National tax lawyers group urges US Supreme Court to take NC sales tax case

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  • A national group of tax lawyers is asking the U.S. Supreme Court to take up a case from North Carolina dealing with sales taxes and out-of-state transactions.
  • A Wisconsin-based company, Quad Graphics, is challenging the N.C. Department of Revenue's assessment of taxes for transactions that took place outside the Tar Heel State.
  • The legal issue involves a 1944 U.S. Supreme Court precedent in a case known as Dilworth.

A national group of tax lawyers wants the U.S. Supreme Court to take a case from North Carolina dealing with sales taxes on out-of-state transactions. The case stems from a Wisconsin-based company’s fight against a sales tax assessment from N.C. revenue officials.

The American College of Tax Counsel filed a friend-of-the-court brief Thursday urging the high court to take the case, Quad Graphics v. N.C. Department of Revenue. The group of 700 tax lawyers echoes Quad Graphics’ plea for Supreme Court justices to overturn a decision from North Carolina’s top court.

“[T]he decision below undermines the binding nature of this Court’s precedent and threatens to create sales tax jurisdiction chaos between states and non-resident sources of potential tax revenue,” according to the brief. “The opinion below, if followed and multiplied by similar opinions by other states, would have far-reaching and unpredictable consequences for sales tax reporting, collection, and administration by taxpayers and the advice provided by tax practitioners.”

The tax lawyers focus on the precedent set by a 1944 U.S. Supreme Court case known as Dilworth.

“This Court’s Dilworth decision laid down a clearly understandable rule regarding the location of a sale for purposes of determining which jurisdiction can levy its sales tax on that event,” according to the brief. “The North Carolina Supreme Court’s decision concluding that Dilworth is no longer binding precedent of this Court creates, and will likely proliferate among other states, uncertainty about Dilworth’s ongoing salience.”

“Compliance with dozens of state sales tax systems and thousands of local jurisdictions requires that the retailers who collect such taxes, the customers who pay them, and the state and local jurisdictions who administer them have clear guidance from the Court regarding the jurisdictional reach of a sales tax,” the tax lawyers argued. “This Court’s input on the issues raised by the decision below would provide essential guidance on which jurisdictions
have authority under the Due Process Clause and the Commerce Clause to tax a sale.”

Quad Graphics petitioned the U.S. Supreme Court on March 14. The company is asking justices to respond to a 6-1 ruling last December from the N.C. Supreme Court.

The original petition also emphasized the Dilworth precedent. “[T]his Court held that a state may not tax sales that occur beyond its borders, even when the goods are purchased for delivery into the taxing state,” wrote attorneys representing the company. ”As the Court explained, when title and possession are transferred to the purchaser outside the taxing state, the taxable event — the sale — also occurs outside the taxing state. In that situation, only one state may tax the sale: the state in which the sale occurs.”

Yet the N.C. Supreme Court ruled that state revenue officials could tax Quad Graphics for its out-of-state sales to companies operating in the Tar Heel State.

“[A] majority of the North Carolina Supreme Court declined to follow Dilworth, instead embracing the State’s power to tax sales by Petitioner Quad Graphics that occurred outside the State, on the ground that the goods were purchased for delivery to North Carolina,” according to the Quad Graphics petition. “The majority did not dispute that Dilworth would control if it remained good law and also acknowledged that this Court has never expressly overruled it. Indeed, this Court has continued to cite Dilworth favorably in the decades since it was decided, and the overwhelming consensus of courts and commentators alike is that Dilworth remains a binding precedent.”

“Yet over a strenuous dissent, the majority effectively overruled Dilworth from below based only on impressionistic inferences from and overbroad readings of this Court’s more recent Commerce Clause jurisprudence,” the petition continued.

It’s an “error” that demands a response from the U.S. Supreme Court, Quad Graphics attorneys’ argued.

“At minimum, it should summarily reverse the decision below, which directly challenges this Court’s exclusive prerogative to overrule its own decisions,” according to the petition. “Our federal system does not countenance a state court deciding that the Supreme Court has ‘implicitly overrule[d]’ its own precedents — especially when those precedents limit the state’s own powers. Left unchecked, the ruling below will embolden other states to take matters into their own hands, creating uncertainty and endless litigation for individuals and businesses. Taxpayers should not have to risk million-dollar tax liabilities and penalties — like the ones that North Carolina imposed on Quad Graphics here — for following U.S. Supreme Court precedent.”

The N.C. Chamber Legal Institute filed a friend-of-the-court brief on April 5 supporting Quad Graphic’s case.

“In this case, NCCLI is concerned that the actions of the North Carolina Department of Revenue … and the decision of the North Carolina Supreme Court, if allowed to stand, will undermine this Court’s exclusive power to determine the fate of its own precedents, introduce uncertainty and instability into the legal system and encourage adventurism by courts and administrative agencies,” wrote attorney William Nelson.

“The North Carolina Supreme Court’s decision is a direct challenge to this Court’s explicit instructions to lower courts to respect Supreme Court precedents no matter how uncertain they may have become until officially overturned by this Court,” Nelson added.

The state Supreme Court majority reasoned that two more recent U.S. Supreme Court precedents, Complete Auto Transit v. Brady from 1977 and South Dakota v. Wayfair from 2018, superseded the Dilworth case.

“The sole question before this Court is whether the holding of the Supreme Court of the United States in Dilworth controls the outcome of the case at bar,” wrote Justice Michael Morgan, a Democrat. “Based on the high court’s subsequent decisions in Complete Auto and Wayfair, we hold that Dilworth does not govern the present case. We further conclude that North Carolina’s imposition of sales tax on the purchases at issue in this case does not violate either the Commerce Clause or the Due Process Clause of the Constitution of the United States under the relevant modern test provided by Complete Auto.”

Justice Phil Berger Jr., a Republican, cast the lone dissenting vote. “As the trial court correctly noted, resolution of this case is determined by response to one question: ‘is the holding in Dilworth the controlling law,’” Berger wrote. “In answering in the affirmative, the trial court invalidated assessment of the sales tax against Quad Graphics by the North Carolina Department of Revenue because the Supreme Court of the United States has not overruled McLeod v. J.E. Dilworth Co. The trial court’s decision should be affirmed because this Court is not permitted to disregard the Supreme Court’s interpretation of the Commerce Clause and the federal Constitution.”

The state Revenue Department faces a May 17 deadline to respond to Quad Graphics’ petition. The U.S. Supreme Court will decide at a later date whether to take the case.