust of the objection was that Treasury misinterpreted § 482. But that is a separate question—one properly addressed in the Chevron analysis. That commenters disagreed with Treasury’s interpretation of the law does not make the rulemaking process defective.”
Altera, supra, at 31-32.
It is worth noting that the court did not address larger questions of the applicability of the APA or Chevron in tax cases, stating in a footnote (and citing Stephanie Hoffer & Chris Walker and Kristin Hickman):
“Because the Commissioner does not contest the applicability of the APA or Chevron in this context, this case does not require us to decide the broader questions of the precise contours of the application of APA to the Commissioner’s administration of the tax system or the continued vitality of the theory of tax exceptionalism.”
Id. at 25 n.5. Dan Shaviro has blogged about the decision on Start Making Sense, noting that “the Chevron standard for reviewing administrative regulations . . . may well be on the Supreme Court’s chopping block in the near future.”
I would expect more coverage of the Altera decision soon. For prior Surly coverage, see here.
For those readers in search of some light summer reading, Leigh Osofsky (UNC Law) and I have been working on a paper on statutory drafting, entitled “Constituencies and Control in Statutory Drafting: Interviews with Government Tax Counsels.” We finally got around to posting it on SSRN, here.
In the paper, we report findings from interviews we conducted with government tax counsels who have participated in the tax legislative process, in which we asked questions about various aspects of drafting and creating tax legislation. In addition to reporting our findings, we also discuss the implications of our research for statutory interpretation, tax system design, and the legislative process.
For readers interested in legislation, tax drafting, statutory interpretation, tax shelters, and the political process, the paper is probably worth a look. Feel free to contact either of us with comments.
By now, anyone who reads this post should be aware that the Supreme Court decided South Dakota v. Wayfair and overruled its physical presence rule last week. States now have expanded authority to require the collection of their consumption taxes by remote vendors like online retailers. Coverage of the case and its impact on states and vendors has been widespread, including my preliminary thoughts offered on this blog and with Darien Shanske and David Gamage elsewhere.
One aspect of the coverage that would usually drive state tax aficionados crazy is the continued reference to the case as involving sales tax.
For a long time, many of us have smugly corrected folks (often only in our own minds) and noted that it is the state use tax that is at issue when we are talking about online sales. That may be no more.
The South Dakota law that was challenged in Wayfair indeed requires remote vendors to collect the state’s sales tax rather than the state’s use tax. Historically, that would have been a big problem, but it didn’t trouble Justice Kennedy or the other members of the majority. This may require broader thinking than just analyzing what Wayfair means about states’ powers over remote vendors. The Court’s decision in Wayfair may have done much more than just overrule Quill; it may have unsettled some even longer-standing doctrine in this area.
The Supreme Court issued a 5-4 decision overruling its long-standing physical presence rule in South Dakota v. Wayfair this morning. That decision provides welcomed relief to states (and to those of us who already pay use tax) and will have significant short- and long-term consequences. My reactions to Wayfair will surely extend for a long period of time, but here are some brief first thoughts.
The Court’s holding was very limited: the physical presence rule no longer governs the determination of what constitutes a “substantial nexus” under the dormant Commerce Clause. The Court also found that nexus existed in the case based on the challengers’ connections with South Dakota. Finally, the Court did not bless the South Dakota statute completely, but remanded the decision back to the South Dakota courts to hear non-nexus based challenges to the law, if any exist.
What this means is that states will be able to continue (or expand) their efforts to require the collection of sales/use tax by online vendors. States will also need to monitor whether and how Congress responds, but they should be able to craft their laws to avoid state-court scrutiny until that time.
By: Diane Ring
Since December 2017, tax conferences in the United States have focused substantially on the H.R. 1 tax reform legislation. No surprise there — the 2017 changes are among the most significant in the past thirty years. But over the past five months, through attending numerous tax conferences featuring international tax practitioners, I’ve observed some interesting developments in the nature of the discussions and debates at these conferences. These changes are pretty revealing about the process of absorbing the true impact of the new tax law, particularly in international tax. This weekend’s ABA May Tax Section Meeting in Washington, D.C. highlighted some of these trends.
By: Diane Ring
Today the 9th Circuit weighed in on the validity of a Seattle ordinance that requires businesses contracting with taxi-drivers, for-hire transportation companies, and “transportation network companies” to bargain with drivers if a majority of drivers seek such representation. The legislation, which effectively enables Uber and Lyft drivers to unionize, drew objections from Uber, Lyft and the Chamber of Commerce— which sued the City of Seattle. In an August 2017 post, I reviewed the ruling of the U.S. District Court for the Western District of Washington, which concluded that the Seattle ordinance was an appropriate exercise of the city’s authority and did not violate the Sherman Act (because of state action immunity) and was not preempted by the National Labor Relations Act (NLRA). So what did the 9th Circuit say?
My favorite news story from last week: it turns out that ten years ago, a group of dog owners in Tribeca installed a lock on a public New York City dog park, and started charging people a membership fee—$120 a year—if they wanted to use the (public!) park. They created a list of rules, most of which focused on keeping others out, and, if you violated the rules, you were kicked out, and apparently had to let your dog play with other proletariat dogs. (N.b.: this state of affairs lasted ten years, until the city finally cut the lock and reopened the park to the public.)
This story has everything: self-absorbed and self-righteous New Yorkers; a funny thing I read on Twitter while sitting in church Sunday; a bit on this week’s Wait Wait Don’t Tell Me. And, perhaps more importantly, a tax angle. See, these snooty, selfish New Yorkers did something more than hijack a public space—they formed a tax-exempt organization to manage it. Continue reading “Dog Owners of Tribeca”
Professor of Law
UC Hastings College of the Law
Greetings from San Francisco, the epicenter of the gig economy, where workers-rights advocates are celebrating Monday’s California Supreme Court decision in the Dynamex case. The ruling, which cites an article by my colleague Veena Dubal, is expected to make it harder for businesses in California to classify gig economy workers (and others) as independent contractors rather than employees. As a result, these workers are more likely to be protected by rules about minimum wage, overtime, rest breaks, and other working conditions, although there are open questions about exactly how these rules will apply to gig workers.
But what is good for workers for employment/labor law purposes may not be so good for workers for federal income tax purposes. As readers of this blog know, independent contractors can generally deduct their business expenses above-the-line and may be able to take the new Section 199A deduction equal to up to 20% of qualified business income (significantly reducing the effective tax rate). Employees, on the other hand, can do neither. Thus, the employment/labor law win for workers in the Dynamex case may come with some unexpected and unwanted tax losses for these same workers. This is especially true for workers with non-trivial amounts of unreimbursed business expenses (although the amount of a worker’s unreimbursed expenses may decline if the worker is classified as an employee because California Labor Code 2802 generally requires employers to reimburse significant business expenses of employees).
So, taking tax into account, is independent contractor status or employee status better for workers? This question involves complicated employment/labor law and tax law tradeoffs. For example, despite the tax disadvantages of employee classification mentioned above, employee status can benefit workers for employment tax and tax compliance purposes. Others (including Shuyi Oei here, Shuyi Oei and Diane Ring here, here and here, and Kathleen DeLaney Thomas here) have written extensively on worker classification/taxation topics, and at least some of them have additional articles forthcoming on these topics. I will defer to them for more details as I am not an expert (at least right now) on worker classification or its tax implications. But even I know that, when analyzing the implications of the Dynamex case, it will be important for commentators to consider the tax, not just employment/labor, consequences.
One possibility is that the Dynamex case will change California worker classification only for employment/labor purposes and not for tax purposes. After all, the language of the ruling makes it clear that the issue addressed in the case is how to classify the workers “for purposes of California wage orders” (emphasis in original). So the case does not technically have any impact on workers’ tax classifications. Thus, a worker currently classified as an independent contractor for all purposes could be reclassified under the Dynamex standard as an employee for California wage order purposes but could remain classified as an independent contractor for tax and other purposes. The applicable classification standards are different enough that, for some workers, it would be possible to have hybrid status. But I am skeptical about whether businesses will do nuanced context-by-context worker classification determinations. It is possible, particularly if workers (and scholars?) fight for hybrid worker status, but it seems more likely, at least to me, that businesses will just determine worker status based on the employment/labor standard and use that classification across the board. Of course, a worker who believes they have been misclassified for one or more purposes could try to fight the classification, but that is a tough road.
Given the Dynamex decision, will worker classifications change, and if so, for which purposes? I do not know. We will have to wait and see how businesses react to the ruling. Regardless of how businesses respond, I hope that, in analyses of the Dynamex decision and in future discussions about worker classification, commentators will be able to move beyond our legal silos, as Diane Ring recommends in a newly posted paper. This would advance a more holistic analysis that integrates labor, tax and any other relevant issues, and that approach could really help businesses and workers in our evolving economy.