In the age of economic nexus, where taxpayer nexus victories are far and few between, there are still opportunities to prevail, whether it’s based on an error by the opposing party or a forgotten tax concept. Keep up the good fight.
By Judy Vorndran and Alexander Korzhen
This past June, a North Carolina court dismissed a $3 million sales tax bill against Quad Graphics, Inc., a Wisconsin-based commercial printer. The court found that the bill conflicted with the Constitution’s Commerce Clause, which constricts states’ ability to tax out-of-state taxpayers.
In its decision, the court denied the North Carolina Department of Revenue’s position that Quad Graphics owed almost three years of back taxes in North Carolina for goods shipped by common carrier into the state. The court relied on the U.S. Supreme Court’s ruling in McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944) to leverage an in-frequently employed concept of transactional nexus. In McLeod, the high court found that when out-of-state goods are delivered by common carrier into the state, and title and possession of the goods transferred to the purchaser outside of the taxing state, the state cannot assert a sales tax assessment.
In other words, there was no transactional nexus between North Carolina and Quad Graphics. Therefore, the North Carolina Department of Revenue could not impose a sales tax on these transactions.
The Takeaway
The facts of the Quad Graphics case pre-date the 2018 ruling in South Dakota v. Wayfair, Inc., when the U.S. Supreme court decided in favor of economic nexus. This creates a host of conflicting interpretations.
Two interesting elements stand out in this case. First, the case should never have been about collecting a sales tax from an out-of-state vendor; it should have been a use tax case. Pursuing the case from a sales tax liability perspective was a rookie mistake and one of the reasons that the Department of Revenue’s position was rejected.
Second, many practitioners believe that the concept of “transactional nexus” died as a result of the Complete Auto case. Perhaps it is worth reconsidering the scope and implications of this concept in our modern economy at a minimum, from a scholarly perspective, given the tsunami of economic nexus laws that have swept the nation in the last three years.
In the age of economic nexus, where taxpayer nexus victories are far and few between, there are still opportunities to prevail, whether it’s based on an error by the opposing party or a forgotten tax concept. Keep up the good fight.
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