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.
