Petition for Writ of Certiorari — Quad Graphics, Inc., Petitioner v. North Carolina Department of Revenue

APPENDIX

TABLE OF CONTENTS

APPENDIX A:

Opinion and Order of the North

Carolina Supreme Court

(December 16, 2022) ....................... 1a

APPENDIX B:

Opinion and Order of the North

Carolina Superior Court

(June 23, 2021) ............................... 46a

APPENDIX C:

Final Decision of the North

Carolina Office of Administrative

Hearings (June 24, 2020) ............. 81a

(ia)

APPENDIX A

IN THE SUPREME COURT OF NORTH CAROLINA

2022-NCSC-133

No. 407A21

Filed 16 December 2022

QUAD GRAPHICS, INC.

v.

N.C. DEPARTMENT OF REVENUE

Appeal pursuant to N.C.G.S. § 7A-27(a)(2) from the

order and opinion entered on 23 June 2021 by Judge

Gregory P. McGuire, Special Superior Court Judge for

Complex Business Cases, in Superior Court, Wake

County, granting summary judgment in favor of

petitioner after the case was designated a mandatory

complex business case by the Chief Justice pursuant to

N.C.G.S. § 7A-45.4(b). Heard in the Supreme Court on 30

August 2022.

Akerman, LLP, by Michael J. Bowen, pro hac vice;

and Douglas W. Hanna for petitioner-appellee.

Joshua H. Stein, Attorney General, by Ryan Y. Park,

Solicitor General, and Ashley Hodges Morgan,

Special Deputy Attorney General, for respondentappellant.

Poyner Spruill LLP, by Caroline P. Mackie; and

Caroline S. Van Zile, Principal Deputy Solicitor

General for the District of Columbia, for Steve

Marshall, Attorney General for the State of

Alabama, Treg R. Taylor, Attorney General for the

State of Alaska, Philip J. Weiser, Attorney General

for the State of Colorado, Karl A. Racine, Attorney

(1a)

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General for the District of Columbia, William Tong,

Attorney General for the State of Connecticut,

Lawrence G. Wasden, Attorney General for the State

of Idaho, Kwame Raoul, Attorney General for the

State of Illinois, Theodore E. Rokita, Attorney

General for the State of Indiana, Thomas J. Miller,

Attorney General for the State of Iowa, Brian E.

Frosh, Attorney General for the State of Maryland,

Maura Healey, Attorney General for the

Commonwealth of Massachusetts, Keith Ellison,

Attorney General for the State of Minnesota, Aaron

D. Ford, Attorney General for the State of Nevada,

Andrew J. Bruck, Acting Attorney General for the

State of New Jersey, Hector Balderas, Attorney

General for the State of New Mexico, Letitia James,

Attorney General for the State of New York, Wayne

Stenehjem, Attorney General for the State of North

Dakota, Josh Shapiro, Attorney General for the

Commonwealth of Pennsylvania, Peter F. Neronha,

Attorney General for the State of Rhode Island,

Thomas J. Donovan Jr., Attorney General for the

State of Vermont, and Robert W. Ferguson, Attorney

General for the State of Washington, amici curiae.

Q Byrd Law, by Quintin D. Byrd; and Richard

Cram, pro hac vice, for Multistate Tax Commission,

amicus curiae.

William W. Nelson for North Carolina Chamber

Legal Institute, amicus curiae.

MORGAN, Justice.

¶1

Respondent appeals from the Business

Court’s decision, in which the tribunal had concluded that

the sales of printed materials produced by Wisconsin-

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based petitioner out of state and shipped to its customers

and their designees located within North Carolina lacked

a sufficient nexus to North Carolina for the imposition of

state sales tax under the Commerce Clause of the

Constitution of the United States in light of the Supreme

Court of the United States’ decision in McLeod v. J.E.

Dilworth Co., 322 U.S. 327 (1944). The question we are

tasked with answering on appeal is whether Dilworth

remains controlling precedent in this case or if

subsequent Supreme Court decisions supersede

Dilworth’s holding and provide an alternative method for

determining the constitutionality of North Carolina’s

sales tax regime. Because Complete Auto Transit Inc. v.

Brady, 430 U.S. 274 (1977), provides the relevant modern

test for the imposition of a state tax on interstate

commerce and because South Dakota v. Wayfair, Inc.,

138 S. Ct. 2080 (2018), applies this test to a tax regime

materially identical to that of North Carolina without

regard for Dilworth’s holding, we hold in favor of

respondent and reverse the Business Court’s decision

below.

I. Factual and Procedural Background

¶2

The facts of this case are neither particularly

complicated nor in dispute. Petitioner is an S-Corporation

headquartered in Sussex, Wisconsin. Petitioner is

engaged in the production and sale of printed materials,

including books, magazines, catalogs, and other items, for

distribution across the United States. Between 2009 and

2011, petitioner processed approximately $20 million

worth of orders for delivery to customers or third-party

recipients located in North Carolina. Petitioner’s

materials are printed at commercial printing facilities

throughout the United States, but no such facility was

located in North Carolina during the time period at issue.

After producing the purchased materials at a facility

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located out of state, petitioner would deliver customers’

orders to the United States Postal Service or another

common carrier located outside of North Carolina for

delivery to in-state customers or their third-party

representatives. According to its sales contracts,

possession, legal title, and risk of loss for any ordered

materials passed from petitioner to its customers when

those materials were delivered to carriers outside of

North Carolina. Petitioner employs sales representatives

throughout the United States. Beginning in September

2009, petitioner employed a sales representative in North

Carolina who solicited sales to customers both inside and

outside of the state.

¶3

Respondent North Carolina Department of

Revenue is an agency of the State of North Carolina which

administers the state’s tax collection system. In 2011,

respondent conducted an audit related to petitioner’s

collection of sales and use tax within North Carolina for

the period between 1 January 2007 and 31 December

2011. On 12 November 2015, respondent issued a Notice

of Proposed Sales and Use Tax Assessment finding

petitioner liable for uncollected and unremitted sales tax

for sales to North Carolina customers between 1 January

2007 and 31 December 2011. Petitioner appealed

respondent’s Notice of Assessment through respondent’s

departmental review process. Upon review, respondent

found that petitioner was a retailer engaged in business in

North Carolina as it maintained a resident employee to

solicit sales and service customer accounts within the

state. Respondent also found that petitioner had failed to

establish that its customers took possession of purchased

materials outside of North Carolina and, as such,

concluded that the sales were properly sourced to the

state under North Carolina’s sourcing statute N.C.G.S. §

105-164.4B, since the materials were received by

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petitioner’s customers or their designees within the state.1

However, respondent found that the Department had

been unable to establish that petitioner had sufficient

business activity in North Carolina to create the nexus for

the imposition of sales and use tax prior to September

2009 based on petitioner’s lack of physical presence in the

state until that time. On 30 November 2018, after

removing sales predating September 2009 as well as other

exempt transactions and adjusting the assessment

accordingly, respondent issued a Notice of Final

Determination upholding the imposition of uncollected

and unremitted sales tax in the amount of $3,238,022.52

from sales made between 1 September 2009 and 31

December 2011.

¶4

On 28 January 2019, petitioner appealed

respondent’s Notice of Final Determination and filed a

petition with the Office of Administrative Hearings

(OAH) advancing the following arguments: (I) that the

disputed transactions were not subject to North Carolina

retail sales or use tax because all relevant aspects of the

transactions took place outside of the state, (II) that the

assessment of North Carolina sales and use tax on these

transactions violated the Due Process Clause and

Commerce Clause of the Constitution of the United

Section 105-164.4B of the North Carolina General Statutes provides

sourcing principles for the imposition of sales tax on sellers of goods

delivered to in-state purchasers or their designees. In relevant part,

the statute provides that “[w]hen a purchaser receives a product at a

location specified by the purchaser . . . , the sale is sourced to the

location where the purchaser receives the product[,]” N.C.G.S. § 105164.4B(a)(2) (2009), and that “[d]irect mail . . . is sourced to the

location where the property is delivered” when “the purchaser

provides the seller with information to show the jurisdictions to which

the direct mail is to be delivered[,]” N.C.G.S. § 105-164.4B(d)(2)

(2009). This is known as “destination-based” sourcing, which defines

the site of a sale of tangible property based on the item’s destination

and has been adopted by a majority of the states.

1

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States, and (III) that the specific transactions included in

respondent’s assessment should have been excluded or

were otherwise exempt from North Carolina sales and use

tax. Petitioner removed Claim III from its petition but

pursued Claims I and II before the OAH. On 24 June

2020, after petitioner and respondent filed cross-motions

for summary judgment, Administrative Law Judge

Melissa Owens Lassiter entered a Final Decision

granting respondent’s motion for summary judgment and

dismissing petitioner’s case with prejudice.

¶5

The OAH’s Final Decision held that petitioner

was a “retailer” as defined by N.C.G.S. § 105-164.3(35)(a)

and was therefore obligated to collect and remit sales tax

pursuant to N.C.G.S. §§ 105-164.8 and 105-164.4B.

Furthermore, although the OAH acknowledged that it

“has not been given jurisdiction to determine the

constitutionality of legislative enactments[,]” quoting In

re Redmond, 369 N.C. 490, 493 (2017), it opined that

petitioner had sufficient nexus with North Carolina for

respondent to impose sales tax on the sales in question.

Finally, the Final Decision announced that the sales at

issue were properly sourced to North Carolina as set forth

in the state’s sourcing statute. See N.C.G.S. § 105164.4B(a)(2), (d)(2) (2009).

¶6

On 24 July 2020, petitioner petitioned for

judicial review of the OAH’s Final Decision to the

Business Court pursuant to N.C.G.S. § 105-241.16,

designating the case as a mandatory complex business

case pursuant to N.C.G.S. § 7A-45.4. The matter was

assigned to the Honorable Louis A. Bledsoe III, Chief

Business Court Judge on the same day. On 20 August

2020, petitioner filed an Amended Petition for Judicial

Review. On 24 September 2020, the parties stipulated to

the official record of the proceedings at the OAH. On 2

October 2020, the Business Court issued an Order and

Opinion on various motions filed by the parties, including

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a denial of respondent’s motion to dismiss petitioner’s

amended petition for judicial review. Between 26 October

2020 and 10 December 2020, the parties filed their briefs,

responses, and replies with the Business Court. On 6

January 2021, the case was reassigned to the Honorable

Gregory P. McGuire, Special Superior Court Judge for

Complex Business Cases. The parties appeared for a

hearing on 2 February 2021. On 27 May 2021, the

Business Court issued a Notice to Provide Supplemental

Briefing; in response, the parties filed supplemental

briefs on 11 June 2021.

¶7

On appeal before the Business Court,

petitioner argued that (1) the OAH erred in holding that

petitioner was a “retailer” under the provisions of

N.C.G.S. § 105-164.3(35)(a) that was required to pay sales

tax to North Carolina on the sales at issue under the

provisions of the Act, and (2) respondent’s assessment of

sales tax on the sales at issue was unconstitutional under

the Due Process Clause and Commerce Clause of the

Constitution of the United States. On 23 June 2021, the

Business Court held in favor of petitioner, reversing the

OAH’s Final Decision and granting summary judgment in

favor of petitioner. The Business Court first considered

petitioner’s argument that it was misclassified as a

“retailer” under N.C.G.S. § 105-164.3(35) because the

transfer of title and possession to the printed materials

took place outside of North Carolina and a person must

make sales “in this State” to be classified as a retailer

under the statute. See N.C.G.S. § 105-164.3(35) (2009).

The Business Court rejected this argument, concluding

that the OAH had correctly held that petitioner was a

“retailer” within the meaning of N.C.G.S. § 105-164.3(35).

This issue has not been briefed to this Court and is not the

subject of our review.

¶8

The Business Court next considered

petitioner’s contention that North Carolina’s imposition of

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sales tax on the sales at issue—where title and possession

of the printed materials arguably transferred to

purchasers and third-party recipients located in North

Carolina before the materials entered the state—was

unconstitutional under the Commerce Clause of the

Constitution of the United States in light of the Supreme

Court’s decision in Dilworth. The Business Court

discredited respondent’s assertion that the decisions of

the Supreme Court of the United States in Complete Auto

and Wayfair overruled Dilworth formalism, and

therefore concluded that Dilworth remains controlling

precedent in this case. The Business Court accordingly

granted summary judgment to petitioner on the basis that

North Carolina did not have a sufficient nexus with the

sales at issue under the Commerce Clause to impose sales

tax on them, reversing the OAH’s Final Decision. On 1

July 2021, the matter was reassigned to the Honorable

Mark A. Davis, Special Superior Court Judge for

Complex Business Cases. On 22 July 2021, respondent

filed a notice of appeal directly to this Court pursuant to

N.C.G.S. § 7A-27(a)(2). On the same day, respondent filed

a motion to stay execution of the Business Court’s 23 June

2021 Order and Opinion with the Superior Court pending

the outcome of this appeal. The trial court granted this

motion on 5 October 2021.

II. Analysis

¶9

Appeals arising from orders granting

summary judgment are decided under a de novo standard

of review. Dallaire v. Bank of Am., N.A., 367 N.C. 363,

367 (2014). Under this standard, the Court considers the

matter anew and freely substitutes its judgment for that

of the lower court or administrative agency. Midrex

Techs. v. N.C. Dep’t of Revenue, 369 N.C. 250, 257 (2016);

N.C. Dep’t of Env’t & Nat. Res. v. Carroll, 358 N.C. 649,

660 (2004). Since the Business Court granted summary

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judgment to petitioner, we shall consider the questions of

law underlying the decision anew and freely substitute

our own judgment for the conclusion of the Business

Court. The sole question before this Court is whether the

holding of the Supreme Court of the United States in

Dilworth controls the outcome of the case at bar. Based

on the high court’s subsequent decisions in Complete Auto

and Wayfair, we hold that Dilworth does not govern the

present case. We further conclude that North Carolina’s

imposition of sales tax on the purchases at issue in this

case does not violate either the Commerce Clause or the

Due Process Clause of the Constitution of the United

States under the relevant modern test provided by

Complete Auto.

A. Dilworth’s status in modern Commerce

Clause jurisprudence

¶ 10 On 15 May 1944, the Supreme Court of the

United States issued its opinions in both Dilworth and

Dilworth’s companion case General Trading Co. v. State

Tax Comm’n, 322 U.S. 335 (1944). In Dilworth, the

Supreme Court determined that the state of Arkansas

had no authority under the Commerce Clause of the

Constitution of the United States to impose a tax on the

sale of machinery or mill supplies purchased from

Tennessee corporations which did not have any offices,

branches, or other places of business located within

Arkansas, where title passed upon delivery to a common

carrier within Tennessee before the goods were

ultimately brought into Arkansas for delivery to Arkansas

customers. McLeod v. J.E. Dilworth Co., 322 U.S. 327, 330

(1944). Since these sales were, in the high court’s view,

“consummated in Tennessee for the delivery of goods in

Arkansas[,]” Arkansas could not tax them without

“project[ing] its powers beyond its boundaries and . . .

tax[ing] an interstate transaction.” Id. at 328, 330. As

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such, the Supreme Court determined that Arkansas was

prohibited from doing so under the then-prevailing

interpretation of the Commerce Clause as categorically

barring states from taxing interstate commerce, which

was seen as residing within the exclusive province of

Congress. Id. at 330.

¶ 11 Meanwhile, in General Trading, the Supreme

Court of the United States upheld the imposition of an

Iowa use tax levied against property brought into Iowa

from the state of Minnesota for customers located within

Iowa’s boundaries even though the Minnesota company

whose goods were subject to the tax and which was

required to collect and then to remit the tax back to Iowa

maintained no offices or other places of business within

the state. General Trading, 322 U.S. at 336. According to

the Supreme Court in its opinion in General Trading,

Iowa’s imposition of a use tax did not tax the “privilege of

doing interstate business,” but rather the privilege of

enjoying one’s property within the state, regardless of its

origin. Id. at 338. Requiring the Minnesota seller to collect

the tax was, in the Supreme Court’s view, simply a

“familiar and sanctioned device” to implement a use tax

against the ultimate consumer, an Iowa resident. Id. The

high court thus justified Iowa’s imposition of the tax on

the grounds that:

Of course, no State can tax the privilege of doing

interstate business. That is within the protection

of the Commerce Clause and subject to the power

of Congress. On the other hand, the mere fact

that property is used for interstate commerce or

has come into an owner’s possession as a result of

interstate commerce does not diminish the

protection which he may draw from a State to the

upkeep of which he may be asked to bear his fair

share.

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Id. (citation omitted). As Justice Douglas noted in his

dissent in Dilworth, however, the Supreme Court’s

categorical rejection of the imposition of state sales tax

and its simultaneous countenance of a complementary use

tax on the same transactions had no practical effect on the

ability of states to tax the receipt of goods from out of

state. Dilworth, 322 U.S. at 333–34 (Douglas, J.,

dissenting) (“But a use tax and a sales tax applied at the

very end of an interstate transaction have precisely the

same economic incidence. Their effect on interstate

commerce is identical . . . there should be no difference in

result under the Commerce Clause where, as here, the

practical impact on the interstate transaction is the

same.”).

¶ 12 The Dilworth majority addressed this

apparent contradiction by acknowledging that, although a

“sale[s] tax and a use tax in many instances may bring

about the same result[,]” the two forms of tax “are

different in conception, are assessments upon different

transactions, and . . . may have to justify themselves on

different constitutional grounds.” Id. at 330. In particular,

the high court’s majority emphasized that a “sales tax is a

tax on the freedom to purchase” whereas a “use tax is a

tax on the enjoyment of that which was purchased.” Id. A

use tax, according to the Supreme Court, was imposed

only after the sale “had spent its interstate character” and

therefore did not amount to a taxation of interstate

commerce itself. Id. at 331. The Supreme Court thus

reasoned that only the imposition of interstate sales tax

by the states was prohibited by the Commerce Clause:

In view of the differences in the basis of these two

taxes and the differences in the relation of the

taxing state to them, a tax on an interstate sale

like the one before us and unlike the tax on the

enjoyment of the goods sold, involves an

assumption of power by a State which the

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Commerce Clause was meant to end. The very

purpose of the Commerce Clause was to create

an area of free trade among the several States.

Id. at 330. This “free trade” philosophy laid the

groundwork for the subsequent decisions of the Supreme

Court of the United States in cases such as Freeman v.

Hewit, 329 U.S. 249, 252 (1946) (holding that the

Commerce Clause does not “merely forbid a State to

single out interstate commerce for hostile action” but

precludes it from “taking any action which may fairly be

deemed to have the effect of impeding the free flow of

trade between States”), and Spector Motor Serv. v.

O’Connor, 340 U.S. 602, 603–10 (1951) (striking down a

nondiscriminatory “privilege of doing business” franchise

tax as imposed by Connecticut against a foreign

corporation only engaged in interstate commerce on the

basis that Congress has the exclusive power to tax the

privilege of engaging in interstate commerce).

¶ 13 Nearly thirty years later, the Supreme Court

began to disassociate its approach in this legal arena from

the strict formalism that had characterized Dilworth and

the Dilworth progeny. In 1977, the high court chose to

expressly overrule Freeman and Spector, utilizing its

opinion in Complete Auto Transit, Inc. v. Brady, 430 U.S.

274 (1977) to disavow the “free trade” theory which was

articulated in Dilworth. Complete Auto Transit, Inc. was

a Michigan corporation contracted for the purpose of

transporting motor vehicles manufactured by General

Motors Corporation outside of the state of Mississippi

from a railhead in Jackson, Mississippi to dealers

throughout the state. Id. at 276. Complete Auto argued

that Mississippi did not have authority to impose a sales

tax upon its transportation services since the company

was “but one part of an interstate movement” and

therefore immune to state taxation under the precedent

set by cases such as Freeman and Spector. Id. at 277–78.

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In Complete Auto, the Supreme Court acknowledged that

Freeman and Spector had “reflect[ed] an underlying

philosophy that interstate commerce should enjoy a sort

of ‘free trade’ immunity from state taxation[,]” but the

high court opted to follow the path paved by more recent

decisions considering “not the formal language of the tax

statute, but rather its practical effect.” Id. at 278–79. The

Supreme Court criticized the Spector rule’s “holding that

a tax on the ‘privilege’ of engaging in an activity in the

State may not be applied to an activity that is part of

interstate commerce” as having “no relationship to

economic realities[,]” and rejected its blanket prohibition

against the imposition of a direct tax on interstate sales

regardless of whether it was fairly apportioned or

nondiscriminatory. Id.

¶ 14 The Supreme Court in Complete Auto

“abandoned the abstract notion that interstate commerce

‘itself’ cannot be taxed by the States[,]” recognizing, in its

place, that “interstate commerce may be required to pay

its fair share of state taxes.” D.H. Holmes Co. v.

McNamara, 486 U.S. 24, 30–31 (1988). Alternatively, the

high court elected to follow the line of cases sustaining

taxes against Commerce Clause challenges where they

“applied to an activity with a substantial nexus with the

taxing State, [were] fairly apportioned, [did] not

discriminate against interstate commerce, and [were]

fairly related to the services provided by the State.”

Complete Auto, 430 U.S. at 279. This has become known

as Complete Auto’s “four-part formulation” and provides

the modern test for determining the constitutionality of a

state tax imposed on interstate commerce regardless of

its formal designation.

¶ 15 The Complete Auto test has since been applied

to determine the constitutionality of various taxes levied

against interstate commerce. D.H. Holmes, 486 U.S.at 30;

see, e.g., Okla. Tax Comm’n v. Jefferson Lines, Inc., 514

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U.S. 175 (1995), superseded by statute on other grounds.

These cases have made clear that Complete Auto’s

declaration required the rejection of outdated precedent

that “proscribed all taxation formally levied upon

interstate commerce” or encouraged legal gamesmanship

by drawing artificial boundaries around taxes that

differed in form but not substance. Id. at 183 (“[W]e

categorically abandoned . . . [such] formalism when

[Complete Auto . . .] overruled Spector and Freeman.”);

see also Dep’t of Revenue. v. Ass’n of Wash. Stevedoring

Cos., 435 U.S. 734, 745 (1978) (“Because the tax in the

present case is indistinguishable from the taxes at issue in

Puget Sound and in Carter & Weekes [prohibiting state

taxation of the gross receipts of businesses involved in the

unloading of interstate cargo vessels on the grounds that

such taxes were prohibited by the Commerce Clause], the

Stevedoring Cases control today’s decision on the

Commerce Clause issue unless more recent precedent

and a new analysis require rejection of their reasoning.

We conclude that Complete Auto . . . requires such

rejection.”) (emphasis added). Cf. Quill Corp. v. North

Dakota, 504 U.S. 298, 310–11 (1992) (“Complete Auto

rejected Freeman and Spector’s formal distinction

between ‘direct’ and ‘indirect’ taxes on interstate

commerce because that formalism allowed the validity of

statutes to hinge on ‘legal terminology,’ ‘draftsmanship

and phraseology.’ " (citation omitted)), overruled on other

grounds by South Dakota v. Wayfair, Inc., 138 S. Ct. 2080

(2018).

¶ 16 The Dilworth/General Trading dichotomy

was exactly such a formalistic distinction that turned upon

legal draftsmanship as opposed to differences in the

practical effect of a use tax as compared to a sales tax. It

would further appear that the Supreme Court of the

United States has wholly abandoned the free trade theory

which had provided for the distinction’s unsteady

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foundation. See Complete Auto, 430 U.S. at 278–79. In the

instant case, however, petitioner and its amicus curiae

caution that this Court is not authorized to engage in an

“anticipatory overruling” of Supreme Court precedent

interpreting federal law, regardless of how “moth-eaten”

its underlying logic has become. See Rodriguez de Quijas

v. Shearson/Am. Express, Inc., 490 U.S. 477, 484 (1989)

(“If a precedent of [the U.S. Supreme] Court has direct

application in a case, yet appears to rest on reasons

rejected in some other line of decisions, [other courts]

should follow the case which directly controls, leaving to

this Court the prerogative of overruling its own

decisions.”). Nonetheless, there is no “magic words”

requirement that must be used for the nation’s premier

legal forum to overrule its own precedent; indeed, it may

implicitly overrule precedent by issuing a decision in

direct contradiction with its prior holdings. See Miller

Bros. Co. v. Maryland, 347 U.S. 340, 344 (1954) (“Our

decisions are not always clear as to the grounds on which

a tax is supported, especially where more than one exists;

nor are all of our pronouncements . . . consistent or

reconcilable. A few have been specifically overruled, while

others no longer fully represent the present state of the

law.”). Where two precedents are flatly irreconcilable, the

latter in time controls.

B. Wayfair’s application of Complete Auto to

North Dakota’s sales tax regime

¶ 17 We are in the fortuitous position of not having

to discern whether Dilworth was automatically retained

within the Supreme Court’s decision in Complete Auto or

whether we were compelled to engage in an anticipatory

overruling of a federal precedent whose underlying logic

has been abandoned but whose direct holding has never

been specifically readdressed. Instead, we can confidently

look to the application by the Supreme Court of the

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United States of the Complete Auto test to a materially

identical tax regime in South Dakota v. Wayfair, Inc., 138

S. Ct. 2080 (2018) to guide our analysis. Since Wayfair is

directly applicable to the case before us, its holding

supersedes Dilworth to the extent that the two

precedents are in conflict with one another and guide our

own path forward.

¶ 18 Wayfair overruled a line of precedent which

prohibited states from requiring sellers to collect and to

remit state sales or use tax unless they maintained a

physical presence within the state. See Nat’l Bellas Hess,

Inc. v. Dep’t of Revenue, 386 U. S. 753 (1967); Quill Corp.

v. North Dakota, 504 U. S. 298 (1992). In 2016, the state of

South Dakota enacted “An Act to provide for the

collection of sales taxes from certain remote sellers, to

establish certain Legislative findings, and to declare an

emergency” and invited the Supreme Court to reconsider

this precedent in light of the fact that the modern

proliferation of remote e-commerce vendors like Wayfair

was “seriously eroding the sales tax base” and “causing

revenue losses and imminent harm . . . through the loss of

critical funding for state and local services.” Wayfair, 138

S. Ct. at 2088 (alteration in original) (quoting S.B. 106,

2016 Leg. Assembly, 91st Sess. § 8(1) (S.D. 2016) (S.B.

106)). The Act required sellers who delivered more than

$100,000 worth of goods to South Dakota customers or

made more than 200 individual transactions for the

delivery of goods into the state to collect and remit sales

tax “as if [they] had a physical presence in the State.” Id.

at 2089 (quoting S.B. 106, § 1).

¶ 19 Wayfair challenged the South Dakota law

under the Supreme Court’s precedent in Quill, which

affirmed the rule articulated in Bellas Hess that a state

may not require a seller without any physical presence

within the state to collect and remit sales or use tax for

the sale of goods for delivery into the state. Quill, 504 U.S.

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298. Bellas Hess, which was decided prior to the Supreme

Court’s decision in Complete Auto, held that requiring

sellers “whose only connection with customers in the

State [was] by common carrier or . . . mail” to collect and

remit state use tax both “violate[d] the Due Process

Clause of the Fourteenth Amendment and create[d] an

unconstitutional burden upon interstate commerce[,]” in

violation of the Commerce Clause. Bellas Hess, 386 U.S.

at 756, 758. In Quill, the high court overturned the due

process holding in Bellas Hess on the grounds that its

“due process jurisprudence ha[d] evolved substantially in

the 25 years since Bellas Hess,” abandoning “formalistic

tests” concerning a defendant’s presence within the forum

state for a “more flexible inquiry into whether a

defendant’s contacts with the forum made it reasonable . .

. to require it to defend the suit in that State.” Quill, 504

U.S. at 307. The high court went on to say that:

Comparable reasoning justifies the imposition of

the collection duty on a mail-order house that is

engaged in continuous and widespread

solicitation of business within a State. Such a

corporation clearly has “fair warning that [its]

activity may subject [it] to the jurisdiction of a

foreign sovereign.” In “modern commercial life”

it matters little that such solicitation is

accomplished by a deluge of catalogs rather than

a phalanx of drummers: The requirements of due

process are met irrespective of a corporation’s

lack of physical presence in the taxing State.

Thus, to the extent that our decisions have

indicated that the Due Process Clause requires

physical presence in a State for the imposition of

duty to collect a use tax, we overrule those

holdings as superseded by developments in the

law of due process.

18a

In this case, there is no question that Quill

has purposefully directed its activities at North

Dakota residents, that the magnitude of those

contacts is more than sufficient for due process

purposes, and that the use tax is related to the

benefits Quill receives from access to the State.

We therefore agree with the North Dakota

Supreme Court’s conclusion that the Due

Process Clause does not bar enforcement of that

State’s use tax against Quill.

Id. at 308 (alterations in original) (citation omitted). The

Supreme Court did not, however, overrule the holding in

Bellas Hess that such an imposition was in violation of the

Commerce Clause. The high court distinguished the

physical presence requirement in Bellas Hess from those

distinctions articulated in other cases that had been

overturned by its decision in Complete Auto by explaining

that:

Complete Auto, it is true, renounced

Freeman and its progeny as “formalistic.” But

not all formalism is alike. Spector’s formal

distinction between taxes on the “privilege of

doing business” and all other taxes served no

purpose within our Commerce Clause

jurisprudence, but stood “only as a trap for the

unwary draftsman.” In contrast, the bright-line

rule of Bellas Hess furthers the ends of the

dormant Commerce Clause. Undue burdens on

interstate commerce may be avoided not only by

a case-by-case evaluation of the actual burdens

imposed by particular regulations or taxes, but

also, in some situations, by the demarcation of a

discrete realm of commercial activity that is free

from interstate taxation. Bellas Hess followed

the latter approach and created a safe harbor for

vendors “whose only connection with customers

19a

in the [taxing] State is by common carrier or the

United States mail.” Under Bellas Hess, such

vendors are free from state-imposed duties to

collect sales and use taxes.

Id. at 314–15 (alteration in original) (citations omitted).

Instead, the Court in Quill held that Complete Auto had

incorporated Bellas Hess’s physical presence rule into the

first prong of its four-part test. Id. at 311 (“Bellas Hess . .

. stands for the proposition that a vendor whose only

contacts with the taxing State are by mail or common

carrier lacks the ‘substantial nexus’ required by the

Commerce Clause.”).

¶ 20 Citing these cases as binding precedent,

Wayfair moved for, and was granted, summary judgment

in its favor at the state trial court level on the grounds that

it did not have substantial nexus with South Dakota due

to the lack of physical presence within the state. The

South Dakota Supreme Court affirmed the lower court’s

decision pursuant to Quill and South Dakota petitioned

the Supreme Court of the United States for a writ of

certiorari.

¶ 21 After South Dakota had petitioned for a writ

of certiorari, but before the Supreme Court agreed to

hear the case, contemporary tax commentators faulted

the state for drafting its Act to “attack the physical

presence rule only in the context of sales taxes[,]” thereby

raising the specter not only of Bellas Hess and Quill, but

of Dilworth and its progeny. Hayes R. Holderness &

Matthew C. Boch, Did South Dakota Neglect

Transactional Nexus in Its Bill to Kill Quill?, Bloomberg

BNA (Dec. 6, 2017) [hereinafter Holderness & Boch, Did

South

Dakota

Neglect

Transactional

Nexus].

Specifically, despite a dearth of cases explicitly

acknowledging such a distinction, academics had begun to

identify that Complete Auto’s “substantial nexus”

requirement could be broken down into two, separate

20a

inquiries: first, so-called “personal” or “entity nexus”

which requires each taxed entity to have a substantial

connection to the taxing state (and, under the precedent

set by Bellas Hess and Quill, to maintain a physical

presence within the state), and second, so-called

“transactional nexus,” which requires each taxed

transaction to have a substantial connection to the taxing

state. See Jeffrey A. Friedman & Kendall L. Houghton,

The Other Nexus: Transactional Nexus and the

Commerce Clause, 4 St. & Local Tax Law., 19, 22–33

(1999). According to some legal scholars, Dilworth had

been incorporated in part into Complete Auto through the

concept of transactional nexus, and therefore states

remained prohibited from imposing sales tax on

transactions for goods delivered into the state by common

carrier where title and possession transferred outside of

the taxing state for lack of sufficient nexus even where a

complementary use tax would be upheld. See id.; Breen

M. Schiller & Daniel L. Stanley, Nexus News: The

Reemergence of Transactional Nexus, J. St. Taxation 9,

11–12 (Winter 2021).

¶ 22 These commentators theorized that South

Dakota’s “oversight” in drafting its Act to require remote

sellers shipping their goods into the state to collect sales

tax but not use tax might impact the Wayfair case in one

of four ways: (1) the Court might deny certiorari on the

grounds that the Act addressed only sales tax; (2) the

Court might grant certiorari and revisit not only Quill,

but also Dilworth; (3) the Court might grant certiorari

and note that South Dakota would have to extend its

statute to cover use tax before it could require such tax to

be collected pursuant to Dilworth; or (4) the Court might

grant certiorari and overrule Quill without addressing

Dilworth or its progeny, thereby “implicitly suggesting

that the transactional nexus distinction between sales and

use taxes is of little or no importance.” Holderness &

21a

Boch, Did South Dakota Neglect Transactional Nexus.

Indeed, the Court, without ever addressing Dilworth,

overruled Quill and held that there was sufficient nexus

between Wayfair and South Dakota for the imposition of

sales tax.

¶ 23 The Supreme Court accepted South Dakota’s

invitation to reconsider the physical presence

requirement established in Bellas Hess and held to have

been incorporated into the Complete Auto test in Quill.

The high court decided to overrule both Bellas Hess and

Quill on the grounds that the “physical presence rule . . .

[was] unsound and incorrect.” Wayfair, 138 S. Ct. at 2099.

The Supreme Court held that the physical presence rule

was “not a necessary interpretation of Complete Auto’s

nexus requirement” but, rather, was closely related to the

minimum contacts required under the Due Process

Clause of the Fourteenth Amendment. Id. at 2085.

However, as Quill itself had ceded, “a business need not

have a physical presence in a State to satisfy the demands

of due process.” Id. at 2093.

¶ 24 Further, the Wayfair Court explicitly

repudiated

the

formalistic

Commerce

Clause

jurisprudence of eras past as incompatible with modern

legal precedents and economic realities. Id. at 2094. The

high court pointed out the recognition that Complete Auto

and its progeny had “eschewed formalism for a sensitive,

case-by-case analysis of purposes and effects.” Id.

(quoting West Lynn Creamery, Inc. v. Healy, 512 U.S.

186, 201 (1994)). The Supreme Court instead held that:

So long as a state law avoids “any effect

forbidden by the Commerce Clause,” courts

should not rely on anachronistic formalisms to

invalidate it. The basic principles of the Court’s

Commerce Clause jurisprudence are grounded in

functional, marketplace dynamics; and States

22a

can and should consider those realities in

enacting and enforcing their tax laws.

Id. at 2094–95 (citation omitted). Even though the

Wayfair Court clearly understood that South Dakota’s

statute at issue involved the imposition of sales tax and

not use tax, nonetheless the highest tribunal did not draw

any legal distinction between the two. See Wayfair, 138 S.

Ct. at 2089 (“[T]he Act requires out-of-state sellers to

collect and remit sales tax ‘as if the seller had a physical

presence in the state.’ ” (emphasis added) (quoting S.B.

106, § 1)). The Court did not discuss Dilworth or

“transactional nexus” as a concept separate and apart

from “substantial nexus” at all. Conversely, the Supreme

Court held that, “[i]n the absence of Quill and Bellas

Hess, the first prong of the Complete Auto test simply

asks whether the tax applies to an activity with a

substantial nexus with the taxing State.” Id. at 2099.

There, the high court held that the nexus between

Wayfair and South Dakota was “clearly sufficient based

on both the economic and virtual contacts respondents

have with the State.” Id. The Supreme Court went on to

conclude that “the substantial nexus requirement of

Complete Auto [was] satisfied in [that] case[,]” id. at 2099,

and remanded for further proceedings not inconsistent

with its decision, id. at 2100.

¶ 25 The significance of the Wayfair decision was

not lost on either the states or on interstate businesses in

their capacity as the states’ impending taxpayers. In its

wake, South Dakota and Wayfair entered into a

settlement agreement by which Wayfair would collect

state sales tax beginning on 1 January 2019, and many

states began using South Dakota’s law as a model as they

adopted statutes requiring the collection of sales tax by

remote sellers. See Richard D. Pomp, Wayfair: Its

Implications and Missed Opportunities, 58 J. L. & Pol’y

1, 9–10 n.55 (2019); Jennifer Karpchuk, States Could Use

23a

Wayfair Laws To Fix Depleted Budgets, Law360 (July 15,

2020) [hereinafter Karpchuk, States Could Use Wayfair

Laws]. This revenue had become particularly vital as

online retail transactions proliferated while states

continued to contend with a public health crisis. See

Karpchuk, States Could Use Wayfair Laws; see also

Wayfair, 138 S. Ct. at 2097 (“Though Quill was wrong on

its own terms when it was decided in 1992, since then the

Internet revolution has made its earlier error all the more

egregious and harmful.”). In order to remain under the

auspices of the Wayfair decision, many such states

intentionally adopted those aspects of South Dakota’s law

that were mentioned most favorably by the Court. See,

e.g., Jay Hancock, The Wayfair Sales Tax Case:

Companies Without a Physical Presence Required to

Collect Sales Tax, LBMC (Mar. 1, 2022) (detailing which

states adopted “economic nexus” thresholds of $100,000

or more for the imposition of sales tax on remote sellers

after Wayfair).

¶ 26 On 7 August 2018, the North Carolina

Department of Revenue issued a directive requiring

remote sellers making gross sales in excess of $100,000 or

conducting 200 or more separate transactions to North

Carolina customers to begin collecting state sales tax in

accordance with Wayfair. N.C. Dep’t Rev., SD-18-6 (Aug.

7, 2018). This rule was limited to prospective application,

which brought about respondent’s exclusion of those sales

which were made by petitioner before the corporation

first established a physical presence in North Carolina by

hiring an in-state sales representative in September 2009.

Prior to Wayfair, however, North Carolina’s sales tax

regime already paralleled South Dakota’s in several key

respects, given each state’s membership in the

Streamlined Sales and Use Tax Agreement (SSUTA). See

An Act to Enable North Carolina to Enter the

Streamlined Sales and Use Tax Agreement, S.L. 2001-

24a

347, §§ 1.1–3.3, 2001 N.C. Sess. Laws 1041, 1041–60; S.D.

Codified Laws § 10-45C-3 (2010). As member-states,

North Carolina’s and South Dakota’s tax regimes are

largely governed by the same definitions and sourcing

principles. As such, many aspects of their respective tax

laws are nearly identical, including, inter alia:

South Dakota

Sales tax is assessed

against goods or services

to be delivered into

South Dakota for receipt

by in-state customers.

S.B. 106, § 1 (2016).

South Dakota defines to

“receive” as “(a) the taking

possession of tangible

personal property; (b)

making first use of

services; or (c) taking

possession of or making

first use of any product

transferred electronically,

whichever comes first”

excluding possession by a

shipping company on

behalf of the purchaser.

S.D. Admin. R. 64:06:01:62

(2015).

Sales or use tax is due

based on the locations to

which the advertising and

promotional direct mail is

delivered. Other direct

mail is sourced to the

North Carolina

Sales are sourced to the

state in which the product

or service was received for

the purposes of assessing

sales tax. N.C.G.S. § 105164.4B(a)(2) (2009).

“Receipt” is defined as

“taking possession of

tangible

personal

property, making first use

of services, or taking

possession or making first

use of digital goods,

whichever comes first” but

does

not

include

possession by a shipping

company on behalf of the

purchaser. Sales and Use

Tax Bulletin 4-1A.

Direct mail is sourced to

the location where it is

delivered if the purchaser

provides the seller with

information to show the

jurisdictions to which the

25a

address for the purchaser

contained

within

the

seller’s records.

S.D.

Admin. R. 64:06:01:68

(2010).

A use tax is imposed for

the in-state use, storage,

or consumption of tangible

goods at the same rate as

would have been applied

had the goods been

purchased

in

South

Dakota. S.D. Codified

Laws § 10-46-2 (2010).

The imposition of state use

tax is reduced by the

amount of sales or use tax

previously paid in another

state for the same

property. S.D. Codified

Laws § 10-46-6.1 (2010).

Remote

sellers

are

required to collect and

remit sales tax as if they

had a physical presence

within the state if they

make sales exceeding

$100,000 or 200 or more

separate transactions to

South Dakota customers

over the course of a year.

S.D. Codified Laws § 1064-2 (2016). This applies

only

prospectively

following the passage of

direct mail is to be

delivered. N.C.G.S. § 105164.4B(d)(2) (2009).

A complementary use tax

applies when goods that

are purchased out of state

are brought into the state

for their use, storage, or

consumption. N.C.G.S. §

105-164.6(a)(1) (2009).

North Carolina allows

sellers to credit the

amount of sales or use tax

paid on an item in another

state against the tax

imposed under North

Carolina law. N.C.G.S. §

105-164.6(c)(2) (2009).

Remote sellers are only

obligated to collect state

sales tax if they conduct

significant in-state activity

such as making at least

200 separate sales or

$100,000 worth of sales to

in-state customers over

the course of a year. This

applies only prospectively

beginning 1 November

2018. N.C. Dep’t Rev., SD18-6 (Aug. 7, 2018).

26a

the Act. S.B. 106, §§ 5, 3,

8(10) (2016).

South Dakota can extract

sellers’

registration

information from the

central

registration

system. The state further

allows sellers to register

without a signature and

permits agents to register

on behalf of sellers. S.D.

Codified Laws §§ 10-45C3, 10-45C-5, 10-45-24

(2010).

South Dakota provides

state-level administration

of state and local sales and

use taxes. Sellers are

required to register, file

returns, and remit funds

at the state level. South

Dakota requires sellers to

file only one return each

tax period for the state

and all of its local

jurisdictions.

S.D.

Codified Laws § 10- 45C-5

(2010).

South Dakota uses the

definitions provided by the

SSUTA to define the

following terms, inter

alia:

“bundled

transaction,”

“delivery

North

Carolina

can

extract

a

seller’s

information from the

central

registration

system, allows sellers to

register

without

a

signature, and permits

agents to register on

behalf of sellers. N.C.G.S.

§§

105-164.29,

105164.42E(4),

105-164.42I

(2009).

North Carolina provides

state-level administration

of state and local sales and

use taxes. Sellers are

required to register with,

file returns with, and

remit funds to a state-level

authority.

The

state

requires sellers to file only

one tax return each period

for the state and all local

jurisdictions. N.C.G.S. §§

105-164.16, 105-469, 105471,

105-483, 105-498,

105-507.2, 105-509.1, 105510.1, 105-511.3 (2009).

North Carolina uses the

SSUTA definitions to

define the following terms,

inter

alia:

“bundled

transaction,”

“delivery

charges,” “direct mail,”

27a

charges,” “direct mail,”

“lease

or

rental,”

“purchase price,” “retail

sale or sale at retail,”

“sales

price,”

and

“tangible

personal

property.” S.D. Codified

Laws §§ 10-45-1, 10-45-1.5,

10-45-1.9, 10-45-1.12, 1045-1.13, 10-45-1.14, 10-451(4), 10-45-1(10), 10-4594.1 (2010).

South Dakota reviews

sales

tax

software

submitted for certification

as Certified Automated

Software

(CAS)

and

provides liability relief to

sellers for their reliance on

such

software.

S.D.

Codified Laws § 10-45C-7

(2010).

“lease

or

rental,”

“purchase price,” “retail

sale or sale at retail,”

“sales

price,”

and

“tangible

personal

property.” N.C.G.S. §§

105-164.3, 164.4D (2009).

North Carolina reviews

sales

tax

software

submitted for certification

as CAS and provides

liability relief for reliance

on such software. N.C.G.S.

§§

105-164.42H,

105164.42I (2009).

C. Applying Complete Auto’s four-part

formulation to North Carolina’s tax

¶ 27 Because North Carolina’s imposition of sales

tax under the circumstances presented in this case does

not differ from South Dakota’s in any respect that is

legally significant to this matter, and because both states

have incorporated the SSUTA’s uniform rules and

definitions into their sales tax and use tax regimes, we

follow the Supreme Court’s precedent in Wayfair and

apply the four-part test in Complete Auto to determine its

constitutionality. Under the “now-accepted framework

for state taxation” provided by Complete Auto, courts will

28a

sustain a tax imposed on interstate commerce as long as

it: “(1) applies to an activity with a substantial nexus with

the taxing State, (2) is fairly apportioned, (3) does not

discriminate against interstate commerce, and (4) is fairly

related to the services the State provides.” Wayfair, 138

S. Ct. at 2091. We uphold North Carolina’s tax against

petitioner’s Commerce Clause challenge because

petitioner’s activities have a substantial nexus with North

Carolina and the imposition of sales tax on petitioner’s

sales to North Carolina customers is fairly apportioned,

nondiscriminatory, and fairly related to the services

provided by the state. We further hold that North

Carolina’s assessment of sales tax on the sales at issue

does not offend petitioner’s right to due process under the

Due Process Clause of the Constitution of the United

States.

1. Substantial Nexus

¶ 28 Despite petitioner’s contention otherwise, the

Wayfair Court addressed the first requirement of

Complete Auto’s four-part test—substantial nexus—in its

entirety by holding that, “[i]n the absence of Quill and

Bellas Hess, the first prong of the Complete Auto test

simply asks whether the tax applies to an activity with a

substantial nexus with the taxing State.” Id. at 2099.

Specifically, the Supreme Court held that Wayfair’s

“economic and virtual contacts” provided a “clearly

sufficient” nexus for the imposition of sales tax in light of

the fact that South Dakota’s act only applied to sellers

delivering more than $100,000 worth of goods or services

into the state or making 200 or more separate

transactions for the delivery of goods or services into the

state on an annual basis. Id. According to the high court,

this “quantity of business could not have occurred unless

the seller availed itself of the substantial privilege of

carrying on business in South Dakota.” Id. Since a nexus

29a

is established whenever a taxpayer “avails itself of the

substantial privilege of carrying on business in that

jurisdiction,” Polar Tankers, Inc. v. City of Valdez, 557 U.

S. 1, 11 (2009) (quotation marks omitted), the Wayfair

Court held that the substantial nexus requirement of

Complete Auto had been clearly satisfied. Wayfair, 138 S.

Ct. at 2099.

¶ 29 Although the Supreme Court of the United

States in Wayfair did not specifically disaggregate

substantial nexus into its component parts of

transactional and personal nexus, it did begin its

discussion by dispensing with the subject properly

considered as constituting the transactional nexus issue

before proceeding to the physical presence requirement

as an aspect of personal nexus. The high court stated:

All agree that South Dakota has the

authority to tax these transactions. S.B. 106

applies to sales of “tangible personal property,

products transferred electronically, or services

for delivery into South Dakota.” § 1 (emphasis

added). “It has long been settled” that the sale of

goods or services “has a sufficient nexus to the

State in which the sale is consummated to be

treated as a local transaction taxable by that

State.” [Jefferson Lines, 514 U.S. at 184]; see also

2 C. Trost & P. Hartman, Federal Limitations on

State and Local Taxation 2d § 11:1, p. 471 (2003)

(“Generally speaking, a sale is attributable to its

destination”).

Id. at 2092–93. By citing its decision in Jefferson Lines,

South Dakota’s sourcing statute, and a treatise on federal

regulation of state and local taxation, the Supreme Court

did not so much neglect transactional nexus as it

summarily dismissed any notion that South Dakota might

not have authority to tax the sales at issue on the grounds

30a

of both general taxing principles and the state’s specific

destination-based sourcing statute.

¶ 30 The facts presented in the case at bar provide

equal, if not greater, support for a finding of substantial

nexus. Petitioner has clearly availed itself of the

substantial privilege of carrying on its own business in

North Carolina through both its economic and physical

contacts with the state. Petitioner processed

approximately $20 million worth of orders for delivery

into the state between 2009 and 2011. This is well above

the annual threshold of $100,000 cited favorably in

Wayfair. Further, unlike the remote sellers implicated in

Wayfair, petitioner has maintained a physical presence

within North Carolina for the relevant time period by

employing a sales representative to solicit sales both

within and from outside of the state. Finally, as a member

of the SSUTA, North Carolina employs the same

destination-based sourcing principles as South Dakota,

which attribute a sale to the state in which the goods or

services were received for the purpose of assessing state

sales tax. Compare S.B. 106 § 1, with N.C.G.S. § 105164.4B(a)(2). We therefore hold that there is also

substantial nexus here.2

Although the Court only reached and ruled on the issue of nexus in

Wayfair, we note that it also looked favorably to several features of

South Dakota’s statute in anticipating how the Act may be further

evaluated on remand:

The question remains whether some other principle in

the Court’s Commerce Clause doctrine might invalidate

the Act. Because the Quill physical presence rule was an

obvious barrier to the Act’s validity, these issues have not

yet been litigated or briefed, and so the Court need not

resolve them here. That said, South Dakota’s tax system

includes several features that appear designed to prevent

discrimination against or undue burdens upon interstate

commerce. First, the Act applies a safe harbor to those who

transact only limited business in South Dakota. Second, the

2

31a

2. Fair Apportionment

¶ 31 The second requirement of the Complete Auto

test serves “to ensure that each State taxes only its fair

share of an interstate transaction” and to prevent

“multiple taxation” of the same transaction by more than

one state. Jefferson Lines, 514 U.S. at 184–85. The

Supreme Court addressed the issue of malapportionment

in Jefferson Lines in the context of the state of

Oklahoma’s imposition of a state sales tax on the sale of

bus tickets sold within the state for travel into other

states. Id. at 177–78. In Jefferson Lines, the Court began

by stating that:

For over a decade now, we have assessed any

threat of malapportionment by asking whether

the tax is “internally consistent” and, if so,

whether it is “externally consistent” as well.

Internal consistency is preserved when the

imposition of a tax identical to the one in question

by every other State would add no burden to

interstate commerce that intrastate commerce

would not also bear. This test asks nothing about

the degree of economic reality reflected by the

Act ensures that no obligation to remit the sales tax may

be applied retroactively. S.B. 106, §5. Third, South Dakota

is one of more than 20 States that have adopted the

Streamlined Sales and Use Tax Agreement. This system

standardizes taxes to reduce administrative and

compliance costs: It requires a single, state level tax

administration, uniform definitions of products and

services, simplified tax rate structures, and other uniform

rules. It also provides sellers access to sales tax

administration software paid for by the State. Sellers who

choose to use such software are immune from audit

liability.

Wayfair, 138 S. Ct. at 2099–2100. Each of these features is reflected

in North Carolina’s own laws, as detailed in the table above.

32a

tax, but simply looks to the structure of the tax at

issue to see whether its identical application by

every State in the Union would place interstate

commerce at a disadvantage as compared with

commerce intrastate. A failure of internal

consistency shows as a matter of law that a State

is attempting to take more than its fair share of

taxes from the interstate transaction, since

allowing such a tax in one State would place

interstate commerce at the mercy of those

remaining States that might impose an identical

tax . . . .

External consistency, on the other hand,

looks not to the logical consequences of cloning,

but to the economic justification for the State’s

claim upon the value taxed, to discover whether a

State’s tax reaches beyond that portion of value

that is fairly attributable to economic activity

within the taxing State. Here, the threat of real

multiple taxation (though not by literally

identical statutes) may indicate a State’s

impermissible overreaching.

Id. at 185 (citations omitted).

¶ 32 The Supreme Court of the United States held

in Jefferson Lines that Oklahoma’s tax was both

internally and externally consistent. Id. at 185–96. First,

the high court determined that the tax was internally

consistent because if every state were to impose an

identical tax (i.e. a tax on ticket sales within the state for

travel originating in that state), no sale would be subject

to more than one such tax because each would be

attributable to only one lone state. Id. at 185. And second,

the Supreme Court concluded that the tax was externally

consistent because “[a] sale of goods is most readily

viewed as a discrete event facilitated by the laws and

amenities of the place of sale,” and thus the high court had

33a

“consistently approved taxation of sales without any

division of the tax base among different States” by

permitting the state in which the sale is deemed to have

taken place to tax the entire purchase price. Id. at 186. In

Jefferson Lines, the Supreme Court declared that the sale

of a bus ticket within Oklahoma for transit out of the state

was properly deemed a local event because the taxable

event was comprised of the “agreement, payment, and

delivery of some of the services in the taxing State” and

“no other State [could] claim to be the site of the same

combination.” Id. at 190. Further, “the combined events

of payment for a ticket and its delivery for present

commencement of a trip [were] commonly understood to

suffice for a sale.” Id. at 191. The high court therefore

decided that Oklahoma could levy a sales tax upon the

entire purchase price of the ticket even though the service

it entailed included travel across other states. Id. at 186–

96.

¶ 33 North Carolina’s imposition of sales tax on the

sales at issue in this case is likewise both internally and

externally consistent. First, the tax is internally

consistent because, as in Jefferson Lines, every state

could impose an identical destination-based sales tax

without any duplicative effect since each sale would only

be attributable to a single state. Indeed, most states—

including but not limited to, SSUTA member-states—

have destination-based sourcing statutes that attribute

sales to the state in which the goods or services are to be

received and impose state sales taxes accordingly. And

second, the tax is externally consistent because, as the

Court recognized in Wayfair, a sale of goods is generally

attributable to its destination. Wayfair, 138 S. Ct. at 2092–

93. Unlike Arkansas in Dilworth, North Carolina has

state law addressing where a sale is deemed to have taken

place for the purpose of assessing state sales tax. North

Carolina’s sourcing statute traces the sale of goods to

34a

their location of receipt and printed materials to the

mailing address provided by purchasers, notwithstanding

delivery to a common carrier f.o.b.3 in another state.

N.C.G.S. § 105-164.4B(a)(2), (d)(2)(b); N.C.G.S § 105164.4E (2009). As in Jefferson Lines, “no other State

[could] claim to be the site of the same” since each

purchase of goods or materials is delivered to only one

mailing address located within one destination state.

North Carolina has joined a number of states which have

adopted destination-based sourcing principles; beyond

the twenty-three states which are members of the

SSUTA, thirty-five of the fifty states in the nation, along

with the District of Columbia, currently define the sale of

goods according to their ultimate destination. Jennifer

Faubion, Tax Burden Analysis and Review of Recent

Significant Changes: Presentation to the Legislative

Finance

Committee

(July

20,

2022),

https://www.nmlegis.gov/handouts/ALFC%20072022%20

Item%205%20Tax%20Burden%20Analysis%20and%20R

eview%20of%20Recent%20Significant%20Changes.pdf.

This list of states includes Wisconsin—the state in which

petitioner maintains its headquarters and from which

petitioner ships many of its orders—whose sourcing rules

are materially identical to North Carolina’s sourcing rules

as a fellow SSUTA member. Wis. Stat. § 77.522(1)(b),

(1)(c) (2010). Consequently, none of these states will

assess duplicate sales tax, since they all define a sale as

occurring at the point of destination: one address located

within one state. Finally, North Carolina and other states

provide an additional safeguard against multiple taxation

by providing a credit to sellers in the amount of any sales

tax or use tax already paid on a particular purchase.

N.C.G.S. § 105-164.6(c)(2) (2009).

3

“F.o.b.” is an abbreviation for “free on board.”

35a

¶ 34 For these reasons, we hold that North

Carolina’s assessment of sales tax on the sales at issue is

as externally consistent as it is internally consistent.

3. Nondiscrimination

¶ 35 The requirement that a tax imposed on

interstate commerce be nondiscriminatory serves to avoid

the “multiplication of preferential trade areas destructive

of the very purpose of the Commerce Clause,” Dean Milk

Co. v. City of Madison, 340 U.S. 349, 356 (1951), by

preventing states from “providing a direct commercial

advantage to local business,” Nw. States Portland Cement

Co. v. Minnesota, 358 U.S. 450, 458 (1959); see also

Maryland v. Louisiana, 451 U.S. 725, 754 (1981). A law is

therefore discriminatory if it “tax[es] a transaction or

incident more heavily when it crosses state lines than

when it occurs entirely within the State.” Armco Inc. v.

Hardesty, 467 U.S. 638, 642 (1984). On the other hand, a

tax structure that applies the same rate to in-state and

out-of-state transactions and provides a credit for those

taxes paid in another state is nondiscriminatory as a

matter of law. See D.H. Holmes, 486 U.S. at 32 (“The

Louisiana tax structure likewise does not discriminate

against interstate commerce. The use tax is designed to

compensate the State for revenue lost when residents

purchase out of state goods for use within the State. It is

equal to the sales tax applicable to the same tangible

personal property purchased in-state . . . .”).

¶ 36 Here, North Carolina imposes the same sales

tax on all purchases made for delivery to North Carolina

customers regardless of the origin of the goods or the

location of the seller. Further, the state maintains a

complementary tax structure that imposes sales tax and

use tax at an equal rate and provides a credit against the

assessment of use tax for sales tax paid to another state.

N.C.G.S. § 105-164.6(a), (c)(2). As such, North Carolina

36a

does not impose any greater burden on the purchase of

goods from out of state than it does on transactions which

are entirely intrastate. Therefore, the tax is

nondiscriminatory as a matter of law.

4. Fair Relation

¶ 37 The fourth and final prong of the Complete

Auto test requires that the assessment of tax be fairly

related to services provided by the state to its taxpayers.

However, the state does not need to provide a “detailed

accounting” of the services provided to each taxpayer

based on the taxpayer’s in-state activities; instead, the

state may simply demonstrate the provision of ordinary

public services which are advantageous to the execution

of the taxpayer’s business within the state. In D.H.

Holmes, for instance, the Supreme Court found that:

Complete Auto requires that the tax be fairly

related to benefits provided by the State, but that

condition is also met here. Louisiana provides a

number of services that facilitate Holmes’ sale of

merchandise within the State: It provides fire

and police protection for Holmes’ stores, runs

mass transit and maintains public roads which

benefit Holmes’ customers, and supplies a

number of other civic services from which

Holmes profits. To be sure, many others in the

State benefit from the same services; but that

does not alter the fact that the use tax paid by

Holmes, on catalogs designed to increase sales, is

related to the advantages provided by the State

which aid Holmes’ business.

D. H. Holmes, 486 U.S. at 32. Similarly, in Jefferson

Lines, the high court found that:

37a

The fair relation prong of Complete Auto

requires no detailed accounting of the services

provided to the taxpayer on account of the

activity being taxed, nor, indeed, is a State

limited to offsetting the public costs created by

the taxed activity. If the event is taxable, the

proceeds from the tax may ordinarily be used for

purposes unrelated to the taxable event.

Interstate commerce may thus be made to pay its

fair share of state expenses and “ ‘contribute to

the cost of providing all governmental services,

including those services from which it arguably

receives no direct ‘benefit.’ ” The bus terminal

may not catch fire during the sale, and no

robbery there may be foiled while the buyer is

getting his ticket, but police and fire protection,

along with the usual and usually forgotten

advantages conferred by the State’s maintenance

of a civilized society, are justifications enough for

the imposition of a tax.

Jefferson Lines, 514 U.S. at 199–200 (quoting Goldberg v.

Sweet, 488 U.S. 252, 267 (1989)). As with Louisiana in D.H.

Holmes and Oklahoma in Jefferson Lines, North Carolina

requires interstate taxpayers like petitioner to pay their

“fair share” of those ordinary public services that aid their

in-state business activities, including police and fire

protection, mass transit and public roads, and those other

“forgotten advantages conferred by the State’s

maintenance of a civilized society.” See Jefferson Lines,

514 U.S. at 200. For this reason, we hold that the

assessment of sales tax upon the sales at issue in this case

is fairly related to North Carolina’s provision of public

services to its taxpayers, including petitioner.

38a

5. Due Process

¶ 38 Finally, we hold that petitioner has been

afforded due process of law. The Due Process Clause

“limits States to imposing only taxes that ‘bea[r] fiscal

relation to protection, opportunities and benefits given by

the state.’” N.C. Dep’t of Revenue v. Kimberly Rice

Kaestner 1992 Fam. Tr., 139 S. Ct. 2213, 2219 (2019)

(alteration in original) (quoting Wisconsin v. J.C. Penney

Co., 311 U.S. 435, 444 (1940)). “The [U.S. Supreme] Court

applies a two-step analysis to decide if a state tax abides

by the Due Process Clause.” Id. at 2220. First, there must

be “some definite link, some minimum connection,

between a state and the person, property or transaction it

seeks to tax.” Quill, 504 U.S. at 306 (quoting Miller Bros.

Co. v. Maryland, 347 U.S. 340, 344–45 (1954)). Second,

“income attributed to the State for tax purposes must be

rationally related to ‘values connected with the taxing

State.’” Id. at 306 (quoting Moorman Mfg. Co. v. Bair, 437

U.S. 267, 273 (1978)).

¶ 39 Petitioner and its sales have a definite

connection to North Carolina. As in Quill and Wayfair,

petitioner in the present case is engaged in “continuous

and widespread solicitation of business” within North

Carolina, amounting to millions of dollars’ worth of sales

for delivery into the state. See Quill, 504 U.S. at 308. This

level of activity suffices to give petitioner “fair warning”

that its activities may be subject to the state’s jurisdiction.

See id. Further, this activity is rationally related to values

connected with North Carolina since, as discussed above,

the sales at issue can be properly traced to the state

through the application of North Carolina’s sourcing

statute.

¶ 40 Additionally, the Supreme Court has held that

the “Complete Auto test, while responsive to Commerce

Clause dictates, encompasses as well . . . due process

39a

requirement[s].” Trinova Corp. v. Mich. Dep’t of

Treasury, 498 U.S. 358, 373 (1991). As such, the high court

acknowledged the possibility that “every tax that passes

contemporary Commerce Clause analysis [may also be]

valid under the Due Process Clause,” even though the

converse is not necessarily true. Quill, 504 U.S. at 313 n.7.

Although we do not presume to conclusively decide that

this will hold true in all circumstances, nonetheless the

above analysis demonstrating the satisfaction of Complete

Auto’s four factors provides significant additional support

for our conclusion in the case at bar that North Carolina’s

assessment of the sales tax at issue comports with the Due

Process Clause. We therefore hold that North Carolina’s

imposition of sales tax on the sales involved in this case

does not offend the Due Process Clause of the

Constitution of the United States.

III. Conclusion

¶ 41 Based upon the reasons discussed above, we

hold that the formalism doctrine established in Dilworth

has not survived the subsequent decisions of the Supreme

Court of the United States in Complete Auto and Wayfair

so as to render the sales tax regime of North Carolina

violative of the Commerce Clause and the Due Process

Clause of the Constitution of the United States. Further,

North Carolina’s imposition of sales tax on the

transactions at issue in this case is constitutional under

the relevant test provided by Complete Auto.

Accordingly, we reverse the Business Court’s order and

opinion and hold in favor of respondent.

REVERSED.

40a

Justice BERGER dissenting.

¶ 42 As the trial court correctly noted, resolution of

this case is determined by response to one question: “is

the holding in Dilworth the controlling law.” In answering

in the affirmative, the trial court invalidated assessment

of the sales tax against Quad Graphics by the North

Carolina Department of Revenue because the Supreme

Court of the United States has not overruled McLeod v.

J.E. Dilworth Co., 322 U.S. 327, 64 S. Ct. 1023, 88 L. Ed.

1304 (1944). The trial court’s decision should be affirmed

because this Court is not permitted to disregard the

Supreme Court’s interpretation of the Commerce Clause

and the federal Constitution. See Rodriguez de Quijas v.

Shearson/Am. Express, Inc., 490 U.S. 477, 484, 109 S. Ct.

1917, 1921– 22, 104 L. Ed. 2d 526 (1989) (holding that

when United States Supreme Court precedent “has direct

application in a case, yet appears to rest on reasons

rejected in some other line of decisions, [a lower court]

should follow the case which directly controls, leaving to

this Court the prerogative of overruling its own

decisions”). Therefore, I respectfully dissent.

¶ 43 The transaction at issue in the present case is

strikingly similar to the one addressed in Dilworth.

There, Arkansas sought to impose a sales tax upon

Tennessee companies for the sale of machinery and mill

supplies out of offices located in Memphis, Tennessee,

which utilized a Tennessee salesman to solicit sales in

Arkansas. Dilworth, 322 U.S. at 328, 64 S. Ct. at 1024.

Orders for goods were required to be approved by the

Memphis office and would come to Tennessee by mail or

phone. Id. at 328, 64 S. Ct. at 1024. Further, title of the

goods passed upon delivery to the carrier in Tennessee,

and payment of the sales price was not made in Arkansas.

Id. at 328, 64 S. Ct. at 1024–25. Simply, Dilworth involved

“sales made by Tennessee vendors that are consummated

in Tennessee for the delivery of goods in Arkansas.” Id. at

41a

328, 64 S. Ct. at 1025. The U.S. Supreme Court observed

that it “would have to destroy both business and legal

notions to deny that under these circumstances the sale—

the transfer of ownership—was made in Tennessee.” Id.

at 330, 64 S. Ct. at 1025. Thus, the Supreme Court held

that an Arkansas sales tax on transactions completed by

Tennessee companies and consummated in Tennessee

violated the Commerce Clause of the U.S. Constitution.

Id. at 329–30, 64 S. Ct. at 1025.

¶ 44 Here, Quad Graphics, received orders and

produced printed materials outside of the State of North

Carolina. Once the printed materials were produced, they

were delivered to the United States Postal Service or

another common carrier—all outside of North Carolina.

Then, the common carrier would deliver the materials to

customers or direct mail recipients within North Carolina.

In accordance with the contracts between the parties, title

to the printed material and risk of loss passed when the

materials were provided to the common carrier for

shipping. As in in Dilworth, the sale—”transfer of

ownership”—was completed outside of North Carolina

such that petitioner was “through selling” before the

materials reached the state. See Dilworth, 322 U.S. at 330,

64 S. Ct. at 1025. Quad Graphics later hired a North

Carolina-based sales representative to solicit orders in

North Carolina; however, all orders had to be approved

and accepted through the company’s Wisconsin

headquarters.

¶ 45 In 2011, the North Carolina Department of

Revenue attempted to assess a sales tax against Quad

Graphics for transactions which occurred from 2007

through 2011, even though transfer of title and possession

of the printed material to its customers occurred outside

of North Carolina. Quad Graphics contends that under

these circumstances, and pursuant to Dilworth,

imposition of the sales tax is suspect under the Commerce

42a

Clause of the federal Constitution because the sale did not

occur in North Carolina.

¶ 46 Citing to Dilworth, the Supreme Court of the

United States has stated that

where a corporation chooses to stay at home in

all respects except to send abroad advertising or

drummers to solicit orders which are sent

directly to the home office for acceptance, filling,

and delivery back to the buyer, it is obvious that

the State of the buyer has no local grip on the

seller. Unless some local incident occurs

sufficient to bring the transaction within its

taxing power, the vendor is not taxable.

Norton Co. v. Dep’t of Revenue of State of Ill., 340 U.S.

534, 537, 71 S. Ct. 377, 380, 95 L. Ed. 517 (1951).

¶ 47 To determine whether the tax at issue

comports with the Commerce Clause, we must examine

whether the tax is “applied to an activity with a

substantial nexus with the taxing State, is fairly

apportioned, does not discriminate against interstate

commerce, and is fairly related to services provided by the

State.” Complete Auto Transit, Inc. v. Brady, 430 U.S 274,

279, 97 S. Ct. 1076, 1079, 51 L. Ed. 2d 326 (1977) (emphasis

added). Thus, one focus of the first prong in Complete

Auto test is the link between the transaction and the state,

which some legal observers have termed a transactional

nexus. See Hayes R. Holderness, Navigating 21st

Century Tax Jurisdiction, 79 Md. L. Rev. 1, 9 (2019).

¶ 48 Another focus of the first prong is what has

come to be known as personal nexus as discussed in

Wayfair. Personal nexus is the link between the taxpayer

and the state. Id. The majority devotes much of its

analysis to this issue. Notably, the Supreme Court in

Wayfair only addressed personal nexus. The Court did

not address the transactional nexus—leaving that aspect

43a

of Dilworth undisturbed. See South Dakota v. Wayfair,

Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018) (discussing

only the business’s connection with the taxing state—

personal nexus—rather than the transaction’s connection

to the taxing state—transactional nexus). The Court left

open the possibility that the tax at issue in Wayfair could

have been subject to other Commerce Clause challenges

which were not reached in the opinion. Id. at 2099– 2100.

Therefore, Wayfair speaks only to the personal nexus

aspect of the substantial nexus test and does not apply to

the issue in this case—an issue of transactional nexus.

¶ 49 It should be noted that just because the

Department could not levy a sales tax on the transaction

at issue, it does not follow that the State was without

options. The Department could have applied a use tax

without running afoul of the Commerce Clause. The Court

in Dilworth addressed whether Arkansas could have

levied a use tax rather than a sales tax and determined

that such a tax was not chosen by Arkansas and was

therefore not before the Court. Dilworth, 322 U.S. at 330,

64 S. Ct. at 1025. But the Court went on to note that there

was a real difference in the transactions permitting levy

of sales or use taxes:

A sales tax and a use tax in many instances may

bring about the same result. But they are

different in conception, are assessments upon

different transactions, and in the interlacings of

the two legislative authorities within our

federation may have to justify themselves on

different constitutional grounds. A sales tax is a

tax on the freedom of purchase . . . . A use tax is

a tax on the enjoyment of that which was

purchased. In view of the differences in the

relation of the taxing state to them, a tax on an

interstate sale like the one before us and unlike

the tax on the enjoyment of the goods sold,

44a

involves an assumption of power by a State which

the Commerce Clause was meant to end.

Id. at 330, 64 S. Ct. at 1025–26.

¶ 50 The Court further concluded that “[t]hough

sales and use taxes may secure the same revenues and

serve complementary purposes, they are . . . taxes on

different transactions and for different opportunities

afforded by a State.” Id. at 331, 64 S. Ct. at 1026. A use tax

would likely pose no constitutional issue if it had been

chosen by the Department of Revenue. See Gen. Trading

Co. v. State Tax Comm’n of Iowa, 322 U.S. 335, 337–38, 64

S. Ct. 1028, 1029, 88 L. Ed. 1309 (1944).

¶ 51 While the Department and the majority

express concern that Quad Graphics may not be paying its

fair share in state taxes, any loss of revenue here is a

direct result of the Department’s decision to levy a sales

tax. While a taxpayer certainly has an obligation to pay

taxes owed, it is not a charity, and the government is

required to assess the appropriate tax. While some may

deem this a “formalistic” requirement, such a

requirement touches on fundamental fairness for

taxpayers.

¶ 52 In this case, the Department of Revenue chose

to levy a sales tax on a transaction which concluded

outside of the state. Under Dilworth and the facts of this

case, that violates the Commerce Clause. Had the

Department chosen a use tax, the result here might be

different. Contrary to the facts in Wayfair, it is the

Department’s choice of a tax, and not Quad Graphics’s

effort to avoid taxes, that brings this constitutional

quandary before this Court.

¶ 53 Because Dilworth applies in this case and

defines the location of a sale based upon “practical notions

of what constitutes a sale,” Dilworth, 322 U.S. at 329, 64

S. Ct. at 1025, and the transaction here occurred outside

45a

of North Carolina, I would conclude that the tax violates

the Commerce Clause as applied to Quad Graphics and

affirm the Business Court’s order.

APPENDIX B

STATE OF NORTH

CAROLINA

IN THE GENERAL

COURT OF JUSTICE

SUPERIOR COURT

DIVISION

20 CVS 7449

WAKE COUNTY

QUAD GRAPHICS, INC.,

Petitioner,

v.

NORTH CAROLINA

DEPARTMENT OF REVENUE,

ORDER AND

OPINION ON

FIRST

AMENDED

PETITION FOR

JUDICIAL

REVIEW

Respondent.

THIS MATTER is before the Court on Quad

Graphics, Inc.’s (“Petitioner”) First Amended Petition for

Judicial Review. (“Amended Petition for Judicial

Review,” ECF No. 9.) Pursuant to § 105-241.16 of the

North Carolina General Statutes (“N.C.G.S.”), Petitioner

seeks review of the June 24, 2020 Final Decision of the

North Carolina Office of Administrative Hearings

(“OAH”) (“Final Decision,” Rec., at pp. 938–47).1 On

The Official Record on Judicial Review is filed in 10 parts on the

electronic docket at ECF Nos. 27–36, each part consisting of 100

pages. For example, Official Record Part 1 (ECF No. 27) contains

pages 1–100 of the Official Record on Judicial Review; Official Record

Part 2 (ECF No. 28) contains pages 101–200; and so on. Hereinafter,

ECF Nos. 27–36 are referred to as the “Rec.”.

1

(46a)

47a

February 2, 2021, the Court held a hearing on the

Amended Petition for Judicial Review.

THE COURT, having considered the Petition, the

briefs and supplemental briefs filed in support of and in

opposition to the Petition, the official record of

proceedings in the OAH, the arguments of counsel at the

hearing, the applicable law, and other appropriate

matters of record, concludes that the Petition should be

GRANTED and the Final Decision should be

REVERSED.

Graebe Hanna & Sullivan, PLLC by Douglas W.

Hanna and Akerman, LLP by Michael Bowen for

Petitioner Quad Graphics, Inc.

The North Carolina Department of Justice by

Terence Friedman and Matthew Sommer for

Respondent North Carolina Department of Revenue.

McGuire, Judge.

I. FACTS AND PROCEDURAL BACKGROUND

1.

The facts giving rise to this lawsuit are not in

dispute. Petitioner is an S-Corporation headquartered in

Sussex, Wisconsin. Petitioner is engaged in the business

of the commercial printing of books, magazines, catalogs,

and items for direct mail (“printed materials”) to

customers throughout the United States. (Rec., at pp.

192–93, 200.) Petitioner sold printed materials to

customers in North Carolina and to customers who had

printed materials delivered to third-party recipients with

North Carolina addresses (“direct mail”) during the

period September 1, 2009 through December 31, 2011 (the

“Sales at Issue”). (Id. at pp. 245, 551–56.) Petitioner’s

customers provided Petitioner with the addresses for the

48a

direct mail recipients in North Carolina via mailing lists.

(Id. at pp. 200–01, 244.)

2.

It is undisputed that Petitioner received the

orders for the Sales at Issue from a customer, produced

the printed materials at facilities located outside of North

Carolina, and then delivered the printed materials to the

United States Postal Service (“USPS”) or another

common carrier at sites outside of North Carolina.2 (Id. at

p. 224.) The USPS or common carrier would, in turn,

deliver the printed materials to either the customers or

the third-party direct mail recipients inside North

Carolina. (Id. at pp. 200–01, 244.) The contracts between

Petitioner and its customers stated that title to the

printed materials, and risk of loss, passed from Petitioner

to the customers when the printed materials were

deposited on the carrier’s shipping dock.3 (Id. at pp. 326,

335, 684–85.)

3.

In August 2009 Petitioner hired a North

Carolina resident, Edward Waters (“Waters”), as a sales

representative. Waters “solicited orders for printed

materials from North Carolina customers[.]” (Id. at pp.

245, 260, 555.) Waters did not have authority to accept or

approve orders, as all orders were approved and accepted

at Petitioner’s headquarters in Wisconsin. (Id. at p. 244.)

Prior to hiring Waters, Petitioner had no employees nor

any other physical presence in North Carolina. (Id. at pp.

202, 224, 239.)

4.

In or around 2011, Respondent North Carolina

Department of Revenue (the “Department”) notified

Petitioner did not have a printing facility in North Carolina until

2013 when it purchased the assets of a company called Vertis. (Rec.,

at p. 224.)

3

This type of contractual shipping arrangement is commonly

referred to as Free On Board or Freight On Board Shipping Point

(“FOB Shipping”).

2

49a

Petitioner of its intent to conduct an audit related to

Petitioner’s business activities within North Carolina. (Id.

at p. 480.) On November 12, 2015, the Department issued

a Notice of Sales and Use Tax Assessment to Petitioner

for uncollected and unremitted sales tax arising from

sales of printed materials to North Carolina customers for

the period January 1, 2007 to December 31, 2011 (the

“Initial Assessment”). (Id. at p. 635.) Petitioner appealed

the Initial Assessment by filing a request for

Departmental Review. (Id. at p. 43.)

5.

During the Departmental Review, the

Department received additional information from

Petitioner and concluded that certain sales should be

excluded from the Initial Assessment. (Id.) Specifically,

the Department removed those sales shipped to North

Carolina customers for which Petitioner provided

sufficient documentation demonstrating that the

transactions were sales for resale by those customers.

(Id.) The Department also removed those sales that

occurred before Petitioner hired Waters in August 2009.4

(Id.) The Department adjusted the Proposed Assessment

to reflect these changes, and on November 30, 2018 issued

a Notice of Final Determination. (“NOFD,” Rec., at pp.

686–93; upholding the assessment of sales tax on the Sales

at Issue.)

6.

Petitioner appealed the NOFD by filing a

Petition for Contested Tax Case with the OAH. (Id. at pp.

5–12.) Petitioner and the Department both moved for

summary judgment, and on June 24, 2020, the OAH

issued its Final Decision granting summary judgment in

favor of the Department, denying Petitioner’s motion for

summary judgment, and upholding the assessment of

The Department determined that, prior to Petitioner’s hiring of its

resident sales representative in North Carolina, Petitioner did not

have a sufficient sales tax nexus with North Carolina. (Rec., at p. 641.)

4

50a

sales tax on the Sales at Issue. (Id. at pp. 938–947.) The

OAH concluded that the Petitioner was a “retailer” as

defined under N.C.G.S. § 105-164.3(35)(a) (2010)5 (Id. at p.

942), and that the Sales at Issue were properly sourced to

North Carolina under N.C.G.S. §§ 105-164.4B(a)(2) and

(d)(2)(b) (2010). (Id. at pp. 944–45.) In addition, while

acknowledging that she was “barred” from ruling on

Petitioner’s constitutional challenges to the NOFD, the

administrative law judge (“ALJ”) nevertheless opined

that the physical presence of Petitioner’s sales

representative in North Carolina created a sufficient

constitutional nexus with the State to support the State’s

imposition of sales tax on the Sales at Issue.6 (Id. at pp.

942–44.)

7.

On July 24, 2020, Petitioner timely filed its

Petition for Judicial Review of the Final Decision

pursuant to N.C.G.S. §§ 105-241.16 and 7A-45(b)–(f).

(ECF No. 3.) On the same day, the case was designated as

a mandatory complex business case, and assigned to the

Honorable Louis A. Bledsoe, III, Chief Business Court

Judge. (ECF Nos. 1–2.) On August 20, 2020, Petitioner

filed the Amended Petition for Judicial Review. (ECF No.

9.)

8.

On September 24, 2020, the parties filed the

stipulated official record of the proceedings in the Office

of Administrative Hearings. (Stipulation Regarding

For purposes of this Order and Opinion, the Court refers to the

provisions of the North Carolina Sales and Use Tax Act (the “Act”) in

effect during the period September 1, 2009 through December 31,

2011. The Court’s use of the present tense in discussing these statutes

is not intended to mean that the discussion applies to the current

version of the statute to the extent the statute has been amended

effective after December 31, 2011.

6

It is well established that in North Carolina, constitutional

questions must be resolved by the courts and not by the State’s

administrative agencies. In re Redmond, 369 N.C. 490, 493 (2017).

5

51a

Contents of Record, ECF No. 26; Official Record, ECF

Nos. 27–36.)

9.

On October 2, 2020, the Court issued an Order

and Opinion on various motions filed by Petitioner and the

Department which, among other things, denied the

Department’s motion to dismiss the Amended Petition for

Judicial Review. (Ord. and Op. on Respd.’s Mot. to Dism.

Petition, Respd.’s Mot. to Stay, and Petitioner’s Mot. for

Ext. Time to Serve Resp. with Pet. For Jud. Rev., ECF

No. 41.)7

10. On October 26, 2020, Petitioner filed its Brief in

Support of Petition for Judicial Review. (“Brief in

Support,” ECF No. 42.) On November 30, 2020, the

Department filed its Response in Opposition to

Petitioner’s Petition for Judicial Review on the Merits.

(“Response Brief,” ECF No. 43.) On December 10, 2020,

Petitioner filed its Reply Brief. (“Reply Brief,” ECF No.

45.)

11. On January 6, 2021, this matter was reassigned

to the undersigned. (Reassignment Ord., ECF No. 46.)

The parties came before the Court for a hearing on the

Amended Petition for Judicial Review on February 2,

2021.

12. On May 27, 2021, the Court issued a Notice to

Provide Supplemental Briefing. (ECF No. 49.) On June

11, 2021, Petitioner and the Department filed

supplemental briefs. (Respondent’s Suppl. Br., ECF No.

50; Petitioner’s Suppl. Br., ECF No. 51.)

13. The matter is now ripe for review.

The Court also granted Petitioner’s Motion for Extension of Time

to Serve Respondent with Petition for Judicial Review (ECF No. 20)

and denied the Department’s Motion to Stay (ECF No. 13). (ECF No.

41, at ¶ 22.)

7

52a

II. LEGAL STANDARD

14. Petitioner appeals the Final Decision granting

summary judgment in favor of the Department. “A party

aggrieved by the final decision in a contested case

commenced at the Office of Administrative Hearings may

seek judicial review of the decision in accordance with

Article 4 of Chapter 150B of the General Statutes.”

N.C.G.S. § 105-241.16. Under Chapter 150B, the task

before this Court is to “determine whether the petitioner

is entitled to the relief sought in the petition based on [a]

review of the final decision and the official record.”

N.C.G.S. § 150B-5l(c).

15. “In reviewing a final decision allowing . . .

summary judgment, the court may enter any order

allowed by . . . Rule 56” of the North Carolina Rules of

Civil Procedure. N.C.G.S. § 150B-51(d). “Appeals arising

from summary judgment orders are decided using a de

novo standard of review.” Midrex Techs., Inc. v. N.C.

Dep’t of Revenue, 369 N.C. 250, 257 (2016) (citation

omitted). “Under the de novo standard of review, the

[Court] ‘consider[s] the matter anew[] and freely

substitut[es] its own judgment for’ [that of the lower

court].” Id. at 257 (alterations in original) (citation

omitted).

16. Under North Carolina law, summary judgment

“shall be rendered forthwith if the pleadings, depositions,

answers to interrogatories, and admissions on file,

together with the affidavits, if any, show that there is no

genuine issue as to any material fact and that any party is

entitled to a judgment as a matter of law.” N.C.G.S. § lA1, Rule 56(c). A genuine issue is “one that can be

maintained by substantial evidence.” Dobson v. Harris,

352 N.C. 77, 83 (2000). A material fact is one that “would

constitute or would irrevocably establish any material

element of a claim or defense.” Abner Corp. v. City

53a

Roofing & Sheetmetal Co., 73 N.C. App. 470, 472 (1985).

Summary judgment is appropriate if “the facts are not

disputed and only a question of law remains.” Wal-Mart

Stores East v. Hinton, 197 N.C. App. 30, 37 (2009)

(citation omitted).

17. Further, with respect to the standards

applicable to this Court’s consideration of constitutional

challenges, our appellate courts have held that “[a] law is

presumed constitutional until the contrary is shown and

the burden is on the party claiming that the law is

unconstitutional to show why it is unconstitutional as

applied to him.” Perry v. Perry, 80 N.C. App. 169, 176

(1986).

III. ANALYSIS

18. In this appeal, Petitioner raises two arguments.

First, Petitioner contends that the OAH erroneously held

that Petitioner was a “Retailer” under the provisions of

N.C.G.S. § 105-164.3(35)(a) (2010) that was required to

pay sales taxes to North Carolina on the Sales at Issue

under the Act. (Id. at pp. 6–12.) Petitioner argues that

“this set of facts forms the basis for use tax liability for

the customers of Petitioner” but “not a retail sales tax

assessment.”8 (Id., at p. 2 (emphasis in original).)

19. Second,

Petitioner

argues

that

the

Department’s assessment of sales taxes on the Sales at

Issue is unconstitutional under the Due Process Clause

The North Carolina Sales and Use Tax Act “imposes a use tax on

items purchased outside the state and thus not subject to [sales] tax,

which are brought into the state for ‘storage use and consumption’

here.” In re Assessment of Additional North Carolina & Orange

County Use Taxes, 312 N.C. 211, 215 (1984), appeal dismissed, 472

U.S. 1001, 105 S. Ct. 2693, 86 L. Ed. 2d (1985); see also N.C.G.S. § 105164.6 (2010). The Department is not seeking to assess a use tax on the

Sales at Issue.

8

54a

and the Commerce Clause of the United States

Constitution. (Id. at pp. 12–22.) Both of Petitioner’s

arguments are grounded in its position that although the

printed materials were sold to customers for use or

consumption in North Carolina, it is undisputed that title

and possession of the printed materials took place outside

the State. Petitioner contends that since title and

possession passed outside of North Carolina, the “sales”

occurred outside of North Carolina.

20. The Court will first analyze Petitioner’s claim

that the OAH misapplied the provisions of the Act in

deciding that Petitioner is a “retailer” subject to North

Carolina’s sales tax, and second, the Court will analyze

whether the imposition of sales tax on the Sales at Issue

comports with the requirements of the United States

Constitution.

A. OAH’s conclusion that Petitioner was a

“Retailer” under N.C.G.S. § 105-164.3(35) (2010)

21. Determination of Petitioner’s statutory

argument will require the Court to interpret the relevant

and overlapping provisions of the Act regarding the sales

and use taxes that were in effect during the relevant time

period. The Supreme Court of North Carolina

summarized the basic principles used by our courts when

interpreting the language in a statute as follows:

[q]uestions of statutory interpretation are

ultimately questions of law for the courts . . . . The

principal goal of statutory construction is to

accomplish the legislative intent. The best indicia

of that intent are the language of the statute, the

spirit of the act and what the act seeks to

accomplish. The process of construing a

statutory provision must begin with an

examination of the relevant statutory language.

55a

It is well settled that where the language of a

statute is clear and unambiguous, there is no

room for judicial construction and the courts

must construe the statute using its plain

meaning. In other words, if the statutory

language is clear and unambiguous, the court

eschews statutory construction in favor of giving

the words their plain and definite meaning.

Wilkie v. City of Boiling Spring Lakes, 370 N.C. 540, 547

(2018) (cleaned up); see also N.C. Dep’t of Corr. v. N.C.

Med. Bd., 363 N.C. 189, 201 (2009) (“When the language

of a statute is clear and without ambiguity, it is the duty

of this Court to give effect to the plain meaning of the

statute, and judicial construction of legislative intent is

not required. However, when the language of a statute is

ambiguous, this Court will determine the purpose of the

statute and the intent of the legislature in its

enactment.”).

22. “Usually, words of a statute will be given their

natural, approved, and recognized meaning.” Wilkie, 370

N.C. at 550. “Courts should give effect to the words

actually used in a statute and should neither delete words

used nor insert words not used in the relevant statutory

language during the statutory construction process.”

Midrex Techs., 369 N.C. at 258 (cleaned up). The court

should “give every word of the statute effect, presuming

that the legislature carefully chose each word used.” N.C.

Dep’t of Corr., 363 N.C. at 201.

23. Finally, special rules of construction apply

where the statute at issue is one concerning taxation.

Accordingly, “[t]ax statutes are to be strictly construed

against the State and in favor of the taxpayer.” Wal-Mart

Stores East, Inc., 197 N.C. App. at 42 (internal citations

omitted). “If a taxing statute is susceptible to two

constructions, any uncertainty in the statute or legislative

56a

intent should be resolved in favor of the taxpayer.” Lenox,

Inc. v. Tolson, 353 N.C. 659, 664 (2001).

24. There are several statutory provisions relevant

to the determination of Petitioner’s first argument. The

Act imposes a privilege tax on the net taxable sales or

gross receipts of “tangible personal property” by a

“retailer.” N.C.G.S. § 105-164.4 (2010).9 Under the Act, a

“retailer” is defined, in pertinent part, as follows:

A person engaged in the business of any of the

following:

a. Making sales at retail, offering to make sales

at retail, or soliciting sales at retail of tangible

personal property, digital property, or services

for storage, use, or consumption in this State.

N.C.G.S. § 105-164.3(35)(a) (2010).

25. The Act further defines various terms within the

definition of “retailer.” A “person” is defined as “[a]n

individual, . . . a limited liability company, a corporation, .

. . or another group acting as a unit.” Id. at § 105-164.3(26)

(referring to N.C.G.S. § 105-228.90 (2010)). A “sale” is

defined as “[t]he transfer for consideration of title or

possession of tangible personal property or digital

property or the performance for consideration of a

service.” Id. at § 105-164.3(36) (2010). A “sale at retail” or

“retail sale” is “[t]he sale, lease, or rental for any purpose

other than for resale, sublease, or subrent.” Id. at § 105164.3(34) (2010). “Tangible personal property” is defined

as “personal property that may be seen, weighed,

The Act also clarifies that a "Complimentary use tax" at the same

rate that applies to the sale of a product under § 105-164.4 is imposed

where property is purchased outside the State for “storage, use, or

consumption in this State.” N.C.G.S. § 105-164.6 (2010). “A product is

subject to [a complimentary use tax] only if it is subject to tax under

[§] 105-164.4.” Id.

9

57a

measured, felt, or touched or is in any other manner

perceptible to the senses” Id. at § 105-164.3(46) (2010),

which includes “direct mail,” defined as “printed material

delivered or distributed by the [USPS] or other delivery

service to a mass audience or to addresses on a mailing

list by the purchaser or at the direction of the purchaser

when the cost of the items is not billed directly to the

recipients.” Id. at § 105-164.3(7c) (2010). A retailer is

“engaged in business” in North Carolina if it

“permanently or temporarily” maintains “any

representative, agent, sales representative, or solicitor

operating in this State in the selling or delivering” of

tangible personal property. Id. at § 105-164.3(9)(a) (2010).

26. Here, it is undisputed that Petitioner is a

“person” (Rec., at pp. 192, 248); that the Sales at Issue

involve “tangible personal property” or “direct mail” (Id.

at p. 553); that the Sales at Issue were “sales” as defined

in N.C.G.S. § 105-164.3(36) (Id. at p. 276); that Petitioner

“engaged in business” in North Carolina by having a

resident sales representative in North Carolina selling its

products; and that the printed materials were stored,

used, and consumed in this State (ECF No. 42, at p. 11).

27. Nevertheless, Petitioner argues that the OAH

improperly held that Petitioner was a “retailer” under §

105-164.3(35)(a) (2010) because Petitioner did not make

the Sales at Issue in North Carolina. Petitioner first

argues that the Act defines a “sale” as “the transfer for

consideration of title or possession of tangible personal

property.” (ECF No. 42, at p. 8.) Petitioner contends that

it is undisputed that under the terms of its agreements

with its customers, title and possession of the printed

materials occurred when Petitioner delivered the printed

materials to the USPS or other common carrier outside of

58a

North Carolina for delivery to customers and third­ party

recipients in North Carolina.10 (Id. at p. 10.)

28. Petitioner next argues that in order to be a

“retailer” under § 105-164.3(35) a person must make sales

“in this State,” and because the transfer of title and

possession to the printed materials took place outside of

North Carolina, Petitioner cannot be a “retailer” under §

105-164.3(35). (ECF No. 42, at p. 9; ECF No. 45, at p. 3.)

In other words, under Petitioner’s interpretation, in order

to be classified as a “retailer” under § 105-164.3(35), it

must be making sales in which transfer of title or

possession of the tangible personal property occurs in

North Carolina.

29. In response, the Department contends that “it

is without question that Petitioner is a ‘retailer’” under §

105-164.3(35). (ECF No. 43, at p. 13.) Specifically, the

Department argues that Petitioner attempts to

impermissibly “expand[ ] the definition of ‘sale’ to require

that transfer of title and possession occur in the state

before [North Carolina] can impose sales tax on the

transaction,” which is “inconsistent with the General

Assembly’s intent that [North Carolina] be a destinationbased sales tax state[.]” (Id. at p. 15.) In support of this

argument, the Department cites to § 105-164.4B, which

“expressly provides the principles for determining ‘where

to source the sale of a product.’” (Id. (emphasis in original)

The undisputed facts show that Petitioner delivered its printed

materials to USPS or other common carrier “F.O.B.” at the point of

shipment. North Carolina has held that such terms mean that title to

the shipped goods transfers at the place of shipment. Duke Power Co.

v. Clayton, 274 N.C. 505, 516–517 (1968); Petrus Machinery, Inc. v.

Radiator Specialty Co., 257 N.C. 85, 86 (1962) (“Where the contract

of sale provides for a sale f.o.b. the point of shipment, the title is

generally held to pass, in the absence of a contrary intention between

the parties, at the time of the delivery of the goods for shipment at

the point designated.”).

10

59a

(citing to N.C.G.S. § 105-164.4B(a) (2010)).) The

Department also cites to § 106-164.8, which imposes, inter

alia, obligations on a retailer to collect sales and use tax

in certain circumstances where sales are contracted or

accepted outside North Carolina with the intent that they

be brought into North Carolina for storage, use, or

consumption in this State. (Id. at p. 16 (citing N.C.G.S. §

105-164.8(a)(2), (4), (6) (2010).)

30. The Court has closely considered the arguments

raised by both parties and concludes that Petitioner’s

contention that the term “in this State”, as used in § 105164.3(35), requires that transfer of title or possession

must take place within North Carolina in order for a

person to be considered a “retailer” is untenable. First,

and most significantly, the Act imposes both a sales and a

use tax on retailers. In other words, a retailer, as defined

by N.C.G.S § 105-164.3(35), includes persons making sales

of tangible personal property that is used, consumed, or

stored in North Carolina whether or not the sale occurs

inside North Carolina.

31. In addition, a plain reading of the sentence at

issue makes clear that the term “for storage, use, or

consumption in this State” applies to the language in the

phrase in which it is situated and does not limit the terms

“[m]aking sales at retail, offering to make sales at retail,

or soliciting sales at retail” in the first phrase in the

sentence. See N.C.G.S. § 105-164.3(35) (emphasis added).

“Ordinary rules of grammar apply when ascertaining the

meaning of a statute[.]” Winkler v. N.C. State Bd. of

Plumbing, 261 N.C. App. 106, 111 (2018). The “last

antecedent rule” is one such example. See HCA

Crossroads Residential Ctrs. v. N.C. Dep’t of Human

Resources, etc., 327 N.C. 573, 578 (1990); Wilkie, 370 N.C.

at 546–49; Novant Health, Inc. v. Aetna U.S. Healthcare

of the Carolinas, Inc., 2001 NCBC LEXIS 1, at *12 (N.C.

Super. Ct. Mar. 8, 2001); R.R. Friction Prods. Corp. v.

60a

N.C. Dep’t of Revenue, 2019 NCBC LEXIS 13, at *28

(N.C. Super. Ct. Feb. 21, 2019), aff’d per curiam, 374 N.C.

208 (2020).

32. Under the last antecedent rule, “relative and

qualifying words, phrases, and clauses ordinarily are to be

applied to the word or phrase immediately preceding and,

unless the context indicates a contrary intent, are not to

be construed as extending to or including others more

remote.” HCA Crossroads Residential Ctrs., 327 N.C. at

578. Here, applying the term “in this State” to its last

antecedent in the sentence, the statute expands the scope

of the definition of “retailer” to include persons making

sales of tangible personal property outside of North

Carolina where that property will be used, consumed, or

stored within North Carolina. It does not limit “retailer”

only to persons making sales within North Carolina.

33. In addition, the definition of “retailer” must be

read in conjunction with the other provisions of the Act.

See Huntington Props., LLC v. Currituck Cty., 153 N.C.

App. 218, 224 (2002) (“Portions of the same statute dealing

with the same subject matter are to be considered and

interpreted as a whole, and in such case it is the accepted

principle of statutory construction that every part of the

law shall be given effect if this can be done by any fair and

reasonable intendment.” (cleaned up). Section 105-164.6,

titled “Complimentary use tax,” expressly provides the

authority for North Carolina to collect a use tax from

retailers on tangible personal property sold outside of

North Carolina for use, consumption, or storage in North

Carolina. Section 105-164.6 provides, in pertinent part, as

follows:

(a)

Tax. – An excise tax at the applicable rate

set in [N.C.]G.S. [§] 105-164.4 is imposed on the

products listed below. The applicable rate is the

rate and maximum tax, if any, that would apply

61a

to the sale of a product. A product is subject to

tax under this section only if it is subject to tax

under [N.C.]G.S. [§] 105-164.4.

(1) Tangible personal property or digital

property purchased inside or outside this State

for storage, use, or consumption in this State.

N.C.G.S. § 105-164.6 (2010) (emphasis added). The logical

construction of these two separate sections of the Act

leads to the conclusion that the definition of “retailer”

does not include the requirement that a retailer’s “sales”

occur solely “in this State.”

34. Section 105-164.8 also lends support to the

Court’s construction of the definition of “retailer.” That

section provides, in pertinent part, as follows:

A retailer is required to collect the tax imposed

by this Article notwithstanding any of the

following:

...

(2) That the purchaser’s order or the contract of

sale is made or closed by acceptance or approval

outside this State, or before any tangible

personal property or digital property that is part

of the order or contract enters this State.

...

(4) That the property is mailed to the purchaser

in this State or a point outside this State or

delivered to a carrier outside this state f.o.b. or

otherwise and directed to the purchaser in this

State regardless of whether the cost of

transportation is paid by the retailer or by the

purchaser.

...

62a

(6) Any combination in whole or in part of any

two or more of the foregoing statements of fact,

if it is intended that the property purchased be

brought into this State for storage, use, or

consumption in this State.

N.C.G.S. §§ 105-164.8(a)(2), (4), (6) (2010).

35. These provisions directly address a retailer’s

obligation to collect taxes under the precise circumstances

present here, where a seller transfers title or possession

of the products to North Carolina purchasers at a location

outside of North Carolina on F.O.B. terms. Again, these

requirements are not consistent with Petitioner’s

construction of N.C.G.S. § 105-164.3(35) (2010).

36. Therefore, the Court concludes that the OAH

correctly found Petitioner to be a “retailer” within the

meaning of N.C.G.S. § 105-164.3(35) (2010).

B. Constitutional Arguments

37. Petitioner next argues that North Carolina’s

assessment of sales tax on the Sales at Issue—where it is

undisputed that title and possession transferred to North

Carolina purchasers and third-party recipients outside of

the State—is unconstitutional under the Commerce

Clause in light of the United States Supreme Court’s

holding in McLeod v. J.E. Dilworth Co., 322 U.S. 327

(1944) (precluding sales tax liability on Commerce Clause

grounds where out-of-state goods were delivered by

common carrier into the state and title and possession to

the goods transferred to purchaser outside of the taxing

state) (further analyzed infra). (ECF No. 42, at pp. 12–22;

ECF No. 45, at pp. 4–12.)11 The Department, of course,

Petitioner also brought a Due Process Clause challenge; however,

the Court need only address Petitioner’s Commerce Clause argument

to reach its decision.

11

63a

argues that the Sales at Issue were properly sourced to

North Carolina under N.C.G.S. § 105-164.4B (2010), and

that “it is readily apparent that N.C.’s sales tax statutes

meet the constitutional requirements under . . . the

Commerce Clause[.]” (ECF No. 43, at pp. 20–24.)

38. Preliminarily, the Court will address whether

the Commerce Clause issue poses either a facial or an asapplied challenge to North Carolina’s sales and use tax

statutes. The Supreme Court of North Carolina has held:

[a]n as-applied challenge contests whether the

statute can be constitutionally applied to a

particular defendant, even if the statute is

otherwise generally enforceable. A facial

challenge maintains that no constitutional

applications of the statute exist, prohibiting its

enforcement in any context. The constitutional

standards used to decide either challenge are the

same.

State v. Packingham, 368 N.C. 380, 383 (2015). Although

Petitioner does not expressly label its constitutional

challenges as either as-applied or facial, it does state that

[i]n this case, the Department assessed sales tax

to the Petitioner based on the fact that the

property was used – or enjoyed – by Petitioner’s

customers in North Carolina. The assessment in

this case violates the Commerce Clause because

it imposes a sales tax on transactions – the

passage of title and possession – occurring wholly

outside North Carolina.

(ECF No. 9, at p. 2 (emphasis added).) Accordingly, the

Court interprets Petitioner’s constitutional argument as

an “as-applied” challenge and will assess whether the

Department’s application of North Carolina’s thenapplicable sales and use tax statutes to the Sales at Issue

was constitutional under the Commerce Clause.

64a

39. To reach its decision, the Court need only

answer one question: is the holding in Dilworth the

controlling law. At the request of the Court, the parties

submitted supplemental briefing on this issue. (ECF Nos.

50 and 51.) Before directly addressing this question, the

Court will first provide necessary background.

i. The Department’s sourcing of the Sales at Issue

to North Carolina

40. Here, the Department in the NOFD and the

OAH in the Final Decision found that the Sales at Issue

were properly sourced to North Carolina under N.C.G.S.

§ 105-164.4B (2010) and, therefore, concluded that the

State properly assessed a sales tax on Petitioner for the

Sales at Issue. (Rec., at pp. 17, 944–45.) This sourcing

statute provides, in relevant part, as follows:

(a) General Principles – The following principles

apply in determining where to source the sale of

a product.

...

(2) Delivery to a specified address – When a

purchaser receives a product at a location

specified by the purchaser . . . , the sale is sourced

to the location where the purchaser receives the

product.

N.C.G.S. § 105-164.4B(a)(2) (2010). The sourcing

principles also provide that “direct mail . . . is sourced to

the location where the property is delivered” where “the

purchaser provides the seller with information to show

the jurisdictions to which the direct mail is to be

delivered.” N.C.G.S. § 105-164.4B(d)(2) (2010).

41. Under the language in §§ 105-164.4B(a)(2) and

(d)(2), the Sales at Issue are sourced to the location where

the purchaser “receives” the printed materials, or the

65a

address where the printed materials are “delivered.”

Petitioner contends that the printed materials are

“receive[d]” or “delivered” at the location where title and

possession transfers, which in the case of the Sales at

issue, was a location outside North Carolina. (ECF No. 45,

at pp. 3–4.) The Department contends that the printed

materials are “received” or “delivered” at their ultimate

destination, which in the case of the Sales at Issue, was

North Carolina. (ECF No. 43, at p. 20.) While framed as

statutory arguments, the parties’ arguments regarding

N.C.G.S. § 105-164.4B have constitutional implications. If

Petitioner’s Commerce Clause argument prevails, the

Department’s reading of the statute would lead to an

unconstitutional application against Petitioner for the

imposition of sales tax on the Sales at Issue.

42. While neither “receives” nor “delivered” is

defined in the Act, our Supreme Court has stated:

[t]he cardinal principal of statutory construction

is to save and not to destroy. We have repeatedly

held that as between two possible interpretations

of a statute, by one of which it would be

unconstitutional and by the other valid, our plain

duty is to adopt that which will save the act. Even

to avoid a serious doubt the rule is the same.

In re Dairy Farms, 289 N.C. 456, 465 (1976) (citation and

internal quotation marks omitted) (emphasis added); see

also State v. T.D.R., 347 N.C. 489, 498 (“Where one of two

reasonable constructions of a statute will raise a serious

constitutional question, it is well settled that our courts

should adopt the construction that avoids the

constitutional question.”); Appeal of Arcadia Dairy

Farms, Inc., 289 N.C. 456, 465–66 (applying the same

principle to an as-applied challenge to the North Carolina

constitution). Thus, the Court inevitably must determine

whether the Department’s interpretation of N.C.G.S. §

66a

105-164.4B (2010) to source the Sales at Issue to North

Carolina comports with the Commerce Clause.

ii. Commerce Clause

43. The Commerce Clause of Article Three of the

United States Constitution authorizes Congress to

“regulate Commerce with foreign Nations, and among the

several States.” U.S. CONST. art. I, § 8, cl. 3. Along with

its affirmative application, the Commerce Clause also

includes a “negative sweep” which “prohibits certain state

actions that interfere with interstate commerce.” Quill

Corp v. North Dakota, 504 U.S. 298, 309 (1992). Under the

so-called “dormant” Commerce Clause, in order for a

state to impose a tax on an interstate transaction, the tax

must (1) be “applied to an activity with a substantial nexus

with the taxing state”; (2) be “fairly apportioned”; (3) “not

discriminate against interstate commerce”; and (4) be

“fairly related to the services provided by the state.”

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279

(1977).

44. There are two considerations in determining

whether a “substantial nexus” exists between a state and

the tax it wishes to impose: a “personal nexus” (i.e., a

nexus between the state and the taxpayer) and a

“transactional nexus” (i.e., a nexus between the state and

the activity being taxed). Hayes R. Holderness,

Navigating 21st Century Tax Jurisdiction, 79 MD. L.

REV. 1, 7–18 (2019); see also R. Rosen & Marc D.

Bernstein, State Taxation of Corporations: The Evolving

Danger of Attributional Nexus, 41 TAX EXECUTIVE 533,

534 (1989) (referring to the concepts as “presence nexus”

and “transactional nexus”); Walter Hellerstein,

Jurisdiction to Tax Income and Consumption in the New

Economy: A Theoretical and Comparative Perspective,

38 GA. L. REV. 1, 3 (2003) (referring to the concepts as

“enforcement

jurisdiction”

and

“substantive

67a

jurisdiction”); see also MeadWestvaco Corp. v. Ill. Dep’t

of Revenue, 553 U.S. 16, 25 (2008) (“Where, as here, there

is no dispute that the taxpayer has done some business in

the taxing State, the inquiry shifts from whether the State

may tax to what it may tax” (emphasis added)); AlliedSignal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 778

(1992) (“[A]lthough our modern . . . jurisprudence rejects

a rigid, formalistic definition of minimum connection, we

have not abandoned the requirement that, in the case of a

tax on an activity, there must be a connection to the

activity itself, rather than a connection only to the actor

the State seeks to tax.”); American Bus USA Corp. v.

Dep’t of Rev., 151 So. 3d. 67 (Fl. Ct. App. 2014) (finding

that the taxpayer had a nexus with Florida, but holding

that the taxing statute as applied to the taxpayer violated

the nexus mandate of Complete Auto; that is, the

“activity” must have a nexus with the taxing state).

45. Here, Petitioner concedes that it has a personal

nexus with North Carolina. (ECF No. 45, at p. 6.)

Nevertheless, Petitioner argues that this is “only half of

the constitutional inquiry. The remaining dispositive

question . . . is whether North Carolina has a

constitutionally sufficient nexus with the disputed

transactions.” (Id. (emphasis in original).) Specifically,

Petitioner contends “the controlling transactional nexus

cases” of Dilworth and General Trading Co. v. State Tax

Commission of Iowa, 322 U.S. 335 (1944) render North

Carolina’s transactional nexus with the Sales at Issue

insufficient to impose a sales tax on the Sales at Issue.

(ECF No. 45, at p. 5; ECF No. 42, at pp. 18–22.) In

response, the Department denies that there is a

transactional nexus requirement under the Commerce

Clause (ECF No. 43, at p. 22), and further argues in its

supplemental brief that Dilworth is no longer good law

(ECF No. 50, at p. 2). To assess these arguments, the

68a

Court must analyze and determine the continuing vitality

of Dilworth and its companion case, General Trading.

iii. Dilworth and General Trading

46. In Dilworth, the United States Supreme Court

considered whether Arkansas could assess a sales tax on

a Tennessee corporation for certain transactions between

the company and residents of Arkansas. 322 U.S. at 327–

28. The corporation had no physical presence in Arkansas

and was not authorized to do business in Arkansas. Id. at

328. Orders from Arkansas residents were made “through

solicitation in Arkansas by a traveling salesman domiciled

in Tennessee, by mail or telephone.” Id. The orders

required acceptance by the corporation’s office in

Memphis, Tennessee. Id. The corporation’s products

were shipped by delivery to a carrier in Tennessee, and

title passed to the purchaser “in Memphis” upon delivery

of the products to the carrier. Id. The Supreme Court of

Arkansas held that imposition of sales tax on these

transactions by Arkansas was precluded by the

Commerce Clause. Id. at 327. The United States Supreme

Court affirmed, stating:

we would have to destroy both business and legal

notions to deny that under the circumstances of

the sale – the transfer of ownership – was made

in Tennessee. For Arkansas to impose a tax on

such transaction would be to project its powers

beyond its boundaries and to tax an interstate

transaction.

...

A sales tax is a tax on the freedom of purchase . .

. . A use tax is a tax on the enjoyment of that

which was purchased. In view of the differences

in the basis of these two taxes and the differences

in the relation of the taxing state to them, a tax

69a

on an interstate sale like the one before us and

unlike the tax on the enjoyment of goods sold,

involves an assumption of power by a state which

the Commerce Clause was meant to end.

Id. at 330.

47. Conversely, in General Trading, Iowa imposed

a use tax on goods purchased from a Minnesota company

by Iowa residents. 322 U.S. at 336. The Iowa statute at

issue required “every retailer maintaining a place of

business in Iowa to collect the use tax from the

purchaser.” Id. (cleaned up). The company had no

physical presence in Iowa. Id. at 337. “The property on

which the use tax was laid was sent to Iowa as a result of

orders solicited by traveling salesmen sent into Iowa from

[the company’s] Minnesota headquarters. The orders

were always subject to acceptance in Minnesota whence

the goods were shipped into Iowa by common carriers or

the post.” Id. The Iowa Supreme Court held that the

company “was a ‘retailer maintaining a place of business

in this state’ within the meaning of the Iowa statute , . . .

[and] that Iowa had not exceeded its powers in the

imposition of this use tax on Iowa purchasers, and that

collection could validly be made” from the company. Id.

The United States Supreme Court agreed, and held that

Iowa’s use tax did not violate the Commerce Clause,

concluding that

[t]he tax is what it professes to be -- a nondiscriminatory excise laid on all personal

property consumed in Iowa. The property is

enjoyed by an Iowa resident partly because the

opportunity is given by Iowa to enjoy property no

matter whence acquired. The exaction is made

against the ultimate consumer -- the Iowa

resident who is paying taxes to sustain his own

state government. To make the distributor the

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tax collector for the State is a familiar and

sanctioned device.

Id. at 338.

48. Thus, in Dilworth and in General Trading the

states imposed different taxes (i.e., sales versus use) and

the Court reached different results, with the only

significant difference being that in Dilworth, Arkansas

did not have a sufficient transactional nexus with the sales

where title to the products transferred outside of

Arkansas, while in General Trading, Iowa clearly had a

sufficient nexus to tax the in­state use of the products by

Iowa residents.

49. Relying on these precedents, Petitioner

summarizes its argument as follows:

[t]he facts of this case are substantially

indistinguishable from the pertinent facts in

Dilworth and are in direct contrast to those in

General Trading Co. and Excel [Inc. v. Clayton,

269 N.C. 127 (1967)].12 In Dilworth, as in this

case, though orders were solicited in the taxing

state, all orders for tangible personal property

were accepted and approved outside the taxing

state, and legal title and possession of the

tangible personal property passed to the

purchasers outside the taxing state. In Dilworth

and in this case, the tax assessed was a sales tax

– not a use tax. There is simply no

constitutionally significant distinction between

In Excel, the Supreme Court of North Carolina addressed whether

certain purported interstate transactions were subject to sales tax.

269 N.C. 127 (1967). Notably, the Court found that because the outof-state purchasers arranged for pickup of the products “f.o.b.

Lincolnton,” North Carolina, the products “were delivered to [the

purchasers] in North Carolina, the taxing jurisdiction.” Id. at 134.

Accordingly, the Court held that North Carolina’s assessment of a

sales tax on the transaction did not violate the Commerce Clause. (Id.)

12

71a

Dilworth and the facts of this case. Dilworth has

not been overruled by the Court and remains the

law of the land.

(ECF No. 42, at p. 22 (cleaned up).) The Court agrees with

Petitioner that, under Dilworth, “a state sales tax

survives scrutiny under the Commerce Clause only where

the purchase of tangible personal property – i.e., the

transfer of ownership from the seller to buyer – takes

place in the taxing state.” (ECF No. 51, at p. 1)

(hereinafter referred to as the “Dilworth formalism.”) If

the Dilworth formalism remains good law, then the sales

tax imposed on the Sales at Issue in this case is

unconstitutional.

iv. Arguments as to whether Dilworth remains good

law

50. First, Petitioner argues that the United States

Supreme Court has “consistently upheld” the Dilworth

formalism. (ECF No. 51, at p. 1.) Specifically, Petitioner

cites to Oklahoma Tax Comm’n v. Jefferson Lines, 514

U.S. 175, 186–87 (1995) (citing favorably to Dilworth,

stating “we [have] held that a sales tax could not validly

be imposed if the purchaser already had obtained title to

the goods as they were shipped from outside the taxing

State into the taxing State by common carrier”); Itel Cont.

Int’l Corp. v. Huddleston, 507 U.S. 60, 69–75 (1993)

(explaining that “Tennessee’s sales tax is imposed upon

the ‘transfer of title or possession,’” and that this tax “on

a discrete transaction occurring within the state” does not

implicate Foreign Commerce Clause concerns13);

Wardair Canada, Inc. v. Fla. Dep’t of Revenue, 477 U.S.

1, 9 (1986) (recognizing there is “no threat of multiple

The Foreign Commerce Clause requires satisfaction of the same

Complete Auto factors assessed in dormant Commerce Clause

analysis. See Itel Containers, 507 U.S. at 72.

13

72a

international taxation . . . since the tax is imposed only

upon the sale of fuel, a discrete transaction which occurs

within one national jurisdiction only”); American Oil Co.

v. Neill, 380 U.S. 451, 457–58 (1965) (citing favorably to

Dilworth, stating that “this Court has struck down taxes

directly imposed on or resulting from out-of-state sales

which were held to be insufficiently related to activities

within the taxing state, despite the fact that the vendor

knew that the goods were destined for use in that State”).

51. Second, Petitioner addresses the United States

Supreme Court’s most recent sales and use tax decision,

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).

(ECF No. 51, at p. 3.) Specifically, Petitioner argues that

“[t]he core holding in Dilworth . . . was not presented to

– or discussed by – the Wayfair Court.” (Id. at p. 4.)

52. On the other hand, the Department argues that

the United States Supreme Court “implicitly” overruled

Dilworth in its decision in Complete Auto. (ECF No. 50,

at p. 2.) Specifically, the Department argues that:

[i]n place of the semantic distinctions [between a

sales tax and use tax expressed in Dilworth] the

Court offered a four­ part test for evaluating the

constitutionality of a tax . . . . Thus, Complete

Auto articulated a succinct standard by which to

test the constitutionality of a tax while explicitly

eschewing the Spector14 rule and its rationale,

which encapsulated the Dilworth understanding

of the Commerce Clause. Nothing in the

Complete Auto standard turned on semantic

distinctions between sales taxes and use taxes.

Referring to Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602

(1951), where the Court made state taxation of interstate transactions

per se unconstitutional. See also, Freeman v. Hewitt, 329 U.S. 249

(1946) (invalidating a state’s gross receipt tax on interstate sales of

securities under the same rationale).

14

73a

Relying on Dilworth as binding precedent would

introduce an anachronism into modern state tax

jurisprudence by reintroducing a formal

interpretation of the Commerce Clause long

abandoned by the Court.

(ECF No. 50, at p. 7.) Further, the Department argues

that Wayfair did not expressly address Dilworth because

“it was already effectively abandoned under Complete

Auto.” (Id. at pp. 10–11.)

a. Complete Auto

53. The Court is not persuaded that Complete Auto

“implicitly” overruled Dilworth formalism. First,

Complete Auto is neither a sales tax case, nor a nexus

case. Its importance is that (1) it established an analytical

framework for Commerce Clause cases, on which every

case since has relied, see 430 U.S. at 279; and (2) it rejected

the Spector rule that a state tax on the “privilege of doing

business” is necessarily unconstitutional in the context of

interstate commerce. Id. at 288–89.

54. Accordingly, the Court acknowledges that, to

the extent Dilworth posits that taxation on interstate

commerce is per se unconstitutional, Complete Auto and

other cases have clearly overruled that aspect of its

holding. However, the Supreme Court’s rejection of the

Spector rule in Complete Auto did not explicitly overrule

Dilworth’s holding that to meet the transactional nexus

requirement under the Commerce Clause, a state sales

tax must only be imposed on sales where the transfer of

title or possession occurs within the taxing state. This

position is consistent with conclusions reached by

commentators. See Paul J. Hartman, Federal

Limitations on State and Local Taxation § 11.4 (2d ed.)

(Supp. Nov. 2020) (acknowledging that the Court in

Complete Auto “abandoned the position that any tax

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found by the Court to be imposed on interstate commerce

is a per se violation of the commerce clause” but “[u]nless

the Court changes its ideas about what constitutes a

sufficient nexus for sales tax purposes of the taxed event

to the taxing state, apparently the Dilworth holding will

remain”); Richard D. Pomp, Wayfair: It’s Implications

and Missed Opportunities, 58 WASH. U. J. L. & POL’Y 1,

53 (2019) (“[T]here is, however, another aspect of

Dilworth. The whole transaction, starting with solicitation

in Arkansas and ending with the consumer having

possession of the goods in Arkansas, constituted

interstate commerce, which, under the jurisprudence of

the day, could not be taxed. That part of the opinion was

clearly overturned by subsequent cases. But still left open

is the constitutional definition of where a sale takes

place.”).

b. Wayfair

55. With respect to Wayfair, the Court is similarly

unpersuaded that its holding has any effect on the

Dilworth formalism. In Wayfair, the United States

Supreme Court considered “when an out-of-state seller

can be required to collect and remit [a South Dakota sales]

tax” and “reconsidere[d] the scope and validity of the

physical presence rule mandated by” National Bellas

Hess v. Dep’t of Rev., 386 U.S. 753 (1967) and Quill, 504

U.S. 298, under the Commerce Clause.15 138 S. Ct. at 2088.

The physical presence rule originated in Bellas Hess, where the

Court held that in order for a tax to pass muster under the Due

Process Clause or the Commerce Clause, the taxpayer must have a

physical presence in the taxing jurisdiction. 386 U.S. at 758–60

(“[T]he Court has never held that a State may impose the duty of use

tax collection and payment upon a seller whose only connection with

customers in the State is by common carrier or the United States

mail.”). Later, in Quill, the Court overruled Bellas Hess to the extent

it “indicated that the Due Process Clause requires a physical

presence for the imposition of duty to collect a use tax . . . as

15

75a

56. South Dakota enacted a statute which

“require[d] out-of-state sellers to collect and remit sales

tax ‘as if the seller had a physical presence in the state’” if

the seller “on an annual basis, deliver[s] more than

$100,000 of goods or services into the State or engage[s]

in 200 or more separate transactions for the delivery of

goods or services into the State.” Id. at 2089 (quoting S.B.

106 at ¶¶ 3, 5, 8(10)). S.B. 106 expressly excluded the

retroactive application of this new tax requirement for

out-of­state sellers. Id.

57. South Dakota filed a declaratory judgment

action against on-line retailers Wayfair, Inc.,

Overstock.com, Inc., and Newegg, Inc., none of which had

any employees or real estate in South Dakota, “seeking a

declaration that the requirements of [S.B. 106] are valid

and applicable to respondents[.]” Id. The South Dakota

Supreme Court affirmed a lower court’s decision that S.B.

106 was unconstitutional due to respondents’ lack of

physical presence in South Dakota, reasoning that “Quill

has not been overruled [and] remains the controlling

precedent on the issue of Commerce Clause limitations on

interstate collection of sales and use taxes.” Id. (quoting

901 N.W.2d 754, 761 (S.D. 2017)).

58. On review, the United States Supreme Court

first acknowledged that

[u]nder this Court’s decisions in Bellas Hess and

Quill, South Dakota may not require a business

to collect its sales tax if the business lacks a

physical presence in the State. Without that

physical presence, South Dakota must rely on its

superseded by developments in the law of due process.” Id. at 308.

However, with respect to the Commerce Clause, the Quill Court held

that the physical presence “bright­line rule” remained good law. Id.

at 312–319.

76a

residents to pay the use tax owed on their

purchases from out of state sellers.

Id. at 2088. However, the Court ultimately vacated and

remanded the decision of the South Dakota Supreme

Court, overruling the Bellas Hess and Quill physical

presence rule, and upholding the constitutionality of S.B.

106. Id. at 2098–2100. In the absence of the bright-line

physical presence rule, the Court relied on the first prong

of the Complete Auto test, which “simply asks whether

the tax applies to an activity with a substantial nexus with

the taxing state.” Id. Further, the Court stated, “a

substantial nexus is established when the taxpayer [or

collector] ‘avails itself of the subsequent privilege of

carrying on business’ 1n that jurisdiction.” Id. at 2099

(citation omitted).

59. As applied to S.B. 106, the Court in Wayfair

held that the statute’s applicability thresholds require a

“quantity of business [that] could not have occurred

unless the seller availed itself of the substantial privilege

of carrying on business in South Dakota.” Id. at 2099.

Accordingly, in the case of Wayfair, Inc., Overstock.com,

Inc, and Newegg, Inc.—all entities for which S.B. 106 was

applicable—the Court held that the Commerce Clause tax

“nexus is clearly sufficient based on both the economic

and virtual contacts respondents have with the State.” Id.

60. Notably, as pointed out by Petitioner, the

Wayfair Court did not have reason to consider any

questions regarding whether there existed a transactional

nexus between South Dakota and the sales being taxed

because the parties “agree[d] that South Dakota has the

authority to tax these transactions.” Id. at 2092.16

Accordingly, the Court concludes that Wayfair does not

The Supreme Court’s Opinion does not indicate whether title to the

products sold by Wayfair to the South Dakota residents passed inside

or outside of South Dakota.

16

77a

overrule the Dilworth formalism. Again, this Court’s

conclusion is in line with conclusions reached by

commentators. See Adam Themmesch, Darien Shanske,

& David Gamage, Wayfair: Sales Tax Formalism and

Income Tax Nexus, STATE TAX NOTES 975, 976 (Sept. 3,

2018) (stating that the Wayfair Court “certainly did not

explicitly overrule” the “Dilworth formalism” and

“uncertainty involving this issue leads us to conclude that

the better course for states would be to continue to abide

by Dilworth formalism and to enact economic nexus

standards through their use tax systems”); Richard D.

Pomp, Wayfair: Its implications and Missed

Opportunities, 58 WASH. U. J.L. & POL’Y 1, 51–56 (2019)

(opining that “[p]ost-Wayfair legislation should . . .

clarif[y] that it is the use tax that remote vendors are

being asked to collect and not the sales tax” as to avoid “a

potential problem” created by the holdings in Dilworth

and General Trading); Hayes R. Holderness, Navigating

21st Century Tax Jurisdiction, 79 MD. L. REV. 1, 13–24

(2019) (surveying the transactional nexus requirement

since Dilworth and explaining that “the decision and the

parties [in Wayfair] focused on the personal nexus issue”

and “did little with respect to the transactional nexus

doctrine”).

c. State Courts and Dilworth

61. In further support of its arguments, Petitioner

cites to a number of state court cases which have adhered

to the Court’s holding in Dilworth. See Lamtec v. Dep’t of

Revenue, 215 P.3d 968, 971 (Wash. Ct. App. 2009) (holding

that Dilworth applies solely to transaction-based taxes

(i.e., sales taxes) and not gross receipts/activity-based

taxes such as the Business & Occupation tax imposed on

a New Jersey corporation); TA Operating Corp. v. Fla.

Dep’t of Revenue, 767 So. 2d. 1270, 1275 (Fla. Dist. Ct.

App. 2000) (relying on Dilworth and holding fuel shipped

78a

“F.O.B. Brunswick, Georgia” was not subject to Florida’s

fuel tax); World Book, Inc. v. Mich. Dep’t of Treasury, 459

Mich. 403, 412, 590 N.W.2d 293 (1999) (relying on

Dilworth and holding that where a Michigan taxpayer was

“through selling” (i.e., title and possession passed to

buyers outside the State), the sales were subject to

Michigan use tax, and not sales tax); Bloomingdale Bros.

v. Chu, 513 N.E.2d 233, 234 (N.Y. 1987) (“[T]he ultimate

destination of the goods is not necessarily the location of

a particular sale [citing Dilworth]. Delivery may occur

before the merchandise reaches its final destination.

Delivery, in the sense that physical custody is transferred,

may take place several times during the course of a

transaction, but it is only that delivery which transfers

control of the merchandise for consideration which marks

a taxable event [(citations omitted)].”); Sears, Roebuck

and Co. v. Lindley, 436 N.E.2d 1029, 1032 (Ohio 1982)

(holding that Dilworth precluded the imposition of Ohio

sales tax on newspaper inserts printed outside Ohio and

mailed into Ohio, with title and possession passing outside

Ohio).

62. In support of its contrary argument, the

Department cites to state court cases which have treated

Dilworth as obsolete. See Arizona Dep’t of Revenue v.

Care Computer Sys., Inc., 4 P.3d 469, 471 (Ariz. Ct. App.

2000) (rejecting the argument that a “transaction

privilege tax requires a higher level of nexus with the

taxing state than does a use tax” reasoning that “[t]his

argument is based on cases that were decided when state

taxes on interstate commerce were per se

unconstitutional,” referring to Dilworth, Freeman, and

Spector); Greenscapes Home & Garden Prods. v. Testa,

129 N.E.3d 1060, 1071 (Ohio Ct. App. 2019) (explaining

that “[Dilworth] was decided at a time when . . . state

taxes on interstate commerce were per se

unconstitutional” and that “[i]n Complete Auto, the U.S.

79a

Supreme Court overruled this line of cases and upheld a

privilege on doing business tax on gross receipts from

interstate commerce.”); Baker & Taylor, Inc. v.

Kawafuchi, 82 P.3d 804, 815 (Haw. 2004) (holding the

same and declining to find Dilworth determinative).

63. Petitioner, on the other hand, argues that Care

Computer and Greenscapes “are of limited relevance” to

this case due to the fact that (a) they both involve grossreceipts-based taxes—not sales taxes (ECF No. 51, at pp.

9–12; citing to Lamtec, 215 P.3d at 971 and Ford Motor

Co. v. City of Seattle, 156 P.3d 185, 190 (Wash. 2007)

(holding Dilworth irrelevant where the tax involved is not

a sales tax, but rather a business and occupation tax on

the privilege of doing business in the taxing jurisdiction);

and (b) both Care Computer and Greenscapes

misinterpret Complete Auto as a rejection of the holding

in Dilworth. (ECF No. 51, at p. 12.)

64. Both parties make compelling arguments

regarding the impact of Dilworth, Complete Auto, and

Wayfair on this case. The Court has thoroughly reviewed

the parties’ arguments, the relevant court decisions, and

other persuasive authorities, and concludes that (a)

Complete Auto did not overrule the Dilworth formalism;

(b) Wayfair did not overrule the Dilworth formalism; and,

therefore (c) the Dilworth formalism remains the law of

the land. Absent contrary authority from the United

States Supreme Court, the Court concludes that the

principles set forth in Dilworth are controlling, and finds

that North Carolina does not have a sufficient

transactional nexus with the Sales at Issue under the

Commerce Clause to impose sales tax on the Sales at

Issue.

65. Therefore, the OAH’s finding that the Sales at

Issue were properly sourced to North Carolina under

N.C.G.S. § 105-164.4B (2010) giving North Carolina

authority to impose sales tax on those transactions is

80a

unconstitutional as applied to Petitioner and should be

REVERSED. The Sales at Issue lacked a sufficient

transactional nexus to North Carolina under the

Commerce Clause of the United States Constitution since

it is undisputed that title to the Sales at Issue passed to

the purchasers and third-party recipients outside of

North Carolina.17

IV. CONCLUSION

THEREFORE, IT IS ORDERED that the Final

Decision is REVERSED and summary judgment is

hereby entered in favor of Petitioners.

SO ORDERED, this the 23rd day of June, 2021.

/s/ Gregory P. McGuire

Gregory P. McGuire

Special Superior Court Judge

for Complex Business Cases

Again, the Court emphasizes that its conclusion on this “as applied”

challenge—that the Department’s sourcing of the Sales at Issue to

North Carolina under N.C.G.S. § 105-164.4B (2010) is

unconstitutional—is not intended to apply to any later enacted

revised versions of the statute.

17

APPENDIX C

STATE OF NORTH CAROLINA

COUNTY OF WAKE

IN THE

OFFICE OF

ADMINISTRATIVE

HEARINGS

19 REV 00334

Quad Graphics Inc

Petitioner,

FINAL DECISION

v.

NC Department of Revenue

Respondent.

Upon consideration of Respondent’s Motion for

Summary Judgment, accompanying brief and exhibits,

Petitioner’s

Motion

for

Summary

Judgment,

Respondent’s Response to Petitioner’s Motion for

Summary Judgment, Petitioner’s Response to

Respondent’s Motion for Summary Judgment, all

accompanying exhibits to such motions and responses,

pursuant to N.C. Gen. Stat. § 1A-1, Rule 56 of the North

Carolina Rules of Civil Procedure, and for good cause

shown, the undersigned hereby GRANTS Summary

Judgment for Respondent as follows:

APPEARANCES

For Petitioner:

Douglas W. Hanna, Graebe Hanna &

Sullivan, PLLC

Michael J. Bowen, Akerman, LLP

Attorneys for Petitioner

(81a)

82a

For Respondent:

Matthew H. Sommer,

Terence D. Friedman

Assistant Attorneys General

North Carolina Department of

Justice

ISSUE

Whether Petitioner’s sales of printed materials from

September 1, 2009 through December 31, 2011 were

subject to North Carolina sales tax under N.C. Gen. Stat.

§ 105-164.1, et. seq.?

BRIEF OVERVIEW OF UNDISPUTED FACTS

While Findings of Fact are not appropriate in a grant

of summary judgment, the undersigned provides a brief

overview of the undisputed facts in this matter to provide

context for the undersigned’s analysis and ruling. See,

e.g., Hyde Ins. Agency, Inc. v. Dixie Leasing Corp., 26

N.C. App. 138, 142 (1975). See also N.C. Gen. Stat. § 150B34(e).

Petitioner was an S-Corporation and commercial

printer engaged in the production and sale of printed

books, magazines, catalogs, and other items (“printed

materials”), which included delivery of printed materials

to addresses in North Carolina. Upon receiving orders for

and producing printed materials, Petitioner would deliver

the printed materials to the United States Postal Service

or some other common carrier at a site outside North

Carolina for delivery to either customers in North

Carolina or to some third-party recipients with North

Carolina addresses. The addresses of third-party

recipients were provided to Petitioner by its customers

via mailing lists, which identified the recipients and their

addresses. Customers paid for printed materials

83a

regardless of whether printed materials were shipped to

the customers in North Carolina or to third-party

recipients in North Carolina.

While Petitioner’s corporate headquarters was

located in Wisconsin, Petitioner employed sales

representatives throughout the United States. Beginning

in September 2009, Petitioner employed a sales

representative in North Carolina. Petitioner’s sales

representative in North Carolina specifically solicited the

sale of tangible personal property to customers both

inside and outside of North Carolina.

In 2011, Respondent conducted a sales and use tax

audit related to Petitioner’s business activities within

North Carolina for the period January 1, 2007 through

December 31, 2011. On November 12, 2015, Respondent

issued a Notice of Proposed Sales and Use Tax

Assessment finding Petitioner liable for uncollected and

unremitted sales tax resulting from sales of print

materials for the period September 1, 2009 through

December 31, 2011. (“sales at issue”). Respondent

determined that Petitioner had a sales tax nexus for the

period at issue based upon the physical presence of its

sales representative in North Carolina. The proposed

Assessment included, among other things, the sales at

issue in this case.

Petitioner appealed the Notice of Assessment

through Respondent’s Departmental review process.

During that review, Respondent removed some sales and

adjusted the proposed assessment to reflect those

changes. On November 30, 2018, Respondent issued a

Notice of Final Determination upholding the imposition of

uncollected and unremitted sales tax resulting from

Petitioner’s sales of printed materials during the period

at issue. Respondent found that Petitioner was a retailer

engaged in business in North Carolina as it maintained a

resident employee who solicited sales and serviced

84a

customer accounts in this State. See N.C. Gen. Stat. §§

105-164.4, 105-164.4B. Respondent also found that:

Petitioner failed to establish with proper

documentation that its customers took

possession of the Print Media outside North

Carolina or that it had been placed into storage

outside of North Carolina. As such, the sourcing

of Taxpayer’s sales of Print Media delivered into

North Carolina for storage, use or consumption

is governed by the sourcing principles included in

N.C. Gen. Stat. § 105-164.4B.

(Notice of Final Determination) In this Notice,

Respondent concluded that because the print media was

received by Petitioner’s customers or their designee in

North Carolina, the sales of such print media are sourced

to this State under N.C. Gen. Stat. § 105-164.4B(a)(2) and

(d)(2).

On January 29, 2020, Petitioner appealed the Notice

of Final Determination and filed a petition to the Office of

Administrative Hearings alleging Respondent deprived

Petitioner of property, and ordered it to pay a fine or civil

penalty AND exceeded its jurisdiction, acted erroneously

and failed to act as required by law or rule in issuing the

Notice of Final Determination as:

I.

The disputed transactions are not subject to

North Carolina retail sales or use tax because

all relevant aspects of the disputed transactions

took place outside North Carolina,

II. The Assessment of North Carolina Sales and

Use Tax violates the Due Process and

Commerce Clauses of the United States

Constitution, and

III. The specific transactions included in the

assessment should be excluded or are otherwise

85a

exempt from the North Carolina Sales and Use

Tax.

(Petition) It is undisputed that Petitioner is no longer

pursing Claim III in its petition.

STANDARD OF REVIEW

“An Administrative Law Judge may [r]ule on all

prehearing motions that are authorized by G.S. 1A-1, the

[North Carolina] Rules of Civil Procedure.” N.C. Gen.

Stat. § 150B-33(b)(3a); See 26 NCAC 03 .0101(a)

(specifically adopting the North Carolina Rules of Civil

Procedure in contested cases at the Office of

Administrative Hearings).

Summary judgment, under Rule 56(c) of the North

Carolina Rules of Civil Procedure is appropriate “if the

pleadings, depositions, answers to interrogatories, and

admissions on file, together with the affidavits, if any,

show that there is no genuine issue as to any material fact

and that any party is entitled to a judgment as a matter of

law.” The party moving for summary judgment “has the

burden of establishing the lack of any triable issue of fact.

His papers are carefully scrutinized and all inferences are

resolved against him.” Kidd v. Early, 289 N.C. 343, 352,

222 S.E.2d 392, 399 (1976). As both parties have moved for

summary judgment in this matter, both parties

acknowledge, and the undersigned determines, that there

is no genuine issue as to any material fact in this contested

case.

CONCLUSIONS OF LAW

1.

This matter is subject to dismissal pursuant to

N.C. Gen. Stat. §§ 1A-1, Rule 56 of the North Carolina

Rules of Civil Procedure, 150B-33(b)(3a), and 26 NCAC

03.0101(a). This Tribunal has subject matter jurisdiction

86a

over this matter and personal jurisdiction over the

parties.

2.

“A proposed assessment of the Secretary is

presumed to be correct.” N.C. Gen. Stat. § 105-241.9(a).

3.

During the period at issue, North Carolina

imposed a sales tax on the gross receipts from a retailer’s

sales at retail of tangible personal property if the retailer

had a constitutional nexus with North Carolina and the

sales were sourced to North Carolina. See N.C. Gen. Stat.

§§ 105-164.3(9), 105-164.4(a), 105-164.4(a)(1), 105-164.4B,

and 105-164.8. (The relevant portions of the Revenue

statutes at issue in this contested case, including N.C.

Gen. Stat. § 105-164.1, et seq., are from 2010 and will,

therefore, be used in this Final Decision unless

specifically stated otherwise.)

I. The Sales at Issue Were Taxable in North Carolina

A. Petitioner was a retailer making sales at retail

of tangible personal property

4.

A “retailer” was “[a] person engaged in the

business of . . . [m]aking sales at retail, offering to make

sales at retail, or soliciting sales at retail of tangible

personal property, digital property, or services for

storage, use, or consumption in this State.” N.C. Gen.

Stat. § 105-164.3(35)(a).

5.

A “person” was as “[a]n individual . . . limited

liability company, a corporation . . . or another group

acting as a unit” by reference to N.C. Gen. Stat. § 105164.3(26) in N.C. Gen. Stat. § 105-228.90(5).

6.

Under N.C. Gen. Stat. § 105-164.3(46), “tangible

personal property” was defined as “personal property

that may be seen, weighed measured, felt, or touched or

is in any other manner perceptible to the senses.” “Direct

mail,” a particular type of tangible personal property

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relevant to the case at hand, was defined by N.C. Gen.

Stat. § 105-164.3(7c) as:

printed material delivered or distributed by the

United States Postal Service or other delivery

service to a mass audience or to addresses on a

mailing list provided by the purchaser or at the

direction of the purchaser when the cost of the

items is not billed directly to the recipients.

7.

A “sale” was [t]he transfer for consideration of

title or possession of tangible personal property or digital

property or the performance for consideration of a

service.” N.C. Gen. Stat. § 105-164.3(36). Additionally, a

“sale at retail” or “retail sale” was “[t]he sale, lease, or

rental for any purpose other than for resale, sublease, or

subrent.” N.C. Gen. Stat. § 105-164.3(34). There is no

dispute that the printed materials in the sales at issue

were tangible personal property and the printed

materials shipped directly to the third-party recipients in

North Carolina were “direct mail.”

8.

Any person maintaining “permanently or

temporarily . . . any representative, agent, sales

representative, or solicitor operating in this State in the

selling or delivering” of tangible personal property was

“engaged in business” in North Carolina. N.C. Gen. Stat.

§ 105-164.3(9)(a). It is undisputed that Petitioner

employed a sales representative in North Carolina whose

duties were the solicitation of sales to customers located

both inside and outside of North Carolina during the

period at issue. As a result, Petitioner was “engaged in

business,” as defined by N.C. Gen. Stat. § 105-164.3(9)(a),

during the period at issue.

9.

Applying the above statutory definitions to the

undisputed facts in this case, the undersigned concludes

that Petitioner’s sales of printed materials were “sales,”

that the printed materials were “tangible personal

property,” that there was a “transfer of title for

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consideration,” that the printed materials were “stored,

used, and consumed” in North Carolina, and that

Petitioner was a “person” who was “engaged in business”

in North Carolina during the period at issue. As a result,

Respondent was a “retailer” as defined in N.C. Gen. Stat.

§ 105-164.3(35)(a) and was obligated to collect and remit

tax on all of its sales sourced to North Carolina. N.C. Gen.

Stat. §§ 105-164.8, 105-164.4B.

B. Petitioner had a sufficient constitutional nexus

with North Carolina

10. Generally, there are two types of potential

constitutional challenges to a statute, facial and as

applied. In asserting a facial constitutional challenge, the

proponent must “show that there are no circumstances

under which the statute might be constitutional.”

Beaufort County Bd. of Educ. v. Beaufort County Bd. of

Com’rs, 363 N.C. 500, 502, 681 S.E.2d 278, 280 (2009). In

contrast, “[a]n as-applied constitutional challenge

contests whether the statute can be constitutionally

applied to a particular defendant, even if the statute is

otherwise generally enforceable.” State v. Packingham,

368 N.C. 380, 383, 777 S.E.2d 738, 743 (2015), rev’d and

remanded on other grounds, 137 S. Ct. 1730 (2017).

11. “It is a well-settled rule that a statute’s

constitutionality shall be determined by the judiciary”

and not an administrative tribunal or entity. Matter of

Redmond by & through Nichols, 369 N.C. 490, 493, 797

S.E.2d 275, 277 (2017) (quoting Meads v. N.C. Dep’t of

Agric., 349 N.C. 656, 670, 509 S.E.2d 165, 174 (1998)).

12. Similar to other administrative bodies, such as

the Industrial Commission and the Utilities Commission,

the Office of Administrative Hearings is an

“administrative agency created by the legislature . . .

[and] has not been given jurisdiction to determine the

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constitutionality of legislative enactments” despite its

power to conduct hearings, make decisions, and issue

orders. Matter of Redmond by & through Nichols, 369

N.C. 490, 493, 797 S.E.2d 275, 277 (2017) (emphasis

added). Similarly, the Office of Administrative Hearings

is “not a court with general implied jurisdiction but

primarily is an administrative agency of the state” that is

“granted judicial power as is necessary to perform the

duties required of it by the law which it administers.” Id.

(citing Hogan v. Cone Mills Corp., 315 N.C. 127, 137, 337

S.E.2d 477, 483 (1985) (discussing the limited jurisdiction

of the Industrial Commission)).

13. Petitioner raises arguments alleging that

Respondent’s actions against Petitioner violates the Due

Process Clause of the 14th Amendment and the

Commerce Clause. While this Tribunal is barred from

concluding and assessing the constitutionality of the

relevant sales tax statutes in this matter, the undersigned

may, however, analyze constitutional principles as applied

to Petitioner in considering the propriety of Respondent’s

imposition of uncollected and unremitted sales tax

resulting from the sales of printed materials during the

period at issue.

14. In South Dakota v. Wayfair, 138 S. Ct. 2080, the

United States Supreme Court explained that the

substantial nexus requirement contained within the

Commerce Clause is “closely related” to the due process

requirement that there be “some definite link, some

minimum connection, between a state and the person,

property or transaction it seeks to tax[.]” Wayfair, 138 S.

Ct. at 2093 (emphasis added) (internal quotation marks

and citation omitted). This standard requires only that

there be substantial nexus between the state and the

person or the state and the property or the state and the

transaction. Nothing in this standard suggests that only

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the state in which the transfer of title or possession occurs

may tax the transaction.

15. Rather, in Wayfair, the Supreme Court

expressly noted that this substantial nexus requirement

is met simply when a taxpayer “avails itself of the

substantial privilege of carrying on business in that

jurisdiction.” Id. at 2099 (internal quotation marks and

citations omitted). Therefore, as was the case in Wayfair,

this standard is met even when there is only a sufficient

connection between a state and the property subject to

the transaction being taxed.

16. Here, there was a sufficient connection between

both North Carolina and Petitioner, through its resident

sales representative in North Carolina, and North

Carolina and the printed materials’ delivery into and use,

storage, and consumption in North Carolina. In addition

to shipping tangible personal property directly into this

State, far in excess of the $100,000 threshold

contemplated in Wayfair, Petitioner had a physical

presence by way of its sales representative located in

North Carolina.

17. Moreover, to the extent that any such nexus

with the state is required between both the person and the

transaction, the holding in Wayfair implies that such a

requirement is met even when the destination of the

tangible personal property that is the subject of the

transaction is the sole connection between the state

seeking to impose a tax and the transaction. In this case,

it is undisputed that the printed materials in the sales at

issue were delivered directly to North Carolina.

Accordingly, North Carolina was well within it its rights

under the Due Process Clause and the Commerce Clause

to impose sales tax on these transactions in which the

printed materials were shipped directly to North Carolina

for storage, use, and consumption in this State.

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18. Because Petitioner was a retailer with a

constitutional nexus to North Carolina and the sales at

issue were properly sourced to this State, Respondent

correctly and constitutionally assessed Petitioner for

unpaid sales tax on the sales at issue.

II. The Sales at Issue Were Properly Sourced to

North Carolina

19. Sourcing is used to assign a location for where a

transaction occurred, so that it may be taxed in the

appropriate jurisdiction. North Carolina is a classic

destination-based sales and use tax state as set forth in

N.C. Gen. Stat. § 105-164.4B. In a destination-based sales

and use tax state, a sale is sourced to, to deemed to have

occurred in, the location where the product is delivered.

20. North Carolina had two relevant provisions

under its sourcing statute that apply to the sales at issue.

First, N.C. Gen. Stat. § 105-164.4B(a)(2) specifically

stated that: “When a purchaser receives a product at a

location specified by the purchaser and the location is not

a business location of the seller, the sale is sourced to the

location where the purchaser receives the product.”

21. Second, N.C. Gen. Stat. § 105-164.4B(d)(2)(b)

applied to direct mail and stated that direct mail was

“sourced to the location where the property is delivered”

when “the purchaser provides the seller with information

to show the jurisdictions to which the direct mail is to be

delivered.”

22. The undisputed facts show that Petitioner

shipped the sales at issue directly to customers located in

North Carolina or directly to third-party recipients in

North Carolina based on mailing lists provided by its

customers. The shipments directly to customers, without

contention, fall within N.C. Gen. Stat. § 105-164.4B(a)(2)

as sourced to North Carolina because North Carolina was

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the location where the customers received the printed

materials.

23. Regarding shipments to third-party recipients,

those shipments fall squarely within N.C. Gen. Stat. § 105164.4B(d)(2)(b) because the customers provided

Petitioner, via the mailing lists, the information showing

the jurisdictions to which the printed materials were to be

delivered. In the case of the sales at issue, those were all

delivered to North Carolina.

24. Based upon the application of the above statues

to the undisputed facts, Respondent properly sourced the

sales at issue delivered directly to the customers in North

Carolina to the “location where the purchaser receive[d]

the product,” which was North Carolina. N.C. Gen. Stat.

§ 105-164.4B(a)(2). Respondent also correctly sourced the

portion of the sales at issue that were shipped directly to

third-party recipients, i.e., direct mail, “to the location

where the property [was] delivered,” which was also

North Carolina, because “the purchaser provide[d] the

seller with informatio

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