In the first U.S. Supreme Court case since Wayfair, in an unanimous decision, the Court decisively found that a beneficiary’s state of residence in a trust does not establish enough of a minimum connection “between a state and the person, property or transaction it seeks to tax” per the issued decision in “Kaestner” North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, Dkt. 18-457.
In one year to the date that the Court opined on the landmark case regarding the imposition of sales tax in South Dakota v. Wayfair, the justices revisited the longstanding matter of the ability for a state to tax based on interstate activities.
The case comprises of a New York trust, whose only connection to North Carolina is the beneficiary’s state of residence. In the Kaestner case, the beneficiary received no income from the trust, had no right to demand income from the trust, and was not able to count on ever receiving income from the trust. The Court reviewed the Due Process Clause in reference to the nexus case, which requires a two-step analysis to determine if a state abides by the necessary stipulations as historically reviewed.
The multi-step approach, as formulated in the landmark Quill Corp. v. North Dakota in 1992, “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,” and that the “income attributed to the State for tax purposes must be rationally related to values connected with the taxing State”. Justice Sotomayor in writing the opinion concluded that because North Carolina’s tax on the Kaestner Trust does meet Quill’s first requirement, they did not address the second.
Leading up to this case, there was uncertainty if this ruling would have widespread effects on other tax type nexus cases outside of the facts of this case. As Justice Sotomayor wrote that “we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.” Although it appears that this ruling will be limited to the specific facts of the case, the opinion may provide valuable precedent in the future in certain circumstances. For example, if states begin to aggressively assert nexus on an out-of-state corporation based on the residency of a corporate shareholder.
Author: Jason Rosenberg, CPA, CGMA, EA, MST | [email protected]
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