Business groups urge US Supreme Court to take up NC sales tax dispute

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  • National groups representing manufacturers, small businesses, and major corporations are urging the U.S. Supreme Court to take up a sales tax dispute from North Carolina.
  • A Wisconsin-based company, Quad Graphics, challenges the N.C. Revenue Department's assessment of more than $3 million in sales tax for transactions with N.C. customers that took place out of state.
  • The business groups have filed friend-of-the-court briefs supporting Quad Graphics' position in the case.

Groups representing manufacturers, small businesses, and more than 500 large corporations hope the U.S. Supreme Court will take the case of a sales tax dispute from North Carolina. The nation’s highest court will make its decision about accepting or rejecting the case no earlier than mid-May.

The National Association of Manufacturers, National Federation of Independent Business, and the Council on State Taxation are the latest groups to file friend-of-the-court briefs in the case titled Quad Graphics v. N.C. Department of Revenue.

Quad Graphics, a Wisconsin-based company, is challenging state revenue officials’ 2018 assessment of more than $3 million in sales tax and penalties for transactions with customers operating in North Carolina. The company argues that the sales between 2009 and 2011 took place outside North Carolina and are not subject to this state’s sales tax.

The N.C. Supreme Court disagreed. Justices ruled 6-1 in December that the Revenue Department had authority to assess tax on Quad Graphics’ transactions with customers in the Tar Heel State.

“Although sales taxes are passed through to purchasers, businesses bear the administrative costs of computing, collecting, and remitting them,” according to the brief from NAM and NFIB’s Small Business Legal Center. “Businesses also pay the back taxes, interest, and penalties when they fail to anticipate changes in the complex details of over 10,000 taxing jurisdictions’ laws. Businesses thus sometimes rationally attempt to limit the number of jurisdictions to which they must remit sales taxes to reduce their compliance costs and minimize their legal risks.”

“One way that businesses have limited their sales-tax-remittance obligations for decades is to ensure that title to the goods they ship passes inside their State rather than inside the purchaser’s State,” the brief continued. “Under this Court’s decision in McLeod v. J.E. Dilworth Co., … the Commerce Clause forbids States from levying a sales tax on sales consummated outside of their boundaries.”

“But in the decision below, the North Carolina Supreme Court took it upon itself to declare Dilworth inconsistent with this Court’s later decisions. The NAM and NFIB Legal Center
write to explain why the North Carolina Supreme Court’s decision defies this Court’s precedent, upsets businesses’ settled expectations, and will harm businesses if allowed to go unreviewed.”

The Council on State Taxation represents hundreds of “major corporations engaged in interstate and international business.” COST submitted a separate brief along with University of Connecticut law school professor Richard Pomp, author of a textbook on “State and Local Taxation.”

The N.C. Supreme Court “inappropriately dismantled” the 1944 Dilworth precedent, according to the COST brief.

“According to the North Carolina Supreme Court, the Commerce Clause no longer requires that a sale occur within the State as a condition to applying its sales tax,” the brief argued. “This [U.S. Supreme] Court is asked to determine whether North Carolina can ignore the longstanding Dilworth precedent, which this Court has never overruled — but to the contrary, has endorsed — and uphold a sales tax assessment even though no sale occurred in North Carolina.”

The brief also cited a 1989 precedent involving state courts’ overreach. “This case also provides the Court an opportunity to reinforce its warning under Rodriguez de Quijas v. Shearson/American Express, Inc., … that federal and state courts must respect this Court’s holdings and it is not their place to overrule a case like Dilworth.”

The American College of Tax Counsel, a group representing tax lawyers, and the N.C. Chamber Legal Institute filed earlier friend-of-the-court briefs in the case. Both briefs supported Quad Graphics’ position.

The company filed its petition with the nation’s highest court on March 14. Court rules required a response from the N.C. Revenue Department by April 17, but N.C. Solicitor General Ryan Park secured a one-month extension.

Once the Revenue Department submits its legal arguments by May 17, the U.S. Supreme Court will consider the case in a conference and decide whether to take it.