University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

155

Pages:

2
Author:

bratrochanter

The Supreme Court has outlined specific limitations on states when imposing taxes and regulations on foreign corporations engaged in interstate commerce. While states cannot directly tax interstate activities, they may impose fees or taxes on intrastate business activities within their borders. For example, Michigan’s fee on trucks for intrastate hauls was upheld, as it applied only to local activity, whereas Pennsylvania's flat tax on all trucks, including those only passing through, was found unconstitutional because it disproportionately impacted interstate commerce. Regarding state sales and use taxes, the Quill Corp. v. North Dakota case (1992) established that a corporation must have a “physical presence” in a state for it to be taxed on interstate sales, a rule Internet retailers leveraged to avoid certain state taxes. However, as online businesses expanded their physical presence (e.g., Amazon’s warehouses in various states), some states negotiated agreements allowing these corporations to avoid certain state taxes in exchange for economic benefits like job creation. States may also require foreign corporations to qualify to conduct intrastate business, usually necessitating them to register, pay fees, and appoint a registered agent. The Model Business Corporation Act (MBCA) outlines activities that do not require qualification, such as mail-order solicitation, independent contracting, and isolated transactions under 30 days. However, if a corporation maintains offices, contracts, or regularly conducts transactions within a state, it may be required to qualify as an intrastate business. In Ryan v. Cerullo, the Connecticut Supreme Court ruled that a New York-based accounting firm was not transacting business in Connecticut merely by preparing a Connecticut resident’s tax returns. Since the firm had minimal contacts in Connecticut and performed its services predominantly in New York, Connecticut’s long-arm statutes did not establish jurisdiction, highlighting the narrow interpretation of “doing business” under state statutes. Additionally, states generally regulate only the internal affairs of corporations incorporated within their borders, though some, like California, extend certain governance rules to foreign corporations operating primarily within the state (pseudo-foreign corporations). Foreign nonprofits, likewise, must comply with state qualification requirements to conduct intrastate business. Courts may sometimes "pierce the corporate veil" to hold shareholders personally liable if there is (1) shareholder domination over the corporation, making it an “alter ego,” and (2) improper use of the corporation, such as defrauding creditors or circumventing laws. For example, undercapitalizing a corporation (thin capitalization) that leaves it unable to meet debts may lead courts to hold shareholders liable. This protection loss is common in close corporations, where fewer formalities and stronger shareholder control can create conditions for veilpiercing.