Amicus Curiae Brief — DH Holmes Co. v. McNamara

08S 831997

. SPANIOL, JR.

IN THE 7m CLERK

Supreme Court of the United Sta

OCTOBER TERM, 1987

Phi

D.H. HoLMES Co., LTD.,

* Appellant,

SHIRLEY MCNAMARA, SECRETARY OF REVENUE AND

TAXATION, THE DEPARTMENT OF REVENUE AND

TAXATION, STATE OF LOUISIANA,

Appellee.

On Appeal from the Court of Appeal, Fourth Circuit,

State of Louisiana

BRIEF OF THE COMMITTEE ON STATE TAXATION

OF THE COUNCIL OF STATE CHAMBERS

OF COMMERCE AS AMICUS CURIAE

IN SUPPORT OF APPELLANT

JEAN A. WALKER *

Tax Counsel

PAUL H. FRANKEL

Chairman, Lawyers Coordinating

Subcommittee

MICHAEL A. PEARL

Member, Lawyers Coordinating

Subcommittee

Committee on State Taxation

of the Council of State

Chambers of Commerce

122 C Street, N.W.

Suite 200

Washington, D.C. 20001

(202) 484-8103

Counsel for the Committee on

State Taxation of the Council of

State Chambers of Commerce

* Counsel of Record

WILSON - Eres PRINTING Co., INC. - 789-0096 - WASHINGTON, D.C. 20001

ea meme,

QUESTION PRESENTED

Whether a state’s imposition of a use tax on a retailer

on its merchandise catalogs distributed via the United

States mail from outside the taxing State directly to resi-

dents within the taxing State contravenes the Commerce

Clause of Article I, Section 8, Clause 3 of the Constitu-

tion of the United States?

(i)

TABLE OF CONTENTS

Page

INTRODUCTORY STATEMENT ..........................-.-----. 1

INTEREST OF AMICUS CURIAE. .000.00...2.22222.-222--2-00--+- 2

SUMMARY OF ARGUMENT ...................-...--.2---...---200---+ 7

ARGUMENT ................. RE 8

THE LOUISIANA TAX VIOLATES THE COM-

MERCE CLAUSE BECAUSE IT IS IMPOSED ON

AN ACTIVITY WITH WHICH THE STATE

LACKS “SUBSTANTIAL NEXUS.” ........................ 8

CONCLUSION ..... a ceseshammiciamenonine 15

(iii)

iv

TABLE OF AUTHORITIES

CASES: Page

J. Bacon & Sons v. Martin, 305 U.S. 380 (1939) .... 11

Bennett Brothers, Inc. v. New. York State Taz

Commission, 405 N.Y.S.2d 803, 62 A.D.2d 614

CIEE: BID oncecenncnccevccreesctsssissencnssncssssnpnnanromansinstons 6

Commonwealth Edison Company v. Montana, 453

CE, GD CIID ccicsctcnsceccnnisincsitnicnitinnmnnaniinabeteniiion 7

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

0 | | ee eR ne ee 7,8, 14

D.H. Holmes Co., Ltd. v. McNamara, 505 So. 2d

ED icecescntcstcnsisnchinsanbitekdscidvnpentseshenaiieiaiiancs 2,8,9

Deere & Co. v. Allphin, 364 N.E. 2d 117 (Ill. App.

OD aencantkciswssisteschitiiiatinimnptinasschaneinctiiiineniamnrsdibaiminianiion 13

District of Columbia v. W. Bell & Co., Inc., 420

OG —e———yE 2,5

Henneford v. Silas Mason, 300 U.S. 577 (1987).... 11

Hoff man-LaRoche, Inc. v. Porterfield, 243 N.E. 2d

Be GD TD vccnctreniceitstsectecssoemonniiniiaamiinnions 6

Inter-State Nurseries, Inc. v. lowa Department of

Revenue, 164 N.W. 2d 858 (Iowa 1969) ............... 13

J.C. Penney Company, Inc. v. Illinois Department

of Revenue, No. 75 L 16730 (Ill. Cir. Ct. 1977)

COATT cccctscsciiesovnensintenscesinieaninbininaneiiaiatomenties 6

J.C. Penney Company y, Ine. v. ‘Wisconsin Depart-

ment of Revenue, No. 84-CV-3978 (Wis. Cir. Ct.

BO) CI anise sss c ccc ctsccecce es essensesonenes 5, 6

Martin v. Riverside Furniture Corp., 730 S.W. 2d

483 (Ark. 1987) -....... acs spasncsehieiassndiaaieeabmsecaamiaiaiabiaaineid 12

Mart Realty, Inc. v. Norberg, 303 A. 2d 361 (R.1.

ID cncisceisccrictininsnneesntincnscinnsitnistensneniinssntiansamnntantinineaaaas 6

Michlein Tire Corp. v. Wages, 423 U.S. 276

IIIT \ si scesihseiaetadlnaecinlshcbacescauiao Sacchi eamaclamaseicimiaaaniaanidiie 3

Michigan-Wisconsin Pipe Line Co. v. Calvert, 347

a Se CUD a cee cainnanrppienpnemenneniin 11

Miller Bros. Co. v. Maruland, 347 U.S. 340 (1954). 3,14

Minnesota v. Blasius, 290 U.S. 1 (1933) ................. 11, 12

Modern Merchandising, Inc. v. South Dakota De-

partment of Revenue, 397 N.W. 2d 470 (S.D.

IED. . ncccscncoesdabiniistiinntentansaiisadsagdieaediasiaaaiambinniadaiins 6

Vv

TABLE OF AUTHORITIES—Continued

Page

National Bellas Hess, Inc. v. Illinois Department

of Revenue, 386 U.S. 753 (1967) .........................-- 4

National Geographic Society v. California Board

of Equalization, 430 U.S. 551 (1977) ................... 13, 14

Pacific Telephone & Telegraph Co. v. Gallagher,

I a icenieescrsescomnicitinatonns 11

Sears, Roebuck & Co. v. Ohio Tax Commissioner,

486 N.E. 2d 1020 (Ohio 1982) ......................0........ 6

Sears, Roebuck & Co. v. Washington Department

of Revenue, 643 P.2d 884 (Wash. 1982) ............... 6

Service Merchandise Co. v. Tidwell, 529 S.W. 2d

215 (Tenn, 1975) ........ a me i i 5

Tyler Pipe Industries, Inc. v. Washington Depart-

ment of Revenue, 107 S.Ct. 2810 (1987) ............ 14

Washington Department of Revenue v. Association

of Washington Stevedoring Companies, 435 U.S.

Lk ESE RIP Py Pensa onr mene Nee 7

Wisconsin Department of Revenue v. J.C. Penney

Company, Inc., 323 N.W. 2d 168 (Wis. App.

SE IRS: REAR eee ORG Tae eee ee 6

CONSTITUTION:

USB. Cost. Ast. I, § &, e4. B ............0.0000-0000.000-. ha. 2 passim

STATUTES:

La. Rev. Stat. § 47 :302(A) (2) ...........:...---cececceeesereeeees 9

La. Rev. Stat. § 47:305(E) ................ dae beedahedaseiualioe 10

IN THE

Supreme Court of the United States

OCTOBER TERM, 1987

No. 87-267

D.H. HoLMEs Co., LTD.,

. Appellant,

SHIRLEY MCNAMARA, SECRETARY OF REVENUE AND

TAXATION, THE DEPARTMENT OF REVENUE AND

TAXATION, STATE OF LOUISIANA,

Appellee.

On Appeal from the Court of Appeal, Fourth Circuit,

State of Louisiana

BRIEF OF THE COMMITTEE ON STATE TAXATION

OF THE COUNCIL OF STATE CHAMBERS

OF COMMERCE AS AMICUS CURIAE

IN SUPPORT OF APPELLANT

INTRODUCTORY STATEMENT

This brief is submitted by the Committee on State

Taxation of the Council of State Chambers of Commerce

as amicus curiae in support of the Appellant in the

above-captioned case. Written consents of the Appellant

and the Appellee have been obtained and are attached

herewith.

2

INTEREST OF AMICUS CURIAE

The Council of State Chambers of Commerce (COUN-

CIL), organized in 1932, consists of 42 Chambers of

Commerce. The Committee on State Taxation (COST),

one of the three advisory committees of the COUNCIL,

consists of 262 corporate members which conduct a sub-

stantial portion of the interstate commerce of United

States taxpayers. One of COST’s principal activities has

been to work with the States and others toward develop-

ing fair and equitable standards of state taxation.

Member companies of COST are representative of that

part of the Nation’s business sector which is most di-

rectly affected by state taxation of interstate operations.

COST is, therefore, vitally interested in cases such as

this one which present issues significantly affecting state

and local taxation of interstate commerce.

This case involves an important constitutional ques-

tion: Whether levy of Louisiana use tax on a Louisiana

merchant’s cost of purchasing catalogs outside Louisiana

and having them mailed from out-of-state locations di-

rectly to mailboxes of selected Louisiana residents, with-

out charge, constitutes an impermissible burden on inter-

state commerce. The Louisiana Court of Appeal, Fourth

Circuit, held that imposition of use tax does not infringe

the Commerce Clause.

Merchants and other businesses have long utilized the

interstate postal system to disseminate catalogs and other

printed advertising and informational materials. Prior

to the Louisiana Court of Appeal decision in D.H. Holmes

Co., Ltd. v. McNamara, 505 So. 2d 102 (1987), state

courts consistently accorded such interstate mailings im-

munity from use tax under the long-established rule

prohibiting taxation of tangible personal property while

in the stream of interstate commerce. For example, in

District of Columbia v. W. Bell & Co., Inc., 420 A.2d

1208 (D.C. App. 1980), a case involving facts virtually

3

identical to those here but affirmed on statutory grounds,

the appellate court nevertheless reiterated the constitu-

tional principles articulated below:

“{S]ince the catalogs were placed in the stream of

interstate commerce outside of the District and came

to rest only when they reached the individuals to

whom they were addressed, the Commerce Clause of

the United States Constitution, Art. I, § 8, Cl. 3,

prohibits the state from taxing such goods to Bell.”

420 A. 2d at 1210.

The court cited Michelin Tire Corp. v. Wages, 423 U.S.

276 (1976), and Milier Bros. Co. v. Maryland, 347 U.S.

340 (1954), in observing that it is well established that

property may not be taxed while moving in interstate

commerce. /d.

Affirmation of the Louisiana court’s ruling will have

adverse consequences for all types of business. In addi-

tion to catalogs and other printed advertising dissemi-

nated by merchants, virtually every kind of business,

large and small, utilizes the U.S. Mail to send printed

advertising or informational materials without charge to

selected consumers. A substantial portion of such mail-

ings are in interstate commerce. Thus, the Louisiana

court’s unprecedented holdiz.g that a use tax can be

validly levied on the cost of catalogs by virtue of their

“distribution” through the interstate postal system to

Louisiana addressees will detrimentally affect the free

flow of catalogs and other printed materials mailed in

interstate commerce. The novel principle adopted by the

Louisiana court—-i.e., property mailed from outside the

State—in-state distribution—taxable use—could be ap-

plied by any State with an appropriately-worded statute

to any kind of interstate mailing of advertising or in-

formationai material by a firm having a presence in the

State. For example, under the ruling, use tax could be

applied to the cost of interstate mailings of annual re-

4

ports to shareholders of companies having an in-state

presence.

Companies affected by the Holmes ruling will not only

be liable for additional taxes but also the inevitable

spread of this concept to other States will prove at least

as administratively burdensome as the “welter of com-

plicated obligations to local jurisdictions” that this Court

in National Bellas Hess, Ine. v. Illinois Department of

Revenue, 386 U.S. 753, 760 (1967), feared would im-

pede the free conduct of interstate business if mail order

firms were required to collect tax on interstate mail order

sales to customers in States where the firm is not physi-

cally present. The Court noted:

“The very purpose of the Commerce Clause was to

ensure a national economy free from such unjustifi-

able local entanglements.” 386 U.S. at 760.

The “complicated obligations” and “local entangle-

ments” alluded to by the Court concerned the burden

associated with requiring non-nexus mail order firms to

collect taxes from customers at varying state and local

rates on interstate sales. In contrast with the duty to

collect tax on interstate sales of merchandise involved in

National Bellas Hess, Holmes is confronted with the im-

position of a direct tax liability measured by the cost of

the catalogs.' Thus, Holmes and others having direct tax

liability under this holding will be required to deal not

only with variations in state and local tax rates but also

with detailed record-keeping of printing costs, quantities

mailed and their destination, in order to comply with the

‘It should be noted that this is not a National Bellas Hess situa-

tion wherein the issue was whether a mail order firm (1) sending

potential custome: its catalogs, (2) receiving orders from cus-

tomers, and (3) shipping goods to customers in interstate com-

merce, is required to collect use tax on those goods. In this case,

the qvestion is whether the mailing of the catalog itself (whether

or not an order is placed) requires a use tax to be paid on the

cost of the catalogs to the State where the customer resides.

5

variations in the tax bases upon which States levy their

use taxes. For example, a company’s “cost” of printed

materials subject to use tax may be limited in one State

to tangible property costs, such as paper and ink, while

another State may also require inclusion of intangible

items, such as production costs and a third state may re-

quire mailing costs to be included as well.

In every instance prior to Holmes, where an aggressive

state taxing authority sought to apply its use tax to the

cost of materials mailed from out-of-state locations to

residents of the State, state courts have consistently ruled

in favor of the taxpayer challenging the state’s authority

to impose such tax.

For example, the Tennessee Supreme Court, applying

Tennessee’s use tax statute which is virtually identical

to Louisiana, ruled tha. the Commerce Clause prohibited

the imposition of use tax on a Tennessee merchant with

regard to catalogs and other advertising material shipped

via common carrier and the U.S. Mail from an out-of-

state printer to residents of Tennessee. Service Merchan-

dise Co. v. Tidwell, 529 S.W. 2d 215 (Tenn. 1975).

Similarly, in District of Columbia v. W. Bell & Co., Inc.,

420 A. 2d at 1210, the court noted the repugnance to the

Commerce Clause of the District’s assessment of use tax

on catalogs which came to rest when they reached pre-

selected addresses in the District, following an uninter-

rupted journey in interstate commerce. Also, the Wis-

consin Circuit Court for Dane County granted taxpayers’

motion for summary judgment and held that catalogs

mailed to Wisconsin addressees from outside the State

cannot be subjected to Wisconsin use tax because: 1)

there was no taxable use of the catalogs in Wisconsin by

the taxpayers; and 2) there was a lack of substantial

nexus between the State and the mailed catalogs, which

nexus was not satisfied by the presence in Wisconsin of

taxpayers’ stores. J. C. Penney Company, Inc. v. Wis-

6

consin Department of Revenue, No. 84-CV-3978 (Wis.

Cir. Ct. 1985) (unpublished) .*

The principle in this area has long been clear. Use

tax assessments on interstate mailings of catalogs and

other promotional material are improper because the mer-

chant has no taxable use of the property received by

residents of the State. See, Modern Merchandising, Inc.

v. South Dakota Department of Revenue, 397 N.W. 2d

470 (S.D. 1986) ; Wisconsin Department of Revenue v.

J. C. Penney Company, Inc. 323 N.W. 2d 168 (Wis. App.

1982) ; Sears, Roebuck & Co. v. Washington Department

of Revenue 643 P.2d 884 (Wash. 1982) (State did not

appeal trial court holding in favor of Sears that catalogs

shipped directly by out-of-state printers to Washington

addressees were not “used” by Sears within the meaning

of the Washington statute); Sears, Roebuck & Co. v.

Ohio Tax Commissioner, 436 N.E. 2d 1020 (Ohio 1982) ;

Hoffman-La Roche, Inc. v. Porterfield, 243 N.B. 2d 72

(Ohio 1968) ; Bennett Brothers, Inc. v. New York State

Tax Commission, 405 N.Y.S.2d 803, 62 A.D.2d 614 (N.Y.

1978) ; Mart Realty, Inc. v. Norberg, 303 A. 2d 361 (R.I.

1973); J. C. Penney Company, Inc. v. Illinois Depart-

ment of Revenue, No. 75 L 16730 (Ill. Cir. Ct. 1977)

(unpublished) .*

Thus, the Holmes decision is contrary to the holdings

of every other state court on this issue. In upholding the

use tax assessment against Holmes’ Commerce Clause

challenge, the Louisiana Court of Appeal disregarded

longstanding precedent aged misapplied the constitutional

standards established by this Court. The decision should

be reversed.

* This opinion has been lodged with the Court.

7

SUMMARY OF ARGUMENT

A State may not, consistent with the Commerce Clause,

assess its use tax against a merchant on its cost of cata-

logs printed out-of-state and mailed in interstate com-

merce directly to residents of the taxing State, free of

charge.

ARGUMENT

THE LOUISIANA TAX VIOLATES THE COMMERCE

CLAUSE BECAUSE IT IS IMPOSED ON AN ACTIV-

ITY WITH WHICH THE STATE LACKS “SUBSTAN-

TIAL NEXUS.”

In upholding imposition of tax against Holmes’ Com-

merce Clause challenge, the Louisiana Court of Appeal

analyzed the application of the tax in light of Complete

Auto Transit v. Brady, 430 U.S. 274 (1977), and Wash-

ington Department of Revenue v. Association of Wash-

ington Stevedoring Companies, 435 U.S. 734 ( 1978), and

found that the application of the tax did not violate the

Commerce Clause. Under the four-part test established

in Complete Auto Transit, a tax statute does not violate

the Commerce Clause if the tax: (1) is applied to an

activity with a substantial nexus with the taxing state;

(2) is fairly apportioned; (3) does discriminate against

interstate commerce; and (4) is fairly related to services

provided by the State.?

*Complete Auto Transit and Association of Washington Steve-

doring Companies decided only that taxes on the “privilege of

engaging in interstate commerce” were valid if they satisfied the

four-part test. In both cases, the income sought to be taxed was

generated by activities performed entirely within the State. A

subsequent decision of the Court, Commonwealth Edison Company

v. Montana, 453 U.S. 609 (1981), applied the four-part test and

upheld imposition of Montana severance tax similarly measured by

activities performed entirely within the State, namely, in-state

mining activity prior to entry of the coal in interstate commerce.

8

This Court has yet to decide how, or whether, the four-

part test applies to a Commerce Clause challenge to a

use tax or other tax imposed on property movin, in inter-

state commerce. On the Louisiana use tax levy against

Holmes, the result is the same under either analysis. The

tax is contrary to the court’s long-established jurispru-

dence forbidding state taxation of goods in interstate

commerce. Similarly, the tax cannot be sustained under

the Complete Auto Transit analysis because Louisiana

does not have “substantial nexus” with the activity it

seeks to tax, the distribution of catalogs in interstate

commerce.

The Louisiana Court of Appeal applied the four-part

test to imposition of use tax on Holmes’ catalogs and con-

cluded that the tax satisfied each part. In finding that

the tax satisfied the first, or “substantial nexus’’, test,

the court said:

“The nexus requirement is met because Holmes op-

erates 13 stores intrastate. It has approximately

5,000 Louisiana employees, 500,000 charge customers,

and 1,500,000 customers within the state. 82% of

the total number of catalogs were mailed into Louisi-

ana and 1,000 were distributed from the Canal

Street store.” 505 So. 2d at 105.

The Louisiana Court of Appeal erred in finding that

the imposition of tax upon Holmes satisfied the “thresh-

old” or “substantial nexus” requirement. Such finding is

wrong because it is premised on the misconception that

the “substantial nexus” test was satisfied by virtue of

the presence in Louisiana of Holmes’ stores.

The “substantial nexus” requirement means that the

State imposing the tax must have a significant connec-

tion with the specific activity being taxed. Complete Auto

Transit v. Brady, 430 U.S. at 279. It is not enough that

Louisiana have nexus with Holmes; it must have nexus

with Holmes’ activity of distributing catalogs. Holmes

acknowledges that it is present in Louisiana and has

nexus there for many purposes (and accordingly pays

Louisiana property, income, franchise, sales and use

taxes, including Louisiana taxes applicable to merchan-

dise sales generated by the catalogs). However, Louisi-

ana does not have a substantial nexus with the “activity”

involved in this appeal, namely, the distribution of the

catalogs, and, therefore, under the cases construing the

Commerce Clause, Louisiana cannot tax that activity.

The activity upon which Louisiana imposed tax was the

“distribution” by Holmes of catalogs to Louisiana ad-

dressees. The pertinent provision is La. Rev. Stat.

§ 47:302(A) (2), which provides, in relevant part, as

follows:

* * * *

“A. There is hereby levied a tax upon... the dis-

tribution . . . of each item or article of tangible

personal property, ... the levy of said tax to be

as follows:

(2) At the rate of [a given percentage] of the

cost price of each item or article of tangible

personal property when the same is not sold

but is used, consumed, distributed or stored

for use or consumption in this state... .”

The Louisiana Court of Appeal found that Holmes

“used” the catalogs within the meaning of the statute

and stated that:

“Distribution of the catalogs certainly constitutes

‘use’ by Holmes under the statute and is subject to

tax.” 505 So. 2d at 105.

The Louisiana court also found that:

“After the catalogs were in Louisiana mailboxes they

were not part of interstate commerce and became

part of the property mass in the state.” Jd.

That finding satisfied the statutory intent that the

Louisiana use tax law may not be applied to property

10

while in interstate commerce as expressed in La. Rev.

Stat. § 47:305(E), which declares, in relevant part:

“(E) It is not the intention of this Chapter...

to levy a tax on bona fide interstate com-

merce. It is, however, the intention of this

Chapter to levy a tax on... the distribution

. . . of tangible personal property after it has

become a part of the mass of property in this

state.”

The uncontroverted facts do not support the Louisiana

court’s findings that the distribution of the catalogs con-

stituted a “use” by Holmes. All acts and activities re-

lating to the distribution of the catalogs occurred out-

side Louisiana or while the catalogs were in the stream

of interstate commerce. Therefore, Louisiana lacked

“substantial nexus” with the activity—i.e., distribution—

on which the tax was imposed.

The catalogs were designed in New York and printed

in Oklahoma City, Boston or Atlanta. The finished cata-

logs were delivered by the printer to local offices of the

United States Postal Service, postage prepaid, for direct

mailing to pre-selected residents of Louisiana. Other

than the small portion of catalogs mailed to its New

Orleans store for distribution to customers, which Holmes

conceded are taxable because they are used by Holmes

in Louisiana, at no time did Holmes, its employees, or its

agents receive or take possession of the catalogs mailed

from out-of-state post offices. Once the catalogs were

placed in the mail by the out-of-state printer, they en-

tered the stream of interstate commerce and remained

there until their ultimate delivery to Louisiana addressees.

Upon delivery, the Louiisana recipients had unrestricted

ownership and possession of the catalogs and were free

to use or discard them at their pleasure. Thus, if there

were a taxable use of the catalogs—presumably, many

of them are discarded and not used at all—such use

would be by the recipients of the catalogs, not by Holmes.

11

Accordingly, the Louisiana court’s finding that the cata-

logs ceased to be in interstate commerce after they were

delivered to Louisiana mailboxes is irrelevant to its find-

ing that “distribution” constitutes a “use” by Holmes.

In effect, Louisiana predicated its tax upon “use” by

Holmes while the catalogs were in uninterrupted inter-

state commerce, before they came to rest and attained

a tax situs in Louisiana. This is inconsistent with the

manner in which a use tax has traditionally been applied

to property brought into a State; that is, taxation has

been restricted to use after the property leaves the stream

of interstate commerce and comes to rest within the

State. This Court’s observation in Henneford v. Silas

Mason, 300 U.S. 577 (1937), the first decision of the

Court upholding a general use tax over objections that

it violated the Commerce Clause, is instructive on this

point:

“The tax is not upon the operations of interstate

commerce, but upon the privilege of use after com-

merce is at an end.” 300 U.S. at 582.

The Court has consistently held that, once interstate

movement has begun, property in transit remains im-

mune from state taxation urtil the property comes to

rest within the state, see, e.9., Michigan-Wisconsin Pi

Line Co. v. Calvert, 347 U.S. 157 (1954): J. Bacon &

Sons v. Martin, 305 U.S. 380 (1939); Pacific Telephone

& Telegraph Co. v. Gallagher, 306 U.S. 182 (1939): or,

unless a break in the transit occurs in the taxing State

that is not incidental to or necessary to further the in-

terstate movement, see, e 7., Minnesota v. Blasius, 290

U.S. 1 (1933).

These holdings are relevant to the analysis to deter-

mine whether a challenged tax satisfies the “substantial

nexus” requirement of the four-part test established in

Complete Auto Transit. Because property lacks a tax

situs while in the stream of interstate commerce, a use

tax can be validly applied only to an act or activity with

12

respect to the property occurring after the interstate

commerce is completed (or before it begins). Minnesota

v. Blasius, 290 U.S. 1 (1933). In the instant case, be-

cause the activity Louisiana is seeking to tax—i.e.,

Holmes’ distribution of the catalogs—occurred entirely

outside the State and while the catalogs were in inter-

state commerce, the requisite “substantial nexus” with

the activity is lacking. The Louisiana Court of Appeal,

therefore, erred in finding there was “substantial nexus.”

Compare the Louisiana court’s Commerce Clause analy-

sis with the Arkansas Supreme Court’s analysis in Mar-

tin v. Riverside Furniture Corp., 730 S.W. 2d 483 (Ark.

1987). In that case, the taxpayer raised a Commerce

Clause objection to imposing use tax upon printed ad-

vertising materials shipped from an out-of-state printer

to the taxpayer’s Arkansas office where the taxpayer col-

lated, packaged and remailed the materials to sales rep-

resentatives located outside Arkansas. The taxpayer as-

serted that taxation of these materials was precluded

by a provision in the Arkansas use tax law virtually

identical to the Louisiana statute in the instant case.

The Arkansas court described the Commerce Clause con-

siderations reflected in the provision as follows:

“The last sentence of the statute recognizes the con-

stitutional limitation of a state’s imposition of a tax

on goods in interstate transit. If the goods have not

“come to rest” within the state, they are stil! in

the stream of interstate commerce, and a tax may

not be levied... .” 730 S.W. 2d at 485.

In rejecting the taxpayer’s objection to the tax as an

impermissible burden upon interstate commerce, the court

concluded that because the advertising materials came

to rest within the State, albeit for a short period for the

purpose of packaging, addressing and mailing, they were

not a part of interstate commerce and, therefore, use tax

may properly be imposed.* The Iowa Supreme Court

* The Arkansas court made the following observation regarding

Complete Auto Transit: “We take this opportunity to recognize

13

reached the same result on virtually identical facts in

Inter-State Nurseries, Inc. v. lowa Department of Reve-

nue, 164 N.W. 2d 858 (Iowa 1969). See also Deere &

Co. v. Allphin, 364 N.E. 2d 117 (Ill. App. 1977), where

use tax was upheld based on the processing of advertis-

ing materials by taxpayer’s agent in Illinois prior to

their delivery to the post office for interstate mailing

The facts in Holmes differ from these cases in the

significant respect that after the catalogs came to rest

in Louisiana upon being deposited in the mailboxes of

Louisiana recipients, the catalogs were the property of

the recipients and any use of the catalogs was by the

recipients, not by Holmes. Thus, the Louisiana tax was

imposed on “use”? by Holmes while the catalogs were in

interstate commerce and, necessarily, at a point when

Louisiana did not have “substantial nexus” with the cata-

logs or their distribution by Holmes.

In finding “substantial nexus” based on the presence

of Holmes’ stores in Louisiana, the Louisiana Court of

Appeal evidently confused the “substantial nexus” which

must be present in order to sustain imposition of a direct

tax against a Commerce Clause challenge with the nexus

required to impose a duty to collect tax from a customer

on an interstate sale of merchandise. This Ceurt’s deci-

sion in National Geographic Society v. California Board

of Equalization, 430 U.S. 551 (1977) discusses the nexus

required to impose a duty on the seller to collect tax on

an interstate sale. In upholding California’s right to

require National Geographic to collect tax on its mail

order sales to California residents, this Court said adver-

tising offices maintained in California, even though un-

related to its mail order activity, constitute sufficient

nexus to impose a tax collection duty upon National Geo-

that Brady does not address that question of whether an item’s

transit through interstate commerce is continuous or sufiiciently

interrupted so as to come to rest” 730 S.W. 2d at 485-6.

14

graphic.* Citing Miller Bros. Co. v. Maryland, 347 U.S.

340 (1954), the Court stated that:

“the relevant constitutional test to establish the req-

uisite nexus for requiring an out-of-state seller to

collect and pay the use tax is not whether the duty

to collect the use tax relates to the seller’s activities

carried on ‘within the state, but simply whether the

facts demonstrate “some definite link, some minimum

connection, between |the State and] the person...

it seeks to tax.” 430 U.S. at 561.

While the court in National Geographic held that any

nexus between the State and the person is sufficient to

require an out-of-state seller to collect tax. Complete

Auto Transit imposes a much more stringent nexus re-

quirement to support imposition of a direct tax against

a taxpayer. The requisite nexus, expressed by the Court

in Complete Auto Transit in unambiguous terms, and

recently reiterated in Tyler Pipe Industries, Inc. v.

Washington Department of Revenue, 107 S.Ct 2810

(1987), is that a tax can be sustained against a Com-

merce Clause challenge when the tax is applied to an

activity having substantial nexus with the taxing state.

The record is clear that there was no in-state use of

the catalogs by Holmes to support imposition of tax.

All activities relating to the preparation and distribution

of the catalogs, e.g., design, printing, labeling, sorting,

mailing, ete., occurred outside the territorial boundaries

of Louisiana. From the time the catalogs were placed in

the mail outside the State of Louisiana, they remained in

*It should be noted that the Louisiana assessment herein in-

volved a direct tax against Holmes on its cost of catalogs sent,

free of charge, to Louisiana residents. In contrast, the issue in

National Geographic was not whether National Geographic was

liable for use tax on the cost of catalogs mailed to California

residents, but whether California could require National Geographic

to collect use tax on catalog merchandise ordered by California

residents.

15

uninterrupted interstate commerce until they were deliv-

ered to Louisiana addressees. Thus, Louisiana lacked the

requisite connection with the distribution of the catalogs,

the activity upon which the tax was imposed, and, there-

fore, the Louisiana Court of Appeal erred in finding that

“substantial nexus” was present to sustain the tax

against Holmes’ Commerce Clause challenge.

CONCLUSION

For the foregoing reasons, the imposition of use tax

upon Holmes impermissibly burdens interstate commerce

and, iherefore, the Court should reverse the decision

below.

Respectfully submitted,

JEAN A. WALKER *

Tax Counsel

PAUL H. FRANKEL

Chairman, Lawyers Coordinating

Subcommittee

MICHAEL A. PEARL

Member, Lawyers Coordinating

Subcommittee

Committee on State Taxation

of the Council of State

Chambers of Commerce

122 C Street, N.W.

Suite 200

Washington, D.C. 20001

(202) 484-8103

Counsel for the Committee on

State Taxation of the Council of

State Chambers of Commerce

* Counsel of Record

December 24, 1987