What started as an appeal from an audit, the North Carolina Supreme Court ended when they reversed the decision of the North Carolina Superior Court which had granted summary judgement in favor of Quad Graphics, Inc. (Quad Graphics), the petitioner.
In its appeal to the state Supreme Court, the North Carolina Department of Revenue asserted that the North Carolina Business Court, a specialized forum of the Superior Court, erred in reaching its decision which held Quad Graphics lacked sufficient nexus with North Carolina for sales tax purposes under the Commerce Clause of the US Constitution in applying the US Supreme Court’s decision in McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944) (Dilworth).
“... North Carolina’s imposition of sales tax ... is constitutional under ... Complete Auto.”
THE FACTS
Quad Graphics, an S-Corp headquartered in Sussex, Wisconsin, produces and sells printed materials, including books, magazines, catalogs, among other items, for distribution throughout the US. During the years at issue, Quad Graphics had approximately $20 million worth of deliveries to customers or third-party recipients located in North Carolina.
For the years under audit, Petitioner did not have a printing facility in North Carolina. Instead, its materials were printed at commercial printing facilities throughout the US. Once printed, the purchased materials were delivered to the USPS or other common carriers outside of North Carolina for delivery to in-state customers. Further, title or risk of loss passed outside of North Carolina. However, Petitioner did have a sales representative in North Carolina who solicited sales to customers both inside and outside of the state.
A Complex Business Case
Procedurally, after much discourse, the case ultimately made its way to the North Carolina Supreme Court. Although the Superior Court judge for Complex Business Cases of North Carolina ruled in favor of Quad Graphics as not liable for North Carolina sales tax, the state Supreme Court reversed the decision after determining that the four-prong test in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) was applicable and applied in furtherance of another US Supreme Court case, South Dakota v. Wayfair, Inc., 585 U.S. __, (2018).
This decision disregarded the holding in Dilworth which held that state of Arkansas had no authority under the Commerce Clause to impose a tax on the sale of machinery or mill supplies purchased from Tennessee corporations which did not have any offices, branches, or other places of business located with Arkansas, where title passed upon delivery to a common carrier within Tennessee before the goods were ultimately brought into Arkansas for delivery to Arkansas customers.
At the time of Dilworth, the US Supreme Court believed that Arkansas was prohibited from from taxing the goods of sales consummated in Tennessee for delivery in Arkansas because to do so would project its powers beyond its boundaries thereby taxing an interstate transaction.
However, with regard to the current issue, the North Carolina Supreme Court looked past Dilworth and applied the four-prong test of Complete Auto Transit. As such, the court determined that there was substantial nexus with the taxing state, that it was fairly apportioned, it did not discriminate against interstate commerce and was fairly related to the services provided by North Carolina.
The court applied this test as the “modern test for the imposition of a state tax on interstate commerce” and applied it as was done in Wayfair because North Carolina’s tax regime is “materially identical” to that of South Dakota’s.
Ultimately, the North Carolina Supreme Court determined that the more recent US Supreme Court decisions of Complete Auto Transit and Wayfair prevailed in providing an alternative method for determining the constitutionality of North Carolina’s sales tax regime instead of the decision reached in Dilworth’s in 1944.
CALL TO ACTION
The start of a new year is an ideal time to revisit and review nexus, sourcing and prior taxability determinations and decisions in light of the many new and amended state sales tax laws.