# Amicus Curiae Brief — DH Holmes Co. v. McNamara

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1988
- **Citation:** 486 U.S. 24

## Text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0842%3A08. Public record. Not legal advice.