A Tax Case With Broad Implications for the Rule of Law
The NC Chamber’s Legal Institute recently filed an amicus curiae brief in Quad Graphics, Inc. v. NC Department of Revenue, a case pending before the N.C. Supreme Court. The case highlights the latest in a series of aggressive positions taken by the Department of Revenue that are cause for concern to the North Carolina business community.
By way of factual background, Quad Graphics is in the business of preparing custom-printed materials for customers, and it maintains a sales representative in North Carolina. A North Carolina based company placed an order for materials from Quad Graphics, and both acceptance of the order for the materials and transfer of the completed materials occurred in Wisconsin, where Quad Graphics is headquartered. The N.C. Department of Revenue sought to collect a sales tax on the transaction. Quad Graphics challenged the assessment of the sales tax in the N.C. Office of Administrative Hearings. After the OAH found in DOR’s favor, Quad appealed the decision to the N.C. Business Court.
In June of 2021, the N.C. Business Court reversed. It held that the United States Supreme Court’s decision in McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944), prohibited the Department from assessing a sales tax on sales to North Carolina purchasers where title and possession transferred outside the State. The Dilworth court held that the Commerce Clause of the federal Constitution prohibited Arkansas from imposing a sales tax on a sale to an Arkansas resident where the title and possession of the goods at issue passed in Tennessee. A companion case, General Trading Co. v. State Tax Comm’n of Iowa, 322 U.S. 335 (1944), upheld Iowa’s power to assess a use tax on its residents who purchased property in Minnesota. The two taxes yielded different results, because they applied to different objects – the sale versus the use and enjoyment of property. While the states were free to tax the enjoyment of property within their borders, a state’s attempt to tax an out-of-state sale “involves an assumption of power by a state which the Commerce Clause was meant to end.” 322 U.S. at 330.
Before the Business Court and now before the N.C. Supreme Court, the Department argued that later U.S. Supreme Court decisions had “implicitly” overruled Dilworth. The Business Court acknowledged these later decisions but held that until the Supreme Court actually overrules Dilworth, it remains controlling law.
DOR’s appeal has attracted the attention of nineteen other jurisdictions across the United States, all of whom have urged that the rumors of the death of Dilworth are actually true.
Now comes the interesting part. In its appeal of the Business Court’s decision, the Department is contending that cases decided in the decades following the Dilworth decision, which arguably call into question the reasoning of that decision, mean that lower courts can disregard it. The Department does not make the argument with an abundance of restraint, referring to the Supreme Court’s decision in Dilworth as “arcane,” and a “dead letter.” The DOR is advocating a policy of “anticipatory overruling” which would empower lower courts to disregard otherwise controlling precedent of the Supreme Court if the reasoning in the precedent appears contrary to more recent cases. The problem with the DOR’s position, as the CLI’s amicus brief explains, is that Supreme Court caselaw explicitly and unequivocally prohibits “anticipatory overruling” by lower federal courts, or by state courts, irrespective of how “wobbly” or “moth-eaten” those prior holdings may seem. The Supreme Court alone has the power to determine when its decisions are no longer valid.
The reason for this standard should be obvious to all. If lower federal courts or state courts could make their own determinations that Supreme Court decisions have somehow ceased to be viable, uniformity in the application of the law would be in jeopardy. As stated in the CLI’s amicus brief, allowing lower courts to second guess the validity of Supreme Court decisions would lead to anarchy within the judicial system. At a time when so many institutions are being challenged in service of politically polarized positions, anticipatory overruling invites chaos. Throw in a the oft-repeated criticism of “activist judges” and the picture darkens significantly.
Of course, the Department and the amici states have every right to argue that Dilworth is no longer supported by subsequent jurisprudence. But ultimately this is a matter for the U.S. Supreme Court to resolve. If the N.C. Supreme Court is persuaded that Dilworth should be explicitly overruled, it can urge the United States Supreme Court to do just that while respecting the Supreme Court’s exclusive prerogative by upholding the Business Court decision.
In service to the rule of law, and the health of the business and legal climate in North Carolina, we hope that the N.C. Supreme Court declines the Department’s invitation to ignore controlling United States Supreme Court precedent on an important Constitutional question.