Nation’s highest court could take up NC sales tax dispute

Justices Phil Berger Jr., Michael Morgan, and Robin Hudson listen to oral arguments in Quad Graphics v. N.C. Department of Revenue on Aug. 30, 2022. (Image from Supreme Court of North Carolina YouTube channel)

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  • A Wisconsin-based company is urging the U.S. Supreme Court to take up a tax dispute involving the N.C. Department of Revenue.
  • The case focuses on the Revenue Department's assessment of sales tax on transactions that took place outside North Carolina.

A company fighting the N.C. Department of Revenue over sales tax on out-of-state transactions hopes to take its case to the U.S. Supreme Court. The company wants the nation’s highest court to reverse a December ruling from North Carolina’s top court.

The Wisconsin-based company, Quad Graphics, accuses the N.C. Supreme Court of ignoring a 1944 precedent in a case called McLeod v. J.E. Dilworth Co.

“[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 in a 6-1 decision last December 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.”

Even if the high court chooses not to reverse the N.C. Supreme Court outright, “this case presents an ideal vehicle to lay to rest any doubts about the Dilworth rule,” Quad Graphics argued. “The North Carolina Supreme Court deepened a split as to whether the rule is compatible with this Court’s modern Commerce Clause jurisprudence, with state courts of last resort divided 4 to 2 in favor of Dilworth’s continued vitality.”

Quad Graphics filed its petition with the U.S. Supreme Court on March 14. 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 N.C. Supreme Court’s opinion reversed a June 2021 decision from Business Court Judge Gregory McGuire, who had ruled in favor of Quad Graphics.

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.