As interesting as the tax issues were in front of the BOE and OTA, the issues heard (three times) by the United States Supreme Court proved to be even more riveting.⁶ In 1998, Mr. Hyatt sued the FTB in Nevada state court alleging that the FTB had committed tortious actions during the course of the audit because, among other allegations, the FTB sent auditors to Nevada to interview Mr. Hyatt’s estranged friends and family, sent more than 100 letters and demands of information to third parties, and shared his personal information with business contacts.⁷

In Hyatt I, the Supreme Court considered whether, under the Full Faith and Credit Clause of the U.S. Constitution, Nevada was required to apply a California’s statute which immunizes the FTB from liability for any injury caused by its tax collection efforts.⁸ The Nevada Supreme Court rejected the FTB’s Full Faith and Credit argument and the FTB appealed to the Supreme Court, which granted certiorari.⁹ In 2003, the Supreme Court affirmed the Nevada Supreme Court, holding that the Full Faith and Credit Clause did not prohibit Nevada from applying its own immunity law to the case.¹⁰

 In Hyatt II, decided in 2016, the Supreme Court was confronted with the question of whether the law that limited tort liability for Nevada state agencies to $50,000 must also be applied to tort liabilities asserted against the FTB. The issue in Hyatt II stemmed from a jury verdict for Mr. Hyatt, on remand from Hyatt I, in excess of $490 million. The Supreme Court held that the Full Faith and Credit Clause required Nevada to grant the FTB the same immunity enjoyed by Nevada state agencies.¹¹ While the FTB won on the aforementioned issue, the Supreme Court concluded in favor of Hyatt that the Nevada courts had appropriate jurisdiction over the matter.¹² On remand, the Nevada Supreme Court instructed the trial court to enter damages in accordance with the statutory cap for Nevada agencies.¹³

 Once again, the FTB appealed, and for the third time, the Supreme Court granted certiorari. The sole question presented in this third appeal was whether the Supreme Court’s 1979 decision in Nevada v. Hall, which held that the Constitution does not bar private suits against a State in another State’s court, should be overturned. This time around, the Supreme Court found that “Hall’s determination that the Constitution does not contemplate sovereign immunity for each State in a sister State’s courts misreads the historical record and misapprehends the ‘implicit ordering of relationships within the federal system necessary to make the Constitution a workable governing charter and to give each provision within that document the full effect intended by the framers.’”¹⁴ The Court concluded that Nevada v. Hall should be overruled, and that States retain their sovereign immunity from private suits brought in courts of other States.¹⁵

 So what does this mean for state tax law going forward?  The Tax Injunction Act¹⁶ and comity principles¹⁷ generally bar taxpayers from suing state agencies over tax issues in federal court, and now, as a result of the holding in Hyatt III, suits in the courts of any state other than the one asserting the tax liability will also be barred. In Wayfair,¹⁸  the Supreme Court gave states the potential to impose tax collection obligations on a much broader group of out-of-state individuals and companies. Now, with its decision in Hyatt III, the Court has limited the ability of persons to contest the imposition of state tax collection obligations in a forum outside of the state imposing those obligations. As a practical matter, this will likely result in the dismissal of the case filed by Crutchfield, a Virginia-based retailer, against Massachusetts tax officials in a Virginia circuit court challenging Massachusetts cookie nexus regulation for sales and use tax. While the holding in Hyatt III should arguably be limited to suits for monetary damages, Massachusetts will likely assert that it also applies to suits for injunctive relief. 

While Mr. Hyatt’s saga may have finally come to an end, the Supreme Court’s willingness to overturn precedent in both Wayfair and Hyatt III, and its current approach to stare decisis “can only cause one to wonder which holdings the Court will overrule next.”¹⁹

Other California Updates

False Claim Act

On February 21, 2019, California Assembly Member Mark Stone introduced Assembly Bill (A.B.) 1270 which expands the False Claim Act (Act) to include tax-related false claims actions. Currently, the Act imposes liability on persons making false or fraudulent claims to state or local governments; however, under A.B. 1270 the Act would also apply to “claims, records, or statements made on or after January 1, 2020, under the Revenue and Taxation Code” if (1) the damages plead in the action exceed $200,000, and (2) the amount of reported taxable income, net income, or sales equals $500,000 or more.²⁰ The bill passed in the Assembly on May 23, 2019 and was ordered to the Senate.

Currently, New York and Illinois both allow tax-related false claims actions. In both of those states there has been significant litigation by plaintiffs’ firms that has caused grief for many businesses.

The Council of State Taxation submitted a letter to the Assembly’s Appropriations Committee in opposition to A.B. 1270 and is expected to continue advocating against the bill in the Senate.

OTA Small Claims Resolution

On May 9, 2019, Governor Gavin Newsom released his revised budget for the 2019-20 fiscal year. The budget includes a proposed statutory change to OTA procedures. Currently, a panel of three Administrative Law Judges (ALJ) decides all appeals before the OTA, regardless of the amount of tax at issue. The Governor’s proposed statutory change would allow taxpayers to opt into a streamlined process whereby their appeal would be decided by one ALJ if the appeal arises (1) from a tax, fee, or penalty administered by the Franchise Tax Board where the amount in dispute is less than $5,000, or (2) from a tax, fee, or penalty administered by the California Department of Tax and Fee Administration where the amount in dispute is less than $50,000, and the entity filing the appeal has gross receipts of less than $20 million.²¹ The California legislature must pass a budget bill for the upcoming fiscal year by midnight on June 15.²²

1. Franchise Tax Bd. of Cal. v. Hyatt, 587 U.S. ___ (2019) (Hyatt III).
2. Id. at slip op. 1.
3. Id.
4. Id. at slip op. 2.
5. See In the Matter of the Appeal of Gilbert P. Hyatt, OTA Case No. 18010244 (January 15, 2019); In the Matter of the Appeal of Gilbert P. Hyatt, OTA Case No. 18010245 (January 15, 2019).
6. See Franchise Tax Bd. of Cal. v. Hyatt, 538 U.S. 488 (2003) (Hyatt I); Franchise Tax Bd. of Cal. v. Hyatt, 578 U.S. ___ (2016) (Hyatt II); and Hyatt III.
7. Hyatt III, 587 U.S. at slip op. 2.
8. See Hyatt I.
9. Id.
10. Id. at 498-99.
11. Hyatt II, 578 U.S. at slip. op. 4-9.
12. Although the question of whether or not to overturn Nevada v. Hall, 440 U.S. 410 (1979) was briefed and argued, the Court was equally divided on that question and therefore affirmed the jurisdiction of the Nevada Supreme Court. Id. at slip op. 1.
13. Hyatt III, 587 U.S. at slip op. 3.
14. Id. (internal citations omitted).
15. Id. at slip op. 4-18.
16. 28 U.S.C. § 1341.
17. See e.g. Levin v. Commerce Energy, Inc., 560 U.S. 412 (2010).
18. South Dakota v. Wayfair, Inc., 585 U.S. ___ (2019).
19. Hyatt III, 587 U.S. at slip op. 13 (Breyer dissent).
20. A.B. 1270 § 2 (as of June 3, 2019).
21. “OTA Authorization for One Administrative Law Judge”
22. Cal. Const. Art. 4 § 12(c)(3).
    
    

Client Alert 2019-151