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Supreme Court Won’t Hear Arizona Challenge to California Tax (1)

Feb. 24, 2020, 3:44 PMUpdated: Feb. 24, 2020, 6:22 PM

The U.S. Supreme Court won’t hear a dispute between Arizona and California over the constitutionality of a California tax on commercial activity.

Arizona sued California in February, challenging its $800 minimum franchise tax on limited liability companies “doing business” in California. The tax applies to businesses that exceed specified thresholds for sales, property ownership, or compensation in California. Arizona was able to file its initial suit directly with the Supreme Court because the high court can assert original jurisdiction over disputes between state governments.

The Supreme Court on Monday denied leave to file a bill of complaint. Justice Clarence Thomas, joined by Justice Samuel Alito, dissented from the court’s decision not to hear the case. The court doesn’t have the option to turn away suits between two states, they argued.

But the court’s refusal to hear the case isn’t unusual.

In 2016, for example, the court rebuffed Nebraska and Oklahoma attempts to sue Colorado over the decriminalization of marijuana.

The U.S. Solicitor General’s office advised the Supreme Court in December against taking the case, arguing that Arizona wasn’t asserting “the types of interests that would warrant” a first hearing at the Supreme Court and that taxed Arizona entities could adequately litigate the issues.

In its complaint, Arizona argued that the California tax has been applied against entities connected to California only through “purely passive investment in California companies” and is costing Arizona revenue. California replied that the court should pass on the case because states regularly tax out-of-state entities on activity connected to the taxing state, and private entities were “fully capable of litigating the same issue themselves.”

Katie Conner, spokesperson for the Arizona Attorney General’s Office, said by email that the office is disappointed by the Supreme Court’s decision not to hear the case, but will continue to explore ways to rectify the situation.

—With assistance from Jeffery Leon and Kimberly Strawbridge Robinson.

The case is State of Arizona v. State of California, U.S., No. 22O150, 1/27/20.

(Adds comment from Attorney General's Office in final paragraph.)

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; David Jolly at djolly@bloombergtax.com