No. 150, Orig.

In the

Supreme Court of the United States
STATE OF ARIZONA,
V.

Plaintiff,

STATE OF CALIFORNIA,
Defendant.
ON MOTION FOR LEAVE TO FILE A BILL OF COMPLAINT

ARIZONA’S SUPPLEMENTAL BRIEF IN
RESPONSE TO CVSG BRIEF
MARK BRNOVICH
ATTORNEY GENERAL
OFFICE OF THE
ARIZONA ATTORNEY
GENERAL

ORAMEL H. (O.H.) SKINNER
Solicitor General
DREW C. ENSIGN*
Deputy Solicitor General
2005 N. Central Ave. BRUNN (BEAU) W. ROYSDEN III
Phoenix, AZ 85004
ANTHONY R. NAPOLITANO
(602) 542-5025
ROBERT J. MAKAR
DUSTIN ROMNEY
drew.ensign@azag.gov
* Counsel of Record

Counsel for State of Arizona

 TABLE OF CONTENTS
Page
TABLE OF AUTHORITIES ...................................... ii
ARGUMENT ...............................................................1
I.

Purported Need for Factual
Development .................................................2

II.

Similarity to Wyoming and Maryland .........5

III.

Seriousness and Dignity of Arizona’s
Claims ...........................................................7

IV.

Availability of Alternative Fora ...................9

V.

Constitutional Merits .................................11

VI.

More Limited Grant ...................................12

 ii
TABLE OF AUTHORITIES
Page(s)
CASES
Florida v. Georgia
574 U.S. 972 (2014) ................................................ 6
Maryland v. Louisiana
451 U.S. 725 (1981) ......................................... 1, 6-7
Shaffer v. Heitner
433 U.S. 186 (1977) .............................................. 10
Swart Enterprises, Inc. v. Franchise Tax Bd.
7 Cal. App. 5th 497 (Ct. App. 2017) ....................... 3
Wyoming v. Oklahoma
502 U.S. 437 (1992) ...............................1, 5, 6, 9, 10
STATUTES
A.R.S. §§6-132 ............................................................ 8
A.R.S. §§6-133 ............................................................ 8
A.R.S. §13-1804 ....................................................... 8-9
A.R.S. §13-1802 .......................................................... 8
28 U.S.C. §1251(a)...................................................... 6
OTHER AUTHORITIES
U.S. Const. Amend. V ................................................ 9
U.S. Const. Amend. XIV ............................................ 9

 ARGUMENT
The Solicitor General’s opposition brief (“SG
Brief”) founders for substantially the same reasons
as California’s: extensive reliance on supposed
factual complexity that does not actually exist. The
SG Brief contends that it needs to be “fleshed out”
whether California actually imposes Extraterritorial
Assessments based purely on passive investments.
SG Br.19. But California has repeatedly admitted
that it does just that, in its official legal rulings no
less. See Reply Br.1. And Arizona’s complaint
provides extensive documentary evidence that
California’s
repeated
admissions
are
true.
Complaint Exs. D-R. This case therefore does not
require a “more developed factual record.” SG Br.18,
6. It simply requires taking California at its word as
to what it is doing (and with confirmatory evidence).
By refusing to do so, the SG Brief fails to provide a
persuasive basis for denying leave.
More generally, the SG Brief evades critical
questions, simply ducking what it cannot defend.
While California at least attempted to argue that its
actions were colorably constitutional, the SG Brief
offers no such reassurance for the vast majority of
Arizona’s claims. Nonetheless, in the brief’s view,
Arizona must simply acquiesce in the violations of
its sovereignty and borders until such time as some
third-party benefactor steps forward to vindicate
Arizona’s
sovereign,
quasi-sovereign,
and
proprietary interests. The United States would
never tolerate such powerlessness for its own
interests, and this Court should not impose it on
Arizona. Indeed, both Wyoming v. Oklahoma, 502
U.S. 437 (1992) and Maryland v. Louisiana, 451 U.S.
725 (1981) are directly to the contrary. Both cases

 2
accepted
jurisdiction
over—and
vindicated—
strikingly similar original actions by states
challenging unconstitutional policies of other states.
And neither is persuasively distinguished here. A
similar grant of leave is therefore warranted here.
I. Purported Need for Factual Development.
The SG Brief’s principal objection appears to be
postulated factual complexity/ambiguity as to what
California is actually doing, and thus purported need
for additional factual development. See SG Br.6, 1819. It argues that “the[] circumstances have not
been fleshed out” as to if/how often California
imposes
Extraterritorial
Assessments
“based
[purely] on some share of passive ownership” and
that “resolution of any … claims … would benefit
from a more developed factual record.” Id. at 18-19.
But that premise is belied by the pervasive conduct
that California admits it has engaged in for more
than a decade, which Arizona cited prominently. See
Reply Br.1, 3-4; Br.7, 37.
California’s official legal interpretations should
have dispelled any doubt as to whether California is
engaged in taxation based on purely passive
investment. As early as 2008, California made clear
that investment in a California-Operating LLC was
alone sufficient to subject an out-of-state company to
an Extraterritorial Assessment. See Complaint ¶43.
The Board subsequently published Legal Ruling
2014-01, which remarkably admits four times that it
imposes the very passive-investment-only taxation
that Arizona challenges. Specifically, it states that:


The “doing business” tax may be imposed on
businesses that “ha[ve] no activities or factor
presence in California other than through its

 3
membership in [an] LLC[.]” Complaint Ex. A
at 14 (Situation 3; Member F).


To remove any conceivable doubt as to its pure
investment-only taxing policy, the Board
restated that dogma for three additional
examples in virtually identical language. Id.
at 16-18, 19-20 (Situations 4-6, Members H, J,
& L).
That expressly included a purely
passive member of a manager-managed LLC.
Id. at 17-18 (Member J).

One might have thought that after Swart
Enterprises, Inc. v. Franchise Tax Bd., 7 Cal. App.
5th 497, 510 (Ct. App. 2017) the Board would have
backed away from passive-investment-only taxation.
Instead, it doubled down. While begrudgingly
recognizing an exception compelled by Swart, it
limited the exception to Swart’s narrow facts (both
material and immaterial). Complaint ¶47; Br.8-9,
23.
The Board subsequently released Legal Ruling
2018-01, which again tersely acknowledged the
“narrow exception” of Swart, but nonetheless
reiterated its position that “members of the LLC”—
i.e., all its investors, whether passive and active—
“are themselves generally considered to be ‘doing
business’ in California.” Complaint Ex. C at 2.
While amending some language of the prior legal
ruling, it left unchanged its conclusion that all four
examples in Legal Ruling 2014-01 cited above were
properly subject to Extraterritorial Assessments,
including one (Member J) where taxation was based
solely on membership in a manager-managed LLC—
i.e., a paradigmatic example of purely passive

 4
investment. Id. This remains the Board’s official
interpretation to this day.
Arizona’s Complaint notably provides five specific
examples where California imposed Extraterritorial
Assessments based solely on purely passive
investments in manager-managed LLCs. Complaint
¶¶67-118; Exs. D-R. California unpersuasively—and
without citation—quibbled with one of them.
BIO.24.
But even if California were correct,
Arizona’s Complaint provides specific documentary
evidence of at least four such passive-investmentonly Extraterritorial Assessments by California, as
well as reasonably extrapolating that there are likely
thousands of others. Complaint ¶¶63-118; Exs. D-R.
The SG Brief, however, is premised on looking past
the existence of even one such passive-investmentonly Extraterritorial Assessment. SG Br.19.
The SG Brief’s factual-complexity assertions
similarly ignore California’s principal defense of its
Extraterritorial Seizures:
i.e., its four-timesrepeated contention that its Seizure Orders
constitute only “voluntary” compliance. See Reply
Br.4-5. But California’s claim is as absurd as it is
factually simple: moneys extracted by governments
under explicit threats of penalties for noncompliance are manifestly not “voluntary.” Reply
Br.4-5. But while the “voluntary compliance”
argument was central to California’s opposition (BIO
29-30, 32), the SG Brief remarkably refuses to
address it—despite its obvious factual simplicity and
lack of merit.
The voluntariness of California’s extraction of
moneys under its offers-they-can’t-refuse Seizure
Orders is simply not a question that requires factual

 5
development. This Court thus can and should
resolve the pure questions of law raised by
California’s
Extraterritorial
Seizures,
which
squarely infringe on Arizona’s sovereignty.
II. Similarity to Wyoming and Maryland. As
explained previously, this case is strikingly similar
to both Wyoming and Maryland. Br.16-17, Reply
Br.8-11. The SG Brief’s attempt to distinguish these
two controlling precedents fails.
In particular, the SG Brief argues that
Oklahoma’s tax in Wyoming “directly affected
Wyoming’s ability to collect severance tax revenues”
whereas “here, Arizona’s allege injury is indirect.”
SG Br.12 (cleaned up). Not so. In Wyoming,
Oklahoma imposed a mandate that Oklahoma power
plants burn “at least 10% Oklahoma-mined coal.”
502 U.S. at 440. That, in turn, affected Wyoming
coal sales somewhat, which in turn diminished
Wyoming’s severance tax revenue very modestly. Id.
at 447-51. Here, California directly taxes Arizona
companies, which directly reduces their Arizona
taxable income and thereby diminishes the income
taxes that Arizona collects. There is no principled
manner in which the revenue impact in Wyoming
was somehow “direct” and but here is “indirect.”
Indeed, if anything, the harm is more direct here.
In Wyoming, Oklahoma mandated only that 10% of
coal burned be Oklahoma-mined.
Only market
conditions determined whether that mandate
actually led to less Wyoming coal being
purchased/burned/mined. (For example, Oklahoma
power plants could have burned 50% Wyoming coal
both before and after the statute.) In stark contrast,
once California extracts tax revenue from Arizona

 6
companies, it leads inexorably—and without any
intervening step or attenuation by markets—to a
diminution of tax revenue collected by Arizona.
Thus, to the extent that Arizona’s injury is
distinguishable from Wyoming, it is more direct.1
The SG Brief’s attempt to distinguish Maryland
also fails. While the brief focuses on the states’
proprietary interests as purchasers of gas, this Court
found that the states’ parens patriae interests alone
justified accepting jurisdiction. 451 U.S. at 737-39;
Reply Br.9. The SG Brief further dismisses the
estimated 13,333 Arizona business that have been
illegally taxed as insufficient, and instead suggests
that only the “millions of consumers in over 30
States” in Maryland could suffice. SG Br.14. Such
thresholds, however, could only realistically be
reached if there were multiple states on the left side
of the “v.” But this Court has exclusive jurisdiction
over “all controversies between two or more States.”
28 U.S.C. §1251(a) (emphasis added). And this
Court regularly grants review of disputes with only
one state on either side. See, e.g., Florida v. Georgia,
574 U.S. 972 (2014); Wyoming, 502 U.S. at 441.
Contrary to the SG Brief’s view, this Court in
Maryland deemed sufficient that “a great many [of a
state’s] citizens … are faced with increased costs
aggregating millions of dollars per year.” 451 U.S. at
1 The SG Brief repeatedly (at 15, 16) argues that denial is
appropriate because Arizona is not the “most natural plaintiff.”
But the same was true in Wyoming with the mining companies,
and this Court accepted jurisdiction even though the
companies’ absence was for “reasons unknown.” 502 U.S. at
451-52. In contrast, Arizona has explained—with a decade of
supporting evidence—why taxpayer suits are unlikely to
resolve these issues. Reply Br.10-12.

 7
739. Arizona’s Complaint squarely alleges as much.
Complaint ¶65. The SG Brief’s position ignores—
and ultimately flouts—this standard that Maryland
actually set forth.
The SG Brief further protests (at 16) that this
Court’s “‘docket would be inundated’” if leave were
granted here. Wyoming and Maryland demonstrate
otherwise. In the 38 years since Maryland was
decided, this appears to be the first original action in
which a state has challenged a tax of another state
as unconstitutional. One case every generation is
not even a trickle, let alone a flood.
III. Seriousness and Dignity of Arizona’s
Claims. The SG brief correctly observes that “‘the
model case for invocation of this Court’s original
jurisdiction is a dispute between States of such
seriousness that it would amount to casus belli if the
States were fully sovereign.” SG Br.8-9 (cleaned up)
(citation omitted). But despite the acknowledged
centrality of this standard, the SG Brief notably
refuses to offer any analysis under it. And that
standard makes this action a “model case” for
accepting jurisdiction.
Arizona specifically argued that “[t]he federal
government would never tolerate equivalent conduct
by other nations—something California does not
meaningfully dispute.” Reply Br.7-8. The SG Brief
notably does not dispute this point either. And for
good reason: If China or Venezuela imposed an
illegal head tax on all U.S. citizens of
Chinese/Venezuelan descent and then enforced the
tax by coercing U.S. banks into transferring U.S.based deposits to them, the United States would
hardly stand idly by. Instead it quite properly would

 8
regard such conduct as a casus belli precipitating an
international incident.
More generally, Wyoming and Maryland
establish that Arizona’s proprietary and quasisovereign injuries, respectively, justify acceptance of
jurisdiction. Br.14-18; Reply Br.8-9; supra at 5-7.
The SG Brief also belittles Arizona sovereign
interests while never actually disputing that
California is “effectively treating Arizona’s territory
as its own in exercising its taxing and police powers.”
Br.17. That alone is sovereign injury by definition.
The SG Brief instead contends (at 9-10) that
“Arizona has not identified any case suggesting that
one State’s taxation of another State’s residents
violates that [sovereign] interest.” But the fact that
no state has ever previously violated the sovereignty
of other states with its taxing powers so egregiously
(e.g., violating all four Complete Auto requirements)
is hardly a reason to deny jurisdiction. Moreover,
even if the SG Brief were correct, California’s nonjudicial, jurisdiction-less, and warrantless seizures
in Arizona go far beyond mere out-of-state taxation
into wholly distinct violations of Arizona’s
sovereignty and borders (which go unaddressed).
The brief further (at 10) disparages Arizona’s
interest in regulating in-state banks and protecting
the deposits of its citizens by contending that
“Arizona points to no regulation that it cannot
enforce due to California’s collection of its doingbusiness tax.” But Arizona—like most or all states—
unsurprisingly has laws inter alia prohibiting
violations of its banking code and theft (bank or
otherwise), A.R.S. §§6-132-33, 13-1802. And Arizona
specifically prohibits theft by extortion, id. §13-

 9
1804—which California’s Seizure Orders effectively
constitute if they are illegal (and they are, see Br.3236, Reply Br.4-7). California’s seizures thus directly
interfere with Arizona enforcing these laws within
its own sovereign territory. And protecting citizens’
property is one of the core sovereign functions of any
legitimate republican government. See, e.g., U.S.
Const. Amends. V, XIV.
The SG Brief also fails to address California’s
persistent pattern of encroachments upon the
sovereignty of other states. Br.18-20. But where
California has intruded upon the constitutional
prerogatives of the federal government—such as by
entering into its own agreements with foreign
governments—the United States has been far less
sanguine about the infringement of its sovereignty.
See, e.g., United States v. California, No. 19-2142
(filed E.D. Cal. Oct. 23, 2019).
IV. Availability of Alternative Fora. The SG
Brief notably does not contend there is any other
forum in which Arizona could file suit. SG Br.15-17.
Nor does it dispute that there are no “assurances …
that [Arizona’s] interests under the Constitution will
find a forum for appropriate hearing and full
relief”—the absence of which caused this Court to
hold jurisdiction “proper” in Wyoming. 502 U.S. at
452 (emphasis added). But the SG Brief nonetheless
argues denial is appropriate here while pointing to
no relief whatsoever that Arizona could obtain itself
elsewhere.
Nor are individual taxpayer suits an acceptable
alternative. Among other problems, they merely
perpetuate the constitutional violations. Br.20-23;

 10
Reply Br.10-13.2 Simply put, if California cannot
exercise personal/taxing jurisdiction over companies,
it should not be able to seize their money and hold it
as ransom to compel them to “voluntarily” appear in
California courts. But the SG Brief remarkably
blesses these compounded constitutional violations
by contending that “regulated entities often
challenge regulations in the courts of the State that
has imposed them.” SG Br.16. There is, however, no
“regulated entity” exception to this Court’s personal
jurisdiction and taxation precedents (including
Shaffer v. Heitner, 433 U.S. 186 (1977)). Nor should
California courts be deemed “adequate alterative”
fora if they cannot constitutionally exercise
jurisdiction.
More generally, the SG Brief’s reliance on
California state courts as alternative fora defies
compelling historical evidence cited by Arizona. The
brief simply ignores Arizona’s demonstration that a
decade
of—and
likely
over
a
million—
Extraterritorial Assessments have failed to produce
even a single precedential court decision addressing
Arizona’s claims. Reply Br.11-12. And there is no
reason given (or extant) to be more optimistic about
the next decade.
Again, the United States would never
countenance a situation where its thousands-oftimes-over injuries might perhaps be addressed
indirectly by a third-party action sometime within
the next decade (but probably not given the last

2 In addition, Arizona’s “interests would not be directly
represented” in such suits, which also supported accepting
jurisdiction in Wyoming. 502 U.S. at 452.

 11
decade).
This Court should not inflict that
intolerable position on Arizona.3
California courts have had over a decade to stop
the flagrantly unconstitutional abuses identified by
Arizona’s Complaint. Arizona should not have to
wait another decade or more to obtain resolution of
its constitutional claims.
V. Constitutional Merits. Rather than defending
the constitutionally indefensible, the SG Brief
largely adopts a see-no-evil approach that refuses to
engage with most of Arizona’s merits arguments.
The SG Brief, for example, will not even quarrel with
California’s astonishing and repeated contention
that its Seizures Orders effectuate only “voluntary”
compliance. Reply Br.4-5. And the few stray
arguments the SG Brief actually advances are
readily dispatched.
The SG Brief, for example, points (at 20-21) to
IRS’s similar (but actually less problematic) ability
to levy assessments against domestic bank deposits.
But the United States has in rem jurisdiction over
all U.S.-based deposits and in personam jurisdiction
over all U.S. residents. The same is manifestly not
true for California, which unlike the United States
has no sovereign authority within Arizona’s borders.
See Br.33-36; Reply Br.6-7. The SG Brief’s curious
3 The SG Brief also points (at 15) to “pending class actions.”
But it pointedly ignores Arizona’s demonstration that taxpayer
refund class-actions in California move glacially—failing to
produce refunds even a decade after the constitutional violation
has been definitively determined. Reply Br.12. And, notably,
the first class-action cited has been pending for 3½ years and
has not even advanced to a motion for class certification. See
Rasmussen Co. v. FTB, No. 16-554150 (filed Cal. Super. Ct.
Sep. 8 2016).

 12
unwillingness
to
acknowledge
this
crucial
distinction—which is the crux of Arizona’s claims—
renders its analogy unsound. Similarly, the SG
Brief’s suggestion that a “regulated entity” exception
exists to the demands of due process/this Court’s
personal-jurisdiction precedents is patently flawed.
Supra at 10. California cannot violate Shaffer and
Complete Auto with impunity as long as the target
happens to be a “regulated entity.”
It is also worth noting that the SG Brief does not
dispute that passive-investment Extraterritorial
Assessments would violate the Due Process Clause
under Shaffer. Reply Br.1-3. And they would
similarly violate the Complete Auto nexus
requirement. Reply Br.5. Nor does the SG Brief
dispute “Arizona’s demonstration that California
does not provide any benefits to the targets of
Extraterritorial Assessments.” Reply Br.6.
Thus, if California engages in passiveinvestment-only taxation—and it admits that it
does, supra at 1-4—this Court is presented with
pervasive and patent constitutional violations for
which there is no material factual complexity
whatsoever. Indeed, the violations of due process
under Shaffer and two of the Complete Auto
Commerce-Clause requirements are both factually
quite simple and effectively undefended.
VI. More Limited Grant. Even if the SG Brief
were correct that this case presents factual
complexity that militates against plenary review, the
appropriate remedy would not be denial of leave
entirely. Instead, this Court should simply grant
leave and direct Arizona to file an amended
complaint challenging California’s Extraterritorial

 13
Assessments and Seizures only insofar as California
is taxing/seizing based solely on purely passive
investment. California admits that it is doing as
much, and Arizona’s Complaint adds documentary
proof. Such a narrowed complaint presents no
factual complexity, and requires no meaningful
factual development. And such taxation/seizures are
flagrantly unconstitutional and flout Arizona’s
sovereignty.
Thus, at a bare minimum, this Court should
permit Arizona to challenge California’s admitted
and official policy of imposing Extraterritorial
Assessments and Seizures based purely on passive
investment in California companies.
Respectfully submitted,
MARK BRNOVICH
ATTORNEY GENERAL
OFFICE OF THE
ARIZONA ATTORNEY
GENERAL

ORAMEL H. (O.H.) SKINNER
Solicitor General
DREW C. ENSIGN*
Deputy Solicitor General
2005 N. Central Ave. BRUNN (BEAU) W. ROYSDEN III
Phoenix, AZ 85004
ANTHONY R. NAPOLITANO
(602) 542-5025
ROBERT J. MAKAR
DUSTIN ROMNEY
drew.ensign@azag.gov
* Counsel of Record

Counsel for State of Arizona