Another State Tax Trust Nexus Case — Both States Can’t Be Right (Or Can They)?

When it rains, it pours! In the last year, three state tax nexus cases have made their way to the U.S. Supreme Court. The first, South Dakota vs. Wayfair,[1] was decided last year and held that South Dakota could impose South Dakota sales tax collection responsibilities on certain remote internet sellers under the U.S. Commerce Clause. The second, North Carolina Department of Revenue v. The Kimberley Rice Kaestner 1992 Family Trust, Dkt. No. 18-457 (Kaestner Trust),[2] was granted certiorari in January and raises the question of whether the Due Process clause of the U.S. Constitution prohibits North Carolina from taxing the undistributed income of a New York trust based on a beneficiary’s residency in North Carolina. I discussed that one in my earlier blog post.

Supreme Court, Judicial Center, Minneapolis, Minnesota.Getty

As I teased you at the end of my last blog, we also have Comm. of Rev. v William Fielding, et al., No. 18-664[3] (Fielding) before the Supreme Court. Similar to Kaestner Trust, in Fielding, the Minnesota Department of Revenue is petitioning the Court to decide whether it is appropriate under the Due Process Clause to treat a trust as a “resident trust” subject to tax on 100% of its income when its beneficiaries no longer live in the state (except for one contingent beneficiary). Although Kaestner Trust and Fielding address two different aspects of nexus under the Due Process clause , the Minnesota question could throw a wrench into the underlying position of North Carolina. Can both states be right?

Facts of Fielding case

The trust at issue in Fielding was formed under Minnesota law. Its assets are held in a Minnesota bank, and the gain at issue relates to the trust’s sale of S corporation stock in a Minnesota corporation engaged in multistate activities. The Minnesota courts concluded that the trust met the minimum contacts standard under the Due Process clause (i.e., the trust was formed in Minnesota, accounts held in Minnesota banks, etc.) (the same issue considered in Kaestner Trust). The analysis, however, did not end there; the state courts then considered another aspect of the Supreme Court’s Due Process clause jurisprudence: Whether a “rational relationship” existed between “the income subject to tax and the protections and benefits conferred by the state.” Applying this often-forgotten prong of the Due Process nexus standard, the Minnesota courts concluded that no rational relationship existed and struck down the imposition of state tax on the Fielding Trust as a “resident trust.”

To grant or not to grant certiorari?

The big question, of course, is whether the Supreme Court will agree to hear Fielding. As I mentioned in my earlier blog post, most practitioners seemed very surprised that the Supreme Court took Kaestner Trust and they would be equally surprised if it took Fielding too.

Assuming the Court grants certiorari in Fielding, the next question becomes whether it would join the case with Kaestner Trust, hold it in abeyance until Kaestner Trust is decided, or take some other action. While both cases involve state tax nexus considerations under the Due Process clause, they address different prongs of the Due Process nexus standard.

Whatever the outcome,  Kaestner Trust and Fielding show how complicated state taxation of trusts can be. But, ominously, any Due Process clause rule also will have implications for taxpayers outside the trust arena. As Steve Wlodychak, the state and local leader of EY’s Center for Tax Policy, notes, “The implications of these cases aren’t limited to trusts and their beneficiaries. Determinations on state tax nexus under the Due Process Clause could affect state tax considerations for individuals, corporations, partnerships, and limited liability companies and their owners. For example, could a state tax a non-resident corporation based on the residency of a corporate shareholder? Most state tax practitioners would consider that position antithetical and absurd, but the Court could change things. For that reason, all taxpayers and practitioners should be watching these cases.”

So, while we await the Supreme Court’s ruling in Kaester Trust, we’ll also be waiting for its action on Fielding as well. Can both state courts be right? We’ll have to wait and see.

The views expressed in this outline are solely those of the author and do not necessarily represent the view of Ernst & Young LLP or any other firm of the global Ernst & Young organization.

[1] South Dakota v. Wayfair, Inc., 585 U.S. ___ (2018). The Court’s opinion is available on its website at https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf).

[2] The U.S. Supreme Court docket information regarding the Kaestner Trust case is available on the Internet at https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/18-457.html (last accessed Feb. 23, 2019),

[3] The U.S. Supreme Court docket information regarding the Fielding case is available on the Internet at https://www.supremecourt.gov/search.aspx?filename=/docket/docketfiles/html/public/18-664.html (last accessed Feb. 23, 2019).

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