Should I Register My Entity to Do Business in a State? Supreme Court Case Reminds Us of the Scope of Considerations

5 min

Clients frequently ask whether a business entity needs to register to do business in a particular state with which the entity has begun to have some degree of ongoing contact. In responding we typically consider the state's requirements as to when registration is required, the penalties for failure to comply, and collateral consequences of registration, including state tax law considerations. In its June decision in Mallory v. Norfolk Southern Railway Co., the U.S. Supreme Court (the Court) reminds us of another consideration - that in some states mere registration subjects the entity to general personal jurisdiction with the state. This means that the entity can be sued in the state for any issue, regardless of whether that litigation has any connection to the state.

The Mallory case involved a Virginia resident suing Norfolk Southern Railway (Norfolk) in Pennsylvania court for an employment-related personal injury occurring outside of Pennsylvania. The plaintiff was able to sue Norfolk in Pennsylvania solely because Norfolk was registered to do business in Pennsylvania. Pennsylvania had no other current connection to the plaintiff or the underlying litigation. Under Pennsylvania law such registration constituted the corporation's submission to the state's exercise of personal jurisdiction over the corporation. Norfolk contended that Pennsylvania law requiring Norfolk to consent to the state's jurisdiction violated the Due Process Clause of the U.S. Constitution. The highest court of Pennsylvania agreed with Norfolk, but the Court vacated and remanded the case in its 5-4 ruling.

In its ruling, the Court relied on Pennsylvania Fire Ins. Co. of Philadelphia v. Gold Issue Mining & Milling Co., where the Court ruled that a similar statute in Missouri comported with the Due Process Clause. Furthermore, the Court noted that Norfolk's registration enabled Norfolk to take full advantage of its opportunity to do business in the state. Thus, the ruling would not be inconsistent with the "fair play and substantial justice" and "fairness" concerns of the Due Process Clause in the context of personal jurisdiction jurisprudence. Also, as personal jurisdiction may be waived or forfeited, the Court took the view that Norfolk's registration "amount[s] to a legal submission to the jurisdiction of the court."

The Mallory decision reaffirms that a plaintiff may have some ability to engage in forum shopping when suing companies involved in interstate commerce. And, concomitantly, an entity may find itself subject to litigation in a state where it has in fact engaged in little activity (or at least none related to the specific litigation), merely because of having registered with the state. Currently, only two states (Georgia and Pennsylvania) appear to require any foreign company registered in the states to submit to the state's exercise of personal jurisdiction for any claims. But many states have statutes in place that subject to the state's jurisdiction certain types of claims (e.g., claims made by resident plaintiffs) and/or specific types of companies (e.g., insurance companies and railroads) as a result of registration to do business. The Mallory decision leaves otherwise remote businesses subject to suit in a state with such a provision merely because of having registered to do business in the state. And Mallory provides support for states to expand the jurisdictional scope of their current statutes as such expansion is valid under the Court's interpretation of the Due Process Clause.

How does "doing business" registration relate to the obligation to file tax returns with a state? Typically, the two registrations have different processes and standards. Doing business registration usually is with the state's secretary of state. The definition of "doing business" under the model statutes works primarily from a list of activities that will not be considered to be doing business in the state (e.g., merely holding a board meeting or owning real estate as security for a debt will not be considered to be "doing business"). In contrast, tax law registration generally is with the state's taxing authority and is based on the entity having contacts with the state—based either on the entity's actual presence in the state (e.g., personnel or assets in the state) or economic contacts with the state (e.g., sales from outside the state to customers located in the state).

In some states there is a linkage: doing business registration with a state's secretary of state is treated by the state's taxing authority as sufficient to establish nexus for tax purposes. In contrast, other states do not rely on mere registration to do business as being sufficient to create such nexus for tax purposes. And an entity may be required to register for income or sales tax compliance (e.g., because remote sales to customers in the state exceed economic nexus thresholds for tax law purposes) but not be obligated to register as doing business in the same state.

Frequently when the question arises as to whether the undertaking of particular activity in a new state merits doing business registration, the conclusion is that registration is appropriate. The risk of penalties for failure to register and obligations under contracts that the entity be in compliance with all applicable state laws, together with other factors, tend to weigh in favor of registration. But often the adverse factors may be neglected in the analysis. If tax advisors participate in the analysis, they will weigh into the discussion of the potential incremental tax burden of such registration with a new state. And Mallory reaffirms that the risk of being sued in an undesirable forum state belongs on the list of adverse considerations.