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Is Quad Graphics Decision Innocuous or a Jurisprudential Threat?

Jan. 25, 2023, 9:45 AM

From a narrow perspective, the North Carolina Supreme Court’s recent opinion in Quad Graphics Inc. v N.C. Dep’t of Revenue simply rescued the North Carolina tax administration from digging itself into a hole. It assessed a sales tax against Quad rather than the tried-and-true use tax blessed nearly 80 years ago by US Supreme Court Justice Felix Frankfurter in General Trading Co. v. State Tax Commission of Iowa. That decision upheld the collection of the Iowa use by a remote vendor, and that case has since been relied on by nearly every state (but not South Dakota) to require remote vendors to collect the market state’s use tax.

It’s a mystery why North Carolina’s tax department ignored General Trading’s blueprint, which easily would have supported an assessment for the printing company’s failing to collect the North Carolina use tax and instead assessed its sales tax, resurrecting McLeod v. J. E. Dilworth Co. from its semi-obscurity.

Dilworth, a companion case to General Trading, prevented Arkansas from levying its sales tax on a Tennessee-based vendor on facts similar to Quad. Frankfurter contrasted a sales tax with a use tax and held that Dilworth’s fulfillment of an order from an Arkansas customer occurred in Tennessee.

The order required acceptance by Dilworth’s Memphis office, the goods were shipped from there, title passed on delivery to the carrier in Memphis, and the goods were paid for outside of Arkansas. “In short, we are here concerned with sales made by Tennessee vendors that are consummated in Tennessee for the delivery of goods in Arkansas,” the case noted.

Quad’s facts tracked with those in Dilworth. Applying the North Carolina sales tax requires a North Carolina sale, and Quad argued that based on Dilworth, no such sale existed.

If this is all there was to the case, it would have been a big waste of time. Had the state lost, the tax administration would simply have been more careful next time and joined the mainstream by assessing a use tax going forward.But Quad casts a longer shadow.

Other taxes have to situs sales, such as income taxes and gross receipts or turnover taxes. In addition, bonds issued by municipalities are often secured by future revenue streams, such as dedicated sales taxes—not use taxes. And a vendor-based sales tax can be imposed on sales to the federal government or Native American tribes; a use tax generally can’t be applied to either. Quad may have implications for these situations.

The real jurisprudential threat posed by Quad, however, is its casual treatment of Rodriguez de Quijas v. Shearson/Am. Express, Inc. The US Supreme Court warned in that case that “[I]f a precedent of [the U.S. Supreme] Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, [other courts] should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.”

The Quad court thought that the decision in Complete Auto Transit, Inc. v. Brady implicitly overruled the underpinnings of Dilworth, rejecting both its formalism of treating use taxes differently from sales taxes and its outmoded free trade philosophy. Moreover, Quad read South Dakota v. Wayfair for additional support. It thought that its own overruling of Dilworth, which the Supreme Court had never explicitly done, was nonetheless within the teaching and umbrella of Rodriguez.

The Compete Auto decision did reject one form of formalism: a line of cases that had struck down a tax levied on the privilege of conducting an interstate business but upheld the same statute once it eliminated the “privilege” language. “But not all formalism is alike,” notes Quill Corp. v. North Dakota.

The difficulty with thinking that Complete Auto should be read as implicitly overruling Dilworth is that less than a month after Complete Auto, the court decided National Geographic Soc. v. California Bd. of Equalization, which compared Dilworth with the use tax case Scripto, Inc. v. Carson. This is hardly evidence that Complete Auto overruled Dilworth and obliterated the line between sales taxes and use taxes.

The Quad court ignored that case, and the court’s blissfulness isn’t limited to this one oversight. Its citing of Okla. Tax Comm’n v. Jefferson Lines at least seven times conveniently overlooks that case’s acceptance of Dilworth.

Finally, Quad heavily relies on the test case of Wayfair, which ironically doesn’t cite Dilworth. The South Dakota statute at issue levied a sales tax on remote vendors but did not impose an obligation to collect its use tax, an approach roundly criticized by commentators.

The Quad court makes much over the fact that the South Dakota statute imposed only a sales tax and was vulnerable to a Dilworth attack, but none was forthcoming, and that case was never cited. Apparently, this was seen by Quad as tacit acceptance by all concerned that Dilworth had been implicitly overruled.

The question the Quad court never asks is: Why would Wayfair have wanted to strike down the sales tax under a Dilworth argument and merely postpone the next round of litigation, as South Dakota then amended its statute and issued a new assessment for failure to collect its subsequently adopted use tax? Wayfair was a test case; arguing Dilworth would have been a useless distraction that would simply delay the main event.

Quad nicely illustrates why the Rodriguez doctrine should be taken seriously. As Quad demonstrates, a lower court’s interpretation of whether the Supreme Court implicitly overruled Dilworth can be nothing more than the convenient overlooking of facts that get into the way of wishful thinking. The real threat (and damage) of Quad will be if its cavalier approach to Rodriguez spreads to other lower courts.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Richard D. Pomp is the Alva P. Loiselle Professor of Law and the Board of Trustees Distinguished Professor at the University of Connecticut School of Law.

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