NFIB Urges Supreme Court to Take-Up Extraterritorial Taxation Case

Date: June 20, 2019

They say that the best way to start a business in California is to take interstate 40 or 10—either will get you to Arizona, where the business climate is much-much friendlier. But small business entrepreneurs in Arizona may be shocked to see the hand of California bureaucrats reaching beyond its borders. For example, out-of-state manufacturers and packaging companies have struggled with California regulation under Proposition 65. We’ve even asked the Supreme Court to take-up at least one case challenging California’s extraterritorial regulation that sought to account for the life-cycle of greenhouse gas emissions for fuel products, including emissions occurring outside of California. Yet at least in those cases, California has been able to justify its exercise of power because it is regulating products that are ultimately sold to California consumers.

But at some point, courts must reign in California’s extraterritorial ambitions. And the Supreme Court now has an opportunity as it considers whether to hear a  lawsuit that Arizona filed against California over extraterritorial taxation. NFIB joined with the Voice of the Defense Bar in an amicus brief, in Arizona v. California, urging the Supreme Court to hear this case.

In our brief, we argue that the Court needs to delineate California’s power over individuals and businesses operating in other jurisdictions. Particularly in this case, since California is asserting power over businesses that are neither operating in California nor selling products into the state. At issue is a controversial tax on out-of-state businesses that have done nothing more than passively invest in LLCs that happen to operate in California.

Of course, California can regulate and tax businesses actually doing business in California. But regulating or taxing businesses that passively invest is a bridge too far. As such, we hope the Court will take this case to protect the rights of small business owners across the nation. And at the end of the day, this will benefit even California businesses because, otherwise, they might face similar threats from New York, Illinois or other enterprising jurisdictions—modeling their bad behavior on California’s blue-print.

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