State Jurisdiction to Tax 'Nowhere' Activity

49 Pages Posted: 24 Jul 2013

See all articles by John A. Swain

John A. Swain

University of Arizona - James E. Rogers College of Law

Walter Hellerstein

University of Georgia School of Law

Date Written: July 2013


A recurring problem in the taxation of cross-border economic activity is jurisdiction to tax so-called “nowhere” activities, e.g., activities occurring in a jurisdiction that does not have the power to tax. As an economic matter, failure to tax these activities skews the competitive playing field in favor of firms with nowhere income or property, resulting in efficiency (and revenue) losses. States are well aware of this problem, and they have proposed and adopted a variety of approaches to ensure “full accountability” of multi-state income and property. These approaches all have the effect of re-assigning nowhere activities to states that have (apparent) authority to impose a tax, thus raising both tax policy and constitutional questions. From a tax policy perspective, one may contend that however laudable the goal of full accountability may be, it is illogical to posit two contrasting methods for sourcing taxable activity depending entirely on whether the activity is or is not taxable in another jurisdiction. From a constitutional perspective, sourcing rules that arguably have an extraterritorial reach implicate both Due Process and Commerce Clause concerns. Indeed, the recent U.S. Supreme Court case of Polar Tankers, Inc. v. City of Valdez raised – but did not reach – the question of how to resolve these competing claims in the context of the property taxation of oceangoing vessels. This article demonstrates that properly designed statutes that in practical effect absorb nowhere values reflect both good tax policy and are consistent with constitutional constraints on the states’ taxing power. It does so by re-examining the two commonly accepted predicates for states to tax: residence and source. Underlying both these concepts is the notion that states provide benefits, opportunities and protections for which they can ask something in return. Thus, state tax apportionment formulas are not so much about making abstract determinations of where income or other taxable values are geographically located, but rather how to apportion a tax base among the jurisdictions that provide such benefits, opportunities and protections.

Keywords: jurisdiction, due process, commerce clause, apportionment, residence, source, state taxation, state tax, nowhere income, nowhere activity

Suggested Citation

Swain, John A. and Hellerstein, Walter, State Jurisdiction to Tax 'Nowhere' Activity (July 2013). Virginia Tax Review, 2013, Forthcoming , Arizona Legal Studies Discussion Paper No. 13-35, Available at SSRN:

John A. Swain (Contact Author)

University of Arizona - James E. Rogers College of Law ( email )

P.O. Box 210176
Tucson, AZ 85721-0176
United States
(520) 621-7673 (Phone)
(520) 621-9140 (Fax)

Walter Hellerstein

University of Georgia School of Law ( email )

209 Hirsch Hall
Athens, GA 30602
(706) 542-5175 (Phone)
(706) 542-5556 (Fax)

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