Asahi And J. McIntyre: What’s Tax Got To Do With It?

The U.S. Supreme Court has clipped the commerce clause’s nexus wings, and much ink has been spilled on whether the due process clause will enjoy a resurgence in cases on a nonresident’s tax liability. Court due process precedent abounds, cases with which state tax professionals are quite familiar.

However, there are two Supreme Court cases I have seen referenced in state court tax opinions concerning due process, Asahi and J. McIntyre, that I confess leave me wondering.

The Question of Due Process Nexus

There is no room for doubt that physical presence is not required for a state to constitutionally exercise its jurisdiction over a nonresident defendant under the due process clause.

Due process only requires a nonresident have “minimum contacts” with the state, and that those contacts result from the nonresident purposefully availing “itself of the privilege of conducting activities within the forum state, thus invoking the benefit and protection of its laws.”

Cases often cited in the due process debate are two Court product liability cases, Asahi and J. McIntyre.

In Asahi the defendant was a manufacturer of tube valve assemblies for motorcycles. Asahi sold the valves to Cheng Shin Rubber Industry Co. Ltd., a Taiwanese manufacturer of inner tubes for motorcycles.

While traveling, the plaintiff lost control of his motorcycle, resulting in an accident in which he was seriously injured and proved fatal for his passenger. The plaintiff alleged that the accident was caused by a defective tire, tube, and valve assembly, resulting in a sudden loss of air in the motorcycle’s rear tire, causing the tire to explode.

The plaintiff sued Cheng Shin, which in turn sought indemnification from Asahi. The plaintiff’s claim against Cheng Shin was settled, leaving the tube manufacturer’s indemnity action against Asahi. The record showed that Asahi’s valves that ended up in California were sold to Cheng Shin in Taiwan, which then incorporated the valves into its tubes. Cheng Shin sold its products worldwide, including the United States.

The question was whether Asahi, in placing its valves in the stream of commerce by selling its products to Cheng Shin in Taiwan, should have foreseen that its products could have an ultimate destination in California.

A fractured Court found the California courts did not have jurisdiction over Asahi.

Although three theories of due process nexus emerged from the plurality, all the justices agreed that hauling Asahi into the California courts would be unreasonable, as it was not directly involved in the plaintiff’s claim but was a party to an indemnification suit between two foreign companies over a transaction that did not occur in the United States. Justice Sandra Day O’Connor, writing for four justices, introduced the concept of “stream of commerce plus,” which holds that a nonresident’s mere placing of a product in the stream of commerce is not enough to confer due process nexus; it must take additional action to target a state’s market.

Justice William J. Brennan, also writing for four justices, said the Court should have ended its analysis with the finding that it was unreasonable to force Asahi into the California courts because it did not purposefully avail itself of the California market, and even if it had, the unreasonableness factor would have trumped those activities.

Explaining his disagreement with the stream of commerce plus concept, Brennan said the key to determining due process nexus is whether the defendant should have foreseen that its product could end up in the forum state.

He said the term “stream of commerce” refers “to the regular and anticipated flow of products from manufacture to distribution to sale,” and “as long as a participant [that is, defendant] in this process is aware that the final product is being marketed in the forum state, the possibility of a lawsuit cannot come as a surprise.”

Justice John Paul Stevens, writing for three justices, agreed with Brennan that the Court should have stopped its analysis upon determining that to haul Asahi into the California courts would be unreasonable.

However, he diverged from O’Connor and Brennan on the stream of commerce question. Stevens pointed out that a clear line cannot be drawn between a defendant’s “mere awareness” that a product could land in the forum state and whether the defendant “purposefully availed” itself of a state’s market.

The key, Stevens wrote, is to inquire whether the defendant’s actions rise to a constitutional level based on the volume, value, and the hazardous character of its products. In this case, Stevens said, considering the many years Asahi dealt with Cheng Shin and the volume of products Cheng Shin procured yearly from Asahi, he would consider Asahi to have purposefully availed itself of the California market, even though Cheng Shin’s tubes were marketed worldwide.

After Asahi, courts around the country split on the stream of commerce theories espoused by O’Connor (stream of commerce plus specific targeting activities) and Brennan (stream of commerce and foreseeability and fairness).

The competing theories came before the Court in J. McIntyre, a product liability case in which the Court had to decide whether the due process clause gave New Jersey jurisdiction over J. McIntyre, a British manufacturer of metal-shearing machines whose product seriously injured an employee, when the manufacturer neither targeted New Jersey with its products nor shipped them to the state.

The plaintiff argued proper jurisdiction because: a U.S. distributor sold J. McIntyre’s products nationally; J. McIntyre employees attended trade shows in various states (although none in New Jersey); and the product ended up in New Jersey.

The state supreme court additionally found that J. McIntyre held British and U.S. patents on its products, and, to the extent possible, worked alongside the distributor in designing advertising campaigns.

In adopting the stream of commerce theory espoused by Brennan in Asahi, the state supreme court ruled that New Jersey had personal jurisdiction over J. McIntyre under the due process clause because the company knew or reasonably should have known that its products, distributed through a nationwide system, could be sold to a New Jersey customer.

Again, the Court was fractured. Justice Anthony M. Kennedy, joined by Chief Justice John G. Roberts and Justices Antonin Scalia and Clarence Thomas, built the decisional framework, citing International Shoe, Hanson, and other seminal precedents.

The phrase “stream of commerce,” Kennedy wrote, is only a metaphor, and an imprecise one at that. Simply placing a product in the stream of commerce is not enough; there must be evidence of intent to submit to a state’s jurisdiction by placing its product in the stream of commerce with the expectation that it will be purchased by someone in the forum state; that is, by purposefully availing itself of the state’s market.

This general rule holds whether the defendant markets the product itself or acts through an agent. Based on the record, J. McIntyre evinced no intent to target the New Jersey market, thus depriving the state courts of due process jurisdiction. 

Justice Stephen G. Breyer, joined by Justice Samuel Alito, concurred in the judgment, writing that the plaintiff failed to prove his case. However, Breyer said, the facts of this case do not warrant a broad rule as set out in Kennedy’s opinion because there is nothing novel about them. Ample Court precedent addresses the issue in this case, he said, citing Woodson and Asahi.

The novelty arises when a company might “target the world” by selling products from its website, or when a company sells its product through a marketplace facilitator. These questions, Breyer writes, are absent in this case. Justice Ruth Bader Ginsburg, joined by Justices Sonia Sotomayor and Elena Kagan, dissented.

Conclusion

I may be missing something, but I have always been puzzled as to why it is argued that the Asahi and J. McIntyre holdings apply in the tax context.

While it is true that due process is due process, and the Asahi and J. McIntyre cases quote the familiar tax cases like International Shoe and Hanson, which require minimum contacts and purposeful direction, these are product liability cases, and the issue is whether a court has the lawful authority to adjudicate a claim for redress against a nonresident company for injuries sustained because its product was defective.

Stream of commerce, fairness and purposeful direction, foreseeability, and so on are significant markers in determining whether the court has such authority over a nonresident whose product has caused injury.

In the tax arena, the issue is not simply a court’s authority to adjudicate, but tax enforcement.

Questions of minimum contacts, purposeful direction, etc., come into play, but where does stream of commerce fit in? Why the Asahi and J. McIntyre balancing act to determine whether a nonresident has a tax bill due in the state asserting the tax?

The Court’s line of cases to determine tax enforcement jurisdiction span the spectrum of what does and does not constitute minimum contacts, purposeful direction, and questions of fairness, from International Shoe to Miller Bros. and beyond.

I don’t see how Asahi and J. McIntyre have anything do with determining issues of tax liability. Perhaps a reader will kindly enlighten me.