State lawyers reject US Supreme Court review of NC sales tax dispute

North Carolina’s solicitor general is urging the nation’s highest court to reject a case challenging the state Revenue Department’s assessment of sales tax on out-of-state transactions.

The U.S. Supreme Court will decide in the coming weeks whether to take the case titled Quad Graphics v. N.C. Department of Revenue. State Solicitor General Ryan Park filed paperwork Wednesday urging the high court to steer clear of the case.

Park cited the Supreme Court’s decision in a 2018 case involving a Western state.

“In South Dakota v. Wayfair, Inc., this Court considered the constitutionality of a
state statute that taxes remote sales,” Park wrote. “This South Dakota law requires out-of-state sellers to pay a sales tax when they sell goods to in-state consumers and the
goods are delivered by common carrier in South Dakota.”

“A group of retailers challenged this law, claiming that it violated the dormant Commerce Clause,” Park explained. “[T]his Court rejected that challenge. … [T]he Court held that, when an out-of-state retailer sells goods to an in-state consumer, the state has a constitutionally sufficient connection with that sale to impose a sales tax.”

“This case concerns a dormant Commerce Clause challenge to a state tax statute that is materially identical to the law this Court upheld in Wayfair,” Park added. “Following Wayfair, North Carolina was one of many states that amended its sales-tax laws to mirror South Dakota’s. Like South Dakota, North Carolina requires remote sellers who deliver goods to North Carolina customers to pay a sales tax. Given this overlap, the North Carolina Supreme Court held below that the State’s sales-tax regime was constitutional under Wayfair.”

Quad Graphics disagrees. The Wisconsin-based company challenges the N.C. Revenue Department’s 2018 decision to assess $3 million for taxes and penalties. That bill covered Quad Graphics’ sales to N.C. customers between 2009 and 2011.

The state Supreme Court upheld the Revenue Department’s decision with a 6-1 ruling last December. Quad Graphics is petitioning the U.S. Supreme Court to review the case. The company contends that the state court ignored an important 1944 precedent in a case called Dilworth.

“Petitioner claims that Wayfair is not controlling,” Park wrote. “In support, it points to Dilworth, a case where this Court reached a contrary conclusion to Wayfair over seven decades earlier. Specifically, in Dilworth, this Court held that the dormant Commerce
Clause categorically bars states from taxing interstate sales — which it defined as a sale where title and possession are transferred in another state. Petitioner goes so far as to claim that, by following Wayfair, the state supreme court ‘effectively overrul[ed Dilworth] from below.’”

“Petitioner is mistaken,” Park argued. “It is well-established that when a holding of this Court is flatly irreconcilable with an earlier decision, the later precedent controls.
Following this principle, the state supreme court demonstrated fidelity to this Court’s precedent when it affirmed the constitutionality of a law that was explicitly designed to mirror a law this Court had recently upheld.”

The Quad Graphics case would affect more than just North Carolina’s sales tax regime, Park warned.

“North Carolina is far from the only state that has modeled its sales tax regime to conform to Wayfair,” the N.C. solicitor general wrote. “And no fewer than forty states have adopted destination-based sourcing — meaning that, under state law, sales are sourced to the place where products are delivered, even if title and possession are transferred elsewhere.”

“Petitioner has identified no lower court since Wayfair that has cast doubt on this stable regime for state taxation of remote sales,” Park added. “The North Carolina Department of Revenue agrees with Petitioner that the scope of state authority to tax remote sales is vitally important. … But this Court already provided the ‘need[ed] clarity’ in this area of law when it affirmed the constitutionality of South Dakota’s sales-tax statute in Wayfair.”

“Review in this case would only risk disrupting the status quo and interfering with a settled and workable system for state taxation of remote sales,” Park argued.

Despite the state’s objections, Quad Graphics has secured support for its petition from business and tax groups. The National Association of Manufacturers, National Federation of Independent Business, Council on State Taxation, N.C. Chamber Legal Institute, and American College of Tax Counsel have filed briefs urging the Supreme Court to take the case.

“[T]he North Carolina Supreme Court’s decision defies this Court’s precedent, upsets businesses’ settled expectations, and will harm businesses if allowed to go unreviewed,” according to a brief from NAM and the NFIB Legal Center.

The state Supreme Court “inappropriately dismantled” the 1944 Dilworth precedent, COST argued.

“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,” a COST 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.”

Now that the state has submitted its response to Quad Graphics’ petition, the U.S. Supreme Court could decide in the weeks ahead whether to grant a “writ of certiorari,” the legal term for taking the case. Quad Graphics would join cases set for the high court’s next term, which starts in October.

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