In a brief filed Monday with the North Carolina Supreme Court, the North Carolina Department of Revenue said it was well within its constitutional bounds to impose sales on Quad Graphics. The company is a Wisconsin commercial printing business making direct-mail sales to North Carolina residents. In its own recent brief to the North Carolina justices, Quad Graphics maintained that the state tax would have been OK had it been a use tax. But the company does not have the nexus required with the state to impose a sales tax, Quad Graphics said.
In its reply to the North Carolina justices Monday, the tax agency, which is appealing a ruling on behalf of Quad Graphics from a lower court, said that argument is outdated and flawed. Quad Graphics is relying on precedent from 1944 and that precedent, the tax agency said, is no longer good law.
In that year, the U.S. Supreme Court decided McLeod v. J.E. Dilworth Co . Under Dilworth, a state court that ruled last year for Quad Graphics said North Carolina did not have sufficient transactional nexus — the nexus between a state and the activity being taxed — to the disputed sales under the commerce clause. Dilworth precluded sales tax liability in cases where out-of-state goods were delivered by a common carrier into a state and the goods' purchasers were transferred title and possession outside the taxing state, according to both the lower court and Quad Graphics.
But North Carolina, joined via amicus briefs by 20 states and the Multistate Tax Commission, argues that is simply wrong. Dilworth has essentially been overruled several times, they said. It was overruled by Complete Auto Transit v. Brady i n 1977, the case that established the four prongs necessary for substantial nexus. And it was overruled by South Dakota v. Wayfair in 2018, as the court held that physical presence is not necessary for a state to require a company to collect and remit sales tax.
The tax agency told the North Carolina justices that the Supreme Court's decision in Wayfair "is impossible to reconcile" with Dilworth. The tax agency said that in Wayfair, the justices ruled on a sales tax law that is essentially the same as North Carolina's.
"Quad does not even try to identify any way in which the sales taxes here differ from the [three] sales taxes that South Dakota was allowed to assess in Wayfair," the tax agency said. "And where, as here, two precedents are flatly irreconcilable, the later decision controls."
In comments to Law360 in April, when Quad Graphics filed its brief, an attorney for the company said Dilworth is still good law, applies in this case and addresses a different part of nexus than did Wayfair. At that time, Michael Bowen of Akerman LLP said Wayfair addressed personal jurisdiction nexus, but the Quad Graphics case addresses transactional nexus. Quad Graphics is also arguing that there remains a distinction between sales tax and use tax, even though the two are frequently blurred, or referred to together as "sales and use" tax, Bowen said.
Bowen said Tuesday that the company declined further comment.
Representatives of North Carolina did not immediately respond to requests for comment.
Quad Graphics is represented by Michael Bowen of Akerman LLP and by Douglas W. Hanna of Graebe Hanna & Sullivan PLLC.
The department is represented by Ryan Y. Park and Ashley Hodges Morgan of the North Carolina Department of Justice.
The case is Quad Graphics Inc. v. North Carolina Department of Revenue, case number 407A21-1, in the North Carolina Supreme Court.
--Editing by Neil Cohen.
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