Monday, July 14, 2014

Commercial Barge Line Co. and American Commercial Barge Line, LLC, n/k/a American Commercial Lines, LLC, vs. Director of Revenue

Opinion issued
April 29, 2014

Link to Missouri Supreme Court Opinion

Commercial Barge Line and American Commercial Barge Line (collectively, Taxpayers) challenged the Administrative Hearing Commission’s determination that they owed Missouri sales and use tax on goods and supplies received by their towboats while they traveled the Mississippi River.  The Taxpayers argued that the taxes assessed against them violated the Commerce Clause because they were not fairly related to any service that Missouri provides to the Taxpayers. The Supreme Court of Missouri ultimately found the Taxpayer’s argument unpersuasive and affirmed the Administrative Hearing Commission’s ruling.   In so holding, the Court emphasized that the taxes were fairly related to services that the Taxpayers received from the state and were, therefore, not in violation of the Commerce Clause.

I.  Facts & Holding

In 2007, the Department of Revenue (DOR) audited Commercial Barge Line and American Commercial Barge Line (collectively, Taxpayers) and found them liable for unpaid sales and use taxes pursuant to sections 144.020 and 144.610.[i] The DOR found that the Taxpayers owed $12,893.57 in sales tax and related interest and penalties as a result of purchases for food and other supplies.[ii] The DOR also found the Taxpayers liable for $107,775.09 in use tax and related interest and penalties due to purchases that were being delivered or stored by a Missouri company for the taxpayer’s benefit.[iii]  Taxpayers challenged the DOR’s assessments and sought review before the Administrative Hearing Commission (AHC).[iv]

On review, the AHC found the proper assessment was $53,610.33 in use tax and $4,904.82 in sales tax.[v]  These amounts, the AHC determined, reflected the tax owed on transactions that occurred when the towboats were traveling on the Mississippi River in Missouri.[vi] The AHC then upheld the DOR’s assessment of interest and a five percent addition as a penalty.[vii] From these determinations, the Taxpayers appealed.[viii]

On appeal, the Taxpayers asserted that the AHC’s determinations were in error.[ix]  They claimed that the taxes assessed against them violated the Commerce Clause since they were not fairly related to any service that the state of Missouri had provided to them.[x]   Because this argument involved the validly of a Missouri statute and the construction of Missouri Revenue laws, the Supreme Court of Missouri had exclusive jurisdiction.[xi]  The appeal, consequently, went immediately before the Supreme Court of Missouri.[xii]  The Supreme Court of Missouri (en banc) ultimately found the Taxpayers’ argument unpersuasive and affirmed the determination of the ACH.[xiii] 

II. Legal Background

The Commerce Clause of the United States Constitution grants to Congress the power to “regulate Commerce . . . among the several States . . . .”[xiv]  The dormant Commerce Clause, consequently, arises out of negative implication.[xv]  As stated by the United States Supreme Court, “[a]lthough the [Commerce] Clause . . . speaks in terms of powers bestowed upon Congress, the Court long has recognized that it also limits the power of the States to erect barriers against interstate trade.”[xvi]  Thus, the Dormant Commerce Clause is the implicit limitation on the states’ ability to discriminate against interstate commerce.[xvii]  
In Spector Motor Service. v. O'Connor, the United State Supreme Court invoked the Commerce Clause (and ultimately the Dormant Commerce Clause) to invalidate the application of “a state tax imposed upon the franchise of a foreign corporation for the privilege of doing business within the State when . . . the business consists solely of interstate commerce . . .”[xviii]  The Court, in reaching its decision, emphasized the importance of federalism and the division of taxing powers between the federal government and the states.[xix] This holding ultimately led to “the triumph of form over substance.”[xx]
An excellent example of how the Spector rule judged a tax by its formal phrasing rather than its economic effects is seen in Colonial Pipeline Co. v. Traigle.[xxi]  In that case, Colonial, a Delaware corporation, owned an interstate pipeline that ran through Louisiana. The corporation, to see to the pipeline’s upkeep, hired a work force in Louisiana.  It, did not, however, engage in any intrastate business there.  Some years later, Louisiana imposed on Colonial a franchise tax for ‘the privilege of carrying on or doing business’ in the State. The Louisiana Court of Appeals found the tax to be in violation of the Spector rule.  The Louisiana Legislature then decided to refract the statute so that it levied the tax on the “qualification to carry on or do business in this state or the actual doing of business within this state in a corporate form.”  When the case reached the Court of Appeals, the Court of Appeals again found the tax unconstitutional as applied to the Colonial.  The Louisiana Supreme Court, however, reversed and upheld the new tax.  The United States Supreme Court then granted certiorari and by a 7-to-1 vote, affirmed the Supreme Court’s holding. The Court noted that the tax was imposed on “that aspect of interstate commerce to which the State bore a special relation, and that the State bestowed powers, privileges, and benefits sufficient to support a tax on doing business in the corporate form in Louisiana.”

In Complete Auto Transit, Inc. v. Brady, the United States Supreme Court again confronted the holding in Spector.[xxii]  This time, however, the court overruled it, emphasizing that the Commerce Clause is not meant to “relieve those engaged in interstate commerce from their just share of state tax burden.” [xxiii] In that case, a motor carrier challenged the constitutionality of a state statute which taxed entities “for the privilege of engaging or continuing in business or doing business within th[e] state. . .”[xxiv]  Specifically at issue was whether the statute could impose this privilege tax on any activity that was a part of interstate commerce.[xxv] The United States Supreme Court noted that the Spector rule effectively gave companies engaging in interstate commerce “a sort of ‘free trade’ immunity from state taxation.” [xxvi]  This outcome, the court reasoned, was not consistent with the economic rationale behind the Commerce Clause, but was rather an unnecessary “trap for the unwary draftsman.”[xxvii] 
By ending the era of Spector, the court in Complete Auto Transit, Inc. set out a new standard for determining the validity of a state tax.  Under this rule, a tax must meet four conditions to survive a Commerce Clause challenge.[xxviii]  First, the tax must be applied to an activity with a “sufficient nexus” with the taxing state.[xxix]  Second, the tax must not be “unfairly apportioned.”[xxx] Third, the tax must does not discriminate against interstate commerce.  Finally, the tax must be fairly related to the services provided by the state.[xxxi]

                                                              III. Instant Decision

The court determined that the sales and use taxes imposed on supplies purchased or used by the Taxpayer while in Missouri did not violate the Commerce Clause of the U.S. Constitution because the taxes were fairly related to services the Taxpayers received from the state of Missouri.[xxxii]  The court reached this conclusion by laying out the principles guiding its analysis and then carefully deconstructing the issues put forth by the Taxpayers.[xxxiii] 

The court first stated Complete Auto Transit, Inc.’s four requirements for surviving a Commerce Clause challenge.[xxxiv] The court’s analysis, however, only focused on whether the tax was fairly related to services provided by the taxing state because the parties agreed that the taxes met the other three requirements.[xxxv]   The taxpayers contended that the taxes were not fairly related to the services Missouri provided because their boats “did not receive any direct services from the state.”[xxxvi]  This argument, however, was fundamentally flawed because a tax is considered to be fairly related to the services provided by a state if “the ‘incidence of the tax as well as its measure . . . are tied to the earnings which the State ... has made possible.’”[xxxvii]  In other words, “[t]he relevant inquiry is not whether the taxpayers have received any ‘direct benefits’ from the state, but ‘whether the state has given anything for which it can ask return.’”[xxxviii]  Consequently a taxpayer who uses a public thoroughfare or benefits from “the privileges of . . . an organized society” is indeed the recipient of state services.[xxxix] The court, thus, rejected the taxpayers arguments, holding that the taxpayers had “reap[ed] the ‘advantages of a civilized society.”[xl]

IV. Comment

The Supreme Court of Missouri, in handing down this decision, sent a message to persons engaged in the online marketplace: a person not physically present in the state may nevertheless be subject to Missouri’s privilege tax.  Consequently, a party engaged in economic transactions that never “steps foot” in the state may still be properly taxed by Missouri.  This holding will prove beneficial to Missouri in the future.  Our world continues to become more web-friendly and “interactive,” however our needs remain the same.  We still require satisfactory streets and safety in the form of police officers and fire-fighters.   This holding ensures that a person’s means of engaging in trade will not be the determining factor in how and whether they pay privilege taxes.  Now the relevant inquiry is whether an entity has benefitted from the basic “privileges” of “organized society” assured by the state of Missouri. If the answer is yes, then the entity will owe to Missouri some privilege tax in return for what it received.

- Kelly Gorman

[i] Id. at *1-*2.  See Mo. Rev. Stat. §§ 144.020 and 144.610 (2000).
[ii] Id.
[iii] Id.
[iv] Id. at *2.
[v] Id.
[vi] Id.
[vii] Id. See Mo. Rev. Stat. §§ 144.170; 144.250; 144.665; 144.720 (2000).
[viii] Id.
[ix] Id. at *3.
[x] Id. at *3-*4.  The taxpayers also argued that the (1) taxes violated the Maritime Transportation Security Act (an Act prohibiting non-federal entities, like Missouri, from taxing vessels in navigable waters of the United States) and  (2) that the three year statute of limitation in sections 144.220 and 144.720 barred the Department of Revenue (DOR) from assessing additional tax liability on the Taxpayer.  Id. at *4-*5. The court rejected those arguments holding that (1) the taxes did not violate the Maritime Transportation Security Act because they were assessed on purchases and deliveries of supplies, not on the towboats themselves and (2) because the taxpayers did not file any use tax returns during the audit period, the DOR was not barred from assessing tax liability since § 144.220 provides no statute of limitations when a taxpayer fails to file a return.  Id.  This case summary, however, is focused on the Commerce Clause argument raised by Taxpayers and will not, therefore, address the other two issues any further.
[xi] Id. at *3.
[xii] Id.
[xiii] Id. at *6.
[xiv] U.S. Const. art. I, § 8, cl. 3.
[xv] Jennifer L. Larsen, Discrimination in the Dormant Commerce Clause, 49 S.D. L. Rev. 844, 845 (2004).
[xvi] Maine v. Taylor, 477 U.S. 131, 137(1986) (quoting Lewis v. BT Inv. Managers, Inc., 447 U.S. 27, 35 (1980)).
[xvii] Jennifer L. Larsen, supra note 16, at 845.
[xviii] Spector Motor Serv. v. O'Connor, 340 U.S. 602, 603 (1951) overruled by Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977),
[xix] Id. at 608.
[xx] Bryan D. Lemoine, Speak Softly and Carry A Big Commerce Clause: General Motors Corp. v. Director of Revenue, 65 Mo. L. Rev. 295, 303 (2000).   
[xxi] 421 U.S. 100 (1975).
[xxii] Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
[xxiii] Id. at 279 (quoting Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254 (1938).
[xxiv] Id. at 275 (quoting Miss.Code Ann. § 10105 (1942 & 1972 Supp.) Now codified as Miss. Code. Ann. § 27-65-13 (2014)).
[xxv]  Id. at 274-75.
[xxvi]  Id. at 278.
[xxvii] Id. at 279.
[xxviii] Id. at 277-278.
[xxix] Id.
[xxx] Id. at 278.
[xxxi] Id.
[xxxii] Commercial Barge Line Co. v. Dir. of Revenue, SC93448, 2014 WL 1687971 (Mo. Apr. 29, 2014) (en banc).
[xxxiii] Id. at *3-*4.
[xxxiv] Id. at *3.  For the four requirements see the text accompanying notes 30-32 supra.
[xxxv] Id.
[xxxvi] Id.
[xxxvii] Id. (quoting Commonwealth Edison Co. v. Montana, 453 U.S. 609, 626 (1981) (internal punctuation omitted)).
[xxxviii] Id. (quoting Commonwealth Edison Co., 453 U.S. at 622, 625.)
[xxxix] Id.
[xl] Id. at *4.