1.   Introduction

The concept of the 'significant economic presence' is one of the three solutions considered in the OECD's BEPS Action Item 1 Final Report. Much prior to that, the tax authorities of various states of the United States have attempted to invoke that concept for imposing state taxes (income tax, privilege tax, sales/ use tax, etc.) on out-of-state companies. That has given rise to considerable amount of litigation.

Technically, the various US court decisions dealing with validity of the ‘significant economic presence’ principle (for imposition of state taxes) are not in the field of international taxation. However, at least some of those decisions, possess features found in many international tax cases. Indeed, some of those US court decisions employ the expression “foreign corporation” for ‘out-of-state’ companies. Hence, those decisions are relevant and interesting in the context of the BEPS Action Item 1 as well.

In another article, the author has analyzed two important US court decisions upholding application of the significant economic presence principle for imposition of state taxes on certain out-of-state companies. Those out-of-state companies did not have physical presence in the taxing states.

In this article, we would analyze two landmark decisions wherein the Supreme Courts of two US states have rejected application of the significant economic presence principle.