Amicus Curiae Brief — Associated Industries of Mo. v. Lohman

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IN THE

SUPREME COURT OF THE UNITED STATES

Octoser Term, 1993

ASSOCIATED INDUSTRIES OF MISSOURI and

ALUMAX FOILS, INC.,

Petitioners,

Vv.

JANNETTE M. LOHMAN, Director of Revenue,

and DELONG’S, INC., THE CITY OF BLUE

SPRINGS, GARY MARKENSON, THE MISSOURI

ASSOCIATION OF COUNTIES, THE MISSOURI

MUNICIPAL LEAGUE, and THE ASSOCIATED

GENERAL CONTRACTORS OF MISSOURI,

Respondents.

ON WRIT OF CERTIORARI TO

THE SUPREME COURT OF MISSOURI

BRIEF OF WASHINGTON LEGAL FOUNDATION AS

AMICUS CURIAE IN SUPPORT OF PETITIONERS

DANIEL J. POPEO PAMELA F. OLSON

RICHARD A. SAMP SUE C. BAK

(Counsel of Record) 1440 New York Ave., NW

WASHINGTON LEGAL Washington, DC 20005

FOUNDATION (202) 371-7100

2009 Mass. Ave., NW

Washington, DC 20036

(202) 588-0302

Date: January 20, 1994

:

4

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B

QUESTIONS PRESENTED

1. When a state imposes a statewide use tax upon

interstate sales at a rate which, in more than 50% of the

state’s taxing jurisdictions, is higher than the sales tax rate

on identical intrastate sales, is the resulting discrimination

against interstate commerce constitutionally irrelevant

merely because in the aggregate the state collects more

sales taxes than use taxes?

2. Does General American Tank Car Corp. v. Day,

270 U.S. 367 (1926), validate a state tax scheme which in

numerous instances burdens interstate Commerce more

heavily than intrastate commerce? If so, is General

American inconsistent with Halliburton Oil Well Cementing

Co. v. Reily, 373 U.S. 64 (1963); Maryland v. Louisiana,

451 U.S. 725 (1981); and Bacchus Imports, Lid. v. Dias,

468 U.S. 263 (1984); and should it be expressly

overruled?

ili

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .............. iv

INTERESTS OF THE AMICUS CURIAE ....... l

STATEMENT OF THE CASE ............. 2

SUMMARY OF ARGUMENT ............. 4

SS TEE CEE eee 5

I. THE ADDITIONAL USE TAX

STATUTE IS DISCRIMINATORY ON

ITS FACE, AND CANNOT BE

JUSTIFIED AS PART OF A

COMPLEMENTARY TAX SCHEME ... §5

A. The Commerce Clause Requires

Absolute Equality in the Treatment

of Interstate Commerce in Each and

I "Se 666 000600000. 8

B. Statistical Data Cannot Accurately

Quantify the Extent of Discrimina-

tion, and Cannot Provide a

Meaningful and Reliable Test for

IT / O6\4 6 6 60 0 0 6 0 0 16

Il. THIS COURT’S' DECISION IN

GENERAL AMERICAN DOES NOT JUS-

TIFY MISSOURI'S DISCRIMINATORY

ADDITIONAL USE TAX STATUTE

AND, TO THE EXTENT IT CAN BE

INTERPRETED AS SUPPORTING THE

ADDITIONAL USE TAX STATUTE,

IT SHOULD BE OVERRULED ....... 20

Eas sss ds ees cc cccce « 22

iv

TABLE OF AUTHORITIES

Cases Page

Armco, Inc. v. Hardesty, 407 U.S. 638 (1984) .. . 5, 8

Associated Industries of Missouri v. Director

of Revenue, 857 S.W.2d 182 (Mo. 1993) .... passim

Bacchus Imports, Ltd. v. Dias,

2 2 ® ) Ae eee ca a 8

Boston Stock Exchange vy. State Tax

Commission, 429 U.S. 318 (1977) 2.2... 9-10, 18

Charleston Federal Savings & Loan Associ-

ation v. Alderson, 324 U.S. 182 (1945) ........ 21

Complete Auto Transit, Inc. v. Brady,

— 3 fe Fl, eer ee 4, 11, 16, 19

Container Corp. of America v. Franchise Tax

Se, See es SD gb a Se eee ec ee ees 12

Freeman v. Hewit, 329 U.S. 249 (1946)... 22... 14

General American Tank Car Corp. v. Day,

2g! 6S OU ere ee eee 20, 21

Gregg Dyeing Co. v. Query,

Se ED Sect eee eaeses 5, 6, 20-21

Halliburton Oil Well Cementing Co. v. Reily,

Se Ec on de 6.0900 06 bee 0 6, 8

Henneford v. Silas Mason Co.,

ee ar ee 5, 6, 20

Hinson vy. Lott, 75 U.S. (8 Wall.) 148 (1868)... .. 20

Vv

Lawrence v. State Tax Commission of Mississippi,

Se rrr 21

Maryland v. Louisiana, 451 U.S. 725 (1981)... . 6,8

Moorman Manufacturing Co. v. Bair,

oe ee, 5 we 5% 12

Nashville, Chattanooga & St. Louis Railway

Co. v. Wallace, 288 U.S. 249 (1932) ......... 21

National Bellas Hess, Inc. v. Department of

Revenue of Illinois, 386 U.S. 753 (1967) .. 13, 14, 15

Northwestern States Portland Cement Co.

v. Minnesota, 358 U.S. 450 (1959) ........... 14

Pacific Co., Lid. v. Johnson,

I, te oe a es deed ee ees 21

Phillips v. Oklahoma Tax Commission,

hs bo fe 6

Quill Corp. v. North Dakota, \12 S. Ct.

Re ee 10, 11, 13-16

Salomon v. State Tax Commission of New York,

go ke oo Sa yo 4 ue oe die 21

Trinova Corp. v. Michigan Dept. of Treas..,

ee aes SED 6 i's bere oh ees 10, 11, 12, 13

Underwood Typewriter Co. v. Chamberlain,

ee 12

vi

Constitutional Provisions and Statutes

United States Constitution

Article I, Section 8, Clause3.......... passim

Constitution of Missouri (1945, as amended)

Aaeteeee TV, Bema GON ww ttt ccc ce 3

RE 3

Missourt Revised Statute (1992)

+6 fast nie Sure alee pe et 2,3

Ee ee ee 2,3

ns se 6 es eae he oe eS 2

eee eee 3

Other Authoriti

J. Hellerstein & W. Hellerstein, State

PP Ce ee ae ee ee 6, 20

IN THE

SUPREME COURT OF THE UNITED STATES

Octoser Term, 1993

No. 93-397

ASSOCIATED INDUSTRIES OF MISSOURI

and

ALUMAX FOILS, INC.,

Petitioners,

Vv.

JANNETTE M. LOHMAN, Director of Revenue,

and DELONG’S, INC., THE CITY OF BLUE SPRINGS,

GARY MARKENSON, THE MISSOURI ASSOCIATION

OF COUNTIES, THE MISSOURI MUNICIPAL

LEAGUE, and THE ASSOCIATED GENERAL

CONTRACTORS OF MISSOURI,

Respondents.

On Writ of Certiorari

to the Supreme Court of Missouri

BRIEF OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

INTERESTS OF THE AMICUS CURIAE

The Washington Legal Foundation ("WLF") is a non-

profit public interest law and policy center based in Wash-

ington, D.C., with more than 100,000 members and sup-

porters nationwide. WLF regularly appears before federal

2

and state courts in a variety of areas, and devotes a

substantial portion of its resources to the promotion of

economic liberty, free enterprise principles, and a limited

and accountable government.

WLF strongly believes that the economic well-being

of this country depends on the unrestricted flow of

commerce, both interstate and across our nation’s borders.

WLF is concerned that a discriminatory taxing scheme

such as Missouri’s additional use tax will encourage other

States and local taxing jurisdictions to adopt similar taxing

measures which discriminate against and restrict the flow

of interstate commerce.

Amicus submits this brief in support of Petitioners

with the written consent of all parties. The written

consents are on file with the Clerk of the Court.

STATEMENT OF THE CASE

In the interest of brevity, amicus hereby adopts by

reference the Statement of the Case set forth in Petitioners’

Brief.

To summarize, Missouri imposes a statewide sales tax

upon all sellers for the privilege of selling tangible

property or rendering taxable service at retail within Mis-

souri. Mo. Rev. Stat. § 144.020 (1992). Missouri also

imposes a statewide use tax on any article of tangible

personal property stored, used, or consumed within the

state. Mo. Rev. Stat. § 144.610 (1992). Practically, the

sales tax burden is imposed upon purchases made within

Missouri, and the use tax burden upon purchases made

outside Missouri.” The basic sales tax and use tax rates

(including the additional levies authorized under the

“ Under Mo. Rev. Stat. § 144.615(2) (1992), all properties

purchased in transactions that are subject to the Missouri sales tax are

exempted from tne use tax; thus the use tax applies only to the prop-

erties purchased outside Missouri and subsequently brought into the

state for storage, use, or consumption.

3

Missouri Constitution) are both 4.225 percent. Mo.

Const. §§ 43(a), 47(a) (1945, as amended); Mo. Rev.

Stat. §§ 144.020, 144.610.

In addition, Mo. Rev. Stat. § 144.748 (1992) imposes

a statewide additional use tax of 1.5 percent upon all

transactions which are subject to the basic use tax. Thus,

the total statewide use tax rate in Missouri is higher than

the statewide sales tax rate by 1.5 percent.

Missouri has attempted to justify this blatant discrimi-

nation on the ground that local governments have the

authority to levy optional local sales taxes and, in some of

the taxing jurisdictions in Missouri, the local sales tax

rates are equal to or higher than 1.5 percent, resulting in

the aggregate sales tax rates equal to or higher than the

use tax rate. The state has advanced this rationale despite

the fact that, in a substantial number of taxing jurisdictions

in Missouri, the local sales tax rates are lower than 1.5

percent, resulting in aggregate sales tax rates lower than

the use tax rate.

The central issue in this case is whether the additional

use tax, which imposes a heavier statewide tax burden

upon purchases in interstate commerce than those in

intrastate commerce, is justified simply because local

jurisdictions may impose optional local sales taxes, where

the statute provides no guarantee that the total use tax rate

will be equal to or lower than the aggregate sales tax rates

in all instances, and in fact the total use tax rate is higher

than the aggregate sales tax rates in a number of taxing

jurisdictions in Missouri.

4

SUMMARY OF ARGUMENT

The Missouri additional use tax impermissibly

discriminates against interstate commerce on its face, in

violation of the Commerce Clause of the United States

Constitution. The discrimination cannot be ignored either

because its impact is experienced only in some, but not

all, taxing jurisdictions and transactions, or on the ground

that the "extent" of discrimination is insignificant. Unlike

the “fair apportionment" prong or “substantial nexus"

prong, two of the other prongs in the four-part test for

constitutionality under the Commerce Clause, articulated in

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

(1977), the discrimination prong does not require

examination of "extent." This Court has viewed the issue

of discrimination as a matter of dichotomy: Any state tax

statute that fails to accord to each and every instance of

interstate commerce treatment equal to intrastate commerce

has been struck down by this Court under the Commerce

Clause. In the present case, the Court could best deal

with the issue of discrimination by explicitly embracing the

bright line test of absolute equality, the standard that has

been applied in these precedents.

The bright line test of absolute equality is not only

conceptually sound, as it best reflects the nature of the dis-

crimination prong of the Complete Auto Transit test, but

also is advisable from a practical standpoint. Contrary to

Respondent’s and the Missouri Supreme Court’s sugges-

tion, statistical data cannot accurately quantify the extent

or effect of discrimination in this case or in any other

case, and cannot provide a meaningful and reliable test for

constitutionality. For example, if the Court allows any de

minimis exception to the Commerce Clause, the Court

would then have to define the de minimis level, which

decision would inevitably be arbitrary. These conceptual

and practical problems can be avoided only by the bright

line test of absolute equality (i.e., a state tax statute must

accord to each and every instance of interstate commerce

treatment equal to intrastate commerce, and cannot impose

more burdensome taxes on interstate commerce than intra-

5

state commerce however slight the extent of discrimination

might be). Furthermore, the bright line test will

discourage states and local jurisdictions from inventing

creative taxing schemes that discriminate against interstate

commerce, and will decrease the incidence of constitution-

al disputes which would eventually occupy this Court’s

and other courts’ time and resources.

ARGUMENT

I. THE ADDITIONAL USE TAX STATUTE IS

DISCRIMINATORY ON ITS FACE, AND

CANNOT BE JUSTIFIED AS PART OF A

COMPLEMENTARY TAX SCHEME

Standing together, the sales tax and the use tax

generally form a complementary taxing scheme. While

the use tax, standing alone, would appear to discriminate

against interstate commerce, this Court has not reviewed

a use tax statute “within its four comers," but in

conjunction with the same state’s sales tax statute. Gregg

Dyeing Co. v. Query, 286 U.S. 472, 479 (1931). This

Court has upheld the use tax under the Commerce Clause

when the sales tax and the use tax imposed equal burdens

on interstate and intrastate commerce. See Henneford v.

Silas Mason Co., 300 U.S. 577 (1937). Use taxes have

been justified under the Commerce Clause as "complemen-

tary" or "in lieu" taxes to sales taxes.

Generally, a "complementary" or "in lieu" tax must

be "complementary" not only in its nature,” but also in the

actual amount of tax burdens. In cases holding that two

different taxes are part of a "complementary" taxing

scheme, this Court has again and again emphasized that

the actual burdens under the two taxes are equal. In

Gregg Dyeing Co., for example, the Court emphasized the

See, e.g., Armco, Inc. v. Hardesty, 467 U.S. 638 (1984) (in

order to be “complementary ," taxes must apply to “substantially equiv-

alent events").

6

fact that the amount of taxes imposed under the compen-

sating tax was “precisely the same amount per gallon."

Gregg Dyeing Co., 286 U.S. at 480. Also in Henneford,

the Court emphasized with respect to the Washington use

tax statute at issue that "[e]quality is the theme that runs

through all the sections of the statute." Henneford, 300

U.S. at 583. In Halliburton Oil Well Cementing Co. v.

Reily, 373 U.S. 64, 70 (1963), the Court pronounced that

“equal treatment for in-state and out-of-state taxpayers

similarly situated is the condition precedent for a valid use

tax on goods imported from out-of-state." In Maryland v.

Louisiana, 451 U.S. 725, 760 (1981), the Court again

concluded: "We need not know how unequal the tax is

before concluding that it unconstitutionally discriminates."

The examples are numerous. See Petitioners’ Brief, at 15-

22.

Equality, the theme that runs through all truly

"complementary" taxing schemes, is precisely the quality

lacking in Missouri’s additional use tax statute. The

unequal treatment effected by the additional use tax is clear

on the face of the statute: The additional use tax statute

imposes a higher statewide use tax rate than the statewide

sales tax rate. Even if the effect of optional local sales

taxes were to be considered, the additional use tax statute

provides no guarantee whatsoever that the use tax burden

will be no greater than the aggregate sales tax burden in all

instances. In fact, in a number of taxing jurisdictions in

Missouri, the use tax rate is higher than the aggregate sales

tax rates; thus interstate purchases for use or consumption

within these taxing jurisdictions are subject to a heavier tax

burden than comparable intrastate purchases. Commenta-

tors described a similar sales/use tax scheme in Oklahoma

as "probably the most blatant attempted discrimination

against out-of-state purchasers. "*

* J. Hellerstein & W. Hellerstein, State Taxation, ¢ 16.10{3]

(1992). This description relates to the Oklahoma sales/use tax scheme

which imposed a 2 percent sales tax on sales within the state and a 4

percent use tax on sales outside the state.

(continued...)

The discrimination in this case is clear on the face of

the statute, and neither Respondents nor the Missouri

Supreme Court have denied the existence of discrim-

ination. On the contrary, the majority of the Missouri

Supreme Court admitted that: "we acknowledge that the

Missouri scheme of state and local sales and use taxes

does not provide for an equal burden in all situations."

Associated Industries of Missouri v. Director of Revenue,

857 S.W.2d 182, 191 (Mo. 1993); Petition, Appendix A

("Pet. App.") at A-16. Nevertheless, the Missouri

Supreme Court chose to ignore the facial discrimination,

and concluded that the additional use tax statute passed

scrutiny under a “practical analysis" or “practical effect"

test, because the use tax rate in some jurisdictions and

transactions are lower than the aggregate sales tax rate.

Associated Industries of Missouri, 857 §.W.2d at 192; Pet.

App. A-18. Thus, the Missouri Supreme Court concluded

that there was no discrimination against interstate

commerce on a "statewide basis." /d.

In essence, the Missouri Supreme Court’s holding and

Respondents’ arguments in this case are based on the

following fallacious assumptions, and amicus submits that

the Missouri additional use tax statute could be found per-

missible under the Commerce Clause only by accepting

these same assumptions. They are:

*(...continued)

The Oklahoma Supreme Court struck down the use tax as repug-

nant to the Commerce Clause, despite the state’s contention that the in-

equality in the sales/use tax scheme was rectified by the existence of

optional local sales taxes. Phillips v. Oklahoma Tax Commission, 577

P.2d 1278, 1285 (Okla. 1978). The state argued that the higher rate

of use tax in that case was merely the legislature's attempt to equalize

the interstate tax rate with the greater in-state tax burden and that, if

any discrimination existed, it was only a minimal or incidental

discrepancy because a large portion of in-state sales were subject to a

4 percent sales tax. Jd. at 1281. The Oklahoma Supreme Court

rejected these arguments, and held the use tax invalid "whether the

rate of those municipal taxes be 1%, 2% or 3%." Jd. at 1285.

(a) A sales/use tax scheme that discriminates

against interstate commerce may nevertheless

be tolerated under a "practical effect" test, if

the impact of the discrimination is not present

in each and every instance of interstate

commerce, or if the "extent" of discrimination

is small; and

(b) The "extent" of discrimination can be

ascertained through an examination of statis-

tical data and will provide a meaningful and

reliable test for determining whether the

discrimination is constitutionally significant.

Both of these assumptions are without support in this

Court’s Commerce Clause jurisprudence, and will lead to

a number of conceptual and practical problems. Amicus

will examine these two assumptions in turn.

A. The Commerce Clause Requires Absolute

Equality in the Treatment of Interstate

Commerce in Each And Every Instance

The first fallacious assumption has been explicitly

articulated by Respondent Lohman as well as by the

Missouri Supreme Court, which insisted on examining the

discrimination on a “statewide basis." Associated

Industries of Missouri, 857 S.W.2d at 192; Pet. App. at

A-18. Realizing that the additional use tax statute in issue

could not pass constitutional scrutiny under this Court’s

precedents, e.g., Bacchus Imports, Lid. v. Dias, 468 U.S.

263 (1984); Armco, Inc. v. Hardesty, 467 U.S. 638

(1984); Maryland v. Louisiana, 451 U.S. 725 (1981); and

Halliburton Oil Well Cementing Co. v. Reily, 373 U.S. 64

(1963), Respondent Lohman has attempted to distinguish

the present case on factual grounds:

The critical factual distinction between the present

case and Halliburton, Maryland v. Louisiana,

Bacchus, and Armco is that in each of these cases

9

the particular aspect of the sales or use tax under

examination operated in a discriminatory manner

each and every instance in \.hich it applied.

Respondent Lohman’s Opposition to Petition for Writ of

Certiorari ("Opposition"), at 10 (emphasis added). Thus,

Respondent has urged the Court to examine the "overall

effect" of the Missouri additional use tax statutes, as the

majority of the Missouri Supreme Court did. See

Resvondent Lohman’s Opposition, at 14.

Contrary to Respondent’s assertion, however, it is

clear from this Court’s precedents that, in order to be

found unconstitutional, a statute does not have to discrim-

inate against interstate commerce in each and every

instance; rather, in order to be found constitutional, a

Statute must provide an equal treatment to interstate

commerce in each and every instance. As discussed more

extensively in Petitioners’ Brief, a discriminatory tax

burden is not offset, nor does it lose its significance, by

nondiscriminatory treatment of other instances of interstate

commerce, and this Court has struck down state tax stat-

utes despite the allegedly small scale of their discriminato-

ry impact. See Petitioners’ Brief, at 15-25; see also

Boston Stock Exchange v. State Tax Commission, 429 U.S.

318 (1977).*

* In Boston Stock Exchange, the New York transfer tax on

securities transactions allowed: (i) a 50 percent reduction in the tax rate

when the sale was made within New York by a nonresident; and (ii)

a $350 limit on the total tax liability for a single sale when the sale

was made within New York, by a resident or nonresident. Sales made

outside New York were subject to the regular rate of tax, computed by

the number of shares involved. Boston Stock Exchange, 429 U.S. at

323-325.

Clearly the discrimination did not affect each and every instance

of interstate commerce. For example, in the case of a resident, the

discrimination did not affect transactions involving small numbers of

shares, because the $350 limit would not be triggered unless the sale

involved a large enough number of shares. In the case of a nonresi-

(continued...)

10

Respondent’s "each and every instance" or "de mini-

mis" type argument would turn the entire Commerce

Clause jurisprudence on its head. This Court has

repeatedly rejected similar attempts, and there is no reason

why Missouri’s discriminatory tax should be treated

differently.”

The Missouri Supreme Court’s error in this case is

based on its fundamental misunderstanding of the concepts

of "discrimination" and of the “practical analysis" or

“practical effect" test under the Commerce Clause. The

Missouri Supreme Court insisted on applying a "practical

analysis" or “practical effect" test, rather than a "formal-

istic and exacting approach," citing Trinova Corp. vy.

Michigan Dept. of Treas., 498 U.S. 358 (1991), and Quill

Corp. v. North Dakota, 112 S.Ct. 1904 (1992). Associat-

ed Industries of Missouri, 857 S.W.2d at 191-192; Pet.

App. A-17-18. While a brief examination of Trinova and

Quill «ill show that these cases were cited completely out

of context, a more careful analysis will help to explain

how the Missouri Supreme Court fundamentally misunder-

stood the meaning of “discrimination” under the

Commerce Clause, as well as how the concept should be

interpreted in this case.

*(...continued)

dent, the New York Court of Appeals observed that there was no

discrimination against interstate commerce in favor of intrastate

commerce, because New York sales by nonresidents also involved

interstate commerce. /d. at 333. This Court flatly rejected that

contention, noting: “Although it did not so state, the Court of Appeals

apparently believed that such discrimination was permissible under the

Commerce Clause. We disagree with the Court of Appeals with

respect to both residents and nonresidents." /d.

* Amicus does not believe that the discriminatory impact of the

additional use tax is de minimis. However, even if the impact of the

statute were de minimis, such a fact should be irrelevant as a matter of

law.

Trinova involved Michigan's single business tax,

which was imposed on a taxpayer’s total value added that

was apportioned to Michigan based on a formula provided

in the statute. The taxpayer in that case c

Michigan’s formulary apportionment under the Due

Process Clause and the Commerce Clause. Quill involved

North Dakota's attempt to compel out-of-state mail-order

houses to collect and pay a use tax on goods purchased for

use in the state, when such mail-order houses had neither

outlets nor sales representatives in North Dakota.

Trinova and Quill did not primarily involve the issue

of discrimination. Rather, in Trinova, the primary issue

was whether Michigan's formulary apportionment resulted

in “fair apportionment," as ired in the four-prong test

articulated in Complete Auto Tanai, Inc. v. Brady, 430

U.S. 274, 279 (1977).° Thus, Trinova involved the fair

apportionment issue, a different prong of the Complete

Auto Transit test.” The principal Commerce Clause issue

in Quill was the of “substantial nexus," which is

another prong in the te Auto Transit test. Unlike

the present case, neither case involved the discrimination

prong of the Complete Auto Transit test.

Trinova and Quill illustrate the kind of constitutional

scrutiny this Court applies when considering the fair

apportionment prong and the substantial nexus prong of the

Complete Auto Transit test, respectively. In Trinova, this

s

The four prongs in the Complete Auto Transit test are: (i)

substantial nexus between the taxing state and the taxed activity, (ii)

fair apportionment, (iii) no discrimination against interstate commerce,

oy (iv) oy ' weed between the tax and the services provided by

State. .

“While the taxpayer in Trinova also alleged that the apportionment

formula discriminated against interstate commerce, Trinova, 498 U.S.

at 384, that claim obviously depended on the fair apportionment issue.

Because the Court found the apportionment formula valid and the tax-

payer could not point to any facial discrimination in the statute, this

claim was rejected. /d. at 384-386. In contrast, the Missouri addi-

tional use tax statute in this case is facially discriminatory.

12

Court observed that the nature of the fair apportionment

prong test is informed by the original rationale for

apportionment of income. Apportionment of income

becomes necessary because of the difficulty of identifying

the geographic source of the income earned by a multistate

enterprise with any precision. Therefore, the Court noted

that allocating income among various taxing jurisdictions

“bears some resemblance . . . to slicing a shadow.”

Trinova Corp., 498 U.S. at 373-374 (citing Underwood

Typewriter Co. v. Chamberlain, 254 U.S. 113, 120-121

(1920); Container Corp. of America v. Franchise Tax

Board, 463 U.S. 159, 192 (1983)).

Because it is the lack of precision and certainty that

necessitates formulary apportionment in the first place,

formulary apportionment is inherently arbitrary; there is no

“precise” or “right" answer. In principle, all apportion-

ment formulas are to some degree arbitrary; in practice,

some apportionment formulas are more i than

others. Fairness of apportionment is not a matter of black

and white, but many different shades of gray. In the fair

apportionment prong, no bright line test of constitutional-

ity can be established or applied. Therefore, the Court

strikes down an apportionment formula only when it fails

to satisfy absolute minimum tests of rationality.” The

apportionment formula in Trinova passed muster under

* In the fair apportionment prong cases, the Court applies the

“internal consistency” and “external consistency” tests to ensure that

the apportionment meets a minimum level of rationality. The internal

consistency test is satisfied if the formula, if applied by every juris-

diction, would result in no more than all of the unitary business's

income being taxed. The external consistency test is satisfied if the

factors used in the apportionment formula actually reflect a reasonable

sense of how income is generated. Trinova, 498 U.S. at 380 (citing

Container Corp. , 463 U.S. at 169). In order to prevail on the external

consistency challenge, a taxpayer must prove by clear and cogent evi-

dence that the income attributed to the state under the formula is in

fact “out of all appropriate proportions to the business transacted . . .

in that State,” or “led to a grossly distorted result." Trinova Corp.,

498 U.S. at 380 (citing Moorman Manufacturing Co. v. Bair, 437 U.S.

267, 274 (1978)).

13

these tests. Furthermore, the formula advanced by the

taxpayer was not demonstrably less arbitrary than the

state’s formula. Trinova, 498 U.S. at 377. It was in this

Cates Se eS Sane cates Out Ge Constiation "does

not require a formalistic analysis resulting in a penalty for

Michigan's selection of an easier calculation method for its

taxpayers." Id.

The concept of “substantial nexus” at issue in Quill is

somewhat different. On the one hand, unlike the “fair

' " concept, "substantial nexus" presents a real

dichotomy at its two extremes: at one extreme, the

relationship between the taxing state and the taxed activity

is SO extensive that the nexus is clearly substantial; at the

other extreme, the relationship is nonexistent or so

minimal that the nexus is clearly not substantial.” On the

other hand, in the cases between these two extremes, the

substantiality of nexus is a matter of degree, just like the

fair apportionment" concept. Thus, substantiality is a

matter of black and white at two extremes of the spectrum,

but with many shades of gray in between. In the

substantial nexus prong, a bright line test can be estab-

lished and applied, because the issue is a matter of black

and white at its extremes; but such a bright line test

inevitably carries some artificiality and arbitrariness,

because the line is drawn at one point on the spectrum.

In Quill, this Court rejected the state’s suggestion to

abandon the bright line test established in National Bellas

Hess, Inc. v. Department of Revenue of Illinois, 386 U.S.

753 (1967), which held that a state may not impose a duty

to collect use taxes on a seller if the seller’s only

connection with customers in the taxing state is by

common carrier or the United States mail. Quill, 112 S.

* For example, if the taxpayer is physically present on a permanent

basis, has assets and employees, and conducts business within the state,

the nexus would be clearly substantial. In contrast, if the taxpayer has

no relationship or contact whatsoever with the state (not even through

common carrer, telephone, or the United States mail), the nexus

clearly would not be substantial.

14

Ct. at 1914.“ While the Court rejected the "formalistic”

approach in older Commerce Clause cases,“ the Court

noted: "not all formalism is alike. . . [T]he bright line rule

of Bellas Hess furthers the ends of the dormant Commerce

Clause." Jd. Therefore, the Court reasoned:

Like other bright-line tests, the Bellas Hess

rule appears artificial at its edges. . . This

artificiality, however, is more than offset by the

benefits of a clear rule. Such a rule firmly

establishes the boundaries of legitimate state

authority to impose a duty to collect sales a ! use

taxes and reduces litigation concerning these

taxes. This benefit is important, for as we have

so frequently noted, our law in this area is

something of a "quagmire" and the “application of

constitutional principles to specific state statutes

leaves much room for controversy and confusion

and little in the way of precise guides to the

States in the exercise of their indispensable power

of taxation." Northwestern States Portland

Cement Co. v. Minnesota, 358 U.S. 450, 457-458

(1959).

~ When the Court first established this rule in National Bellas Hess,

it was not clear whether the rule was based on the Due Process Clause

or the Commerce Clause. In Quill, the Court examined the evolution

of its Due Process jurisprudence since National Bellas Hess and, to the

extent that its prior decisions have indicated that the Due Process

Clause requires physical presence in a state for the impos’tion of a duty

to collect a use tax, overruled those holdings as superseded by

developments in the law of due process. Quill, 112 S. Ct. at 1911.

However, the Court refused to abandon the bright line rule in National

Bellas Hess for purposes of the Commerce Clause test. /d. at 1914.

“Freeman v. Hewit, 329 U.S. 249 (1946), and its progeny dis-

tinguished, for example, between "direct" and “indirect” taxes on

interstate commerce.

15

Id.”

In contrast to the fair apportionment and substantial

nexus prongs, the discrimination prong involved in this

case presents a pure dichotomy. Discrimination means a

lack of equality. For purposes of the Commerce Clause.

either the statute discriminates or it does not discriminate:

There is no middle ground. Discrimination in the

Commerce Clause is a matter of black and white, without

shades of gray in between.

In the discrimination prong, therefore, the only test

that reflects the nature of the issue, the only test that is not

arbitrary is a bright line test with the line drawn between

black and white. If the Court has retained the bright line

rule of National Bellas Hess because of the inherent

benefits of such a rule, despite the risk of “artificiality” in

the substantial nexus prong, there is much more reason to

apply a bright line rule in the discrimination prong, where

the only rule that is not arbitrary is a bright line test.

Indeed, failing to recognize a bright line rule of absolute

equality would lead to artificiality and arbitrariness.

The bright line test of absolute equality not only is

conceptually sound, but also will further the ends of the

Commerce Clause. Like the bright line test sustained in

Quill, it will provide “precise guides to the States in the

exercise of their indispensable power of taxation." Quill,

112 S. Ct. at 1915. As this Court has noted, providing

‘* _ The Missouri Supreme Court clearly cited Quill out of context.

In discussing the evolution of its Commerce Clause jurisprudence over

the years, this Court noted that it renounced the formalistic distinction

between “direct” and “indirect” taxation on interstate commerce so that

taxes with the same economic effect would not be treated differently

under the Constitution simply because of the “magic words or labels"

attached to them. It was in this context that this Court cited Complete

Auto Transit for the importance of ing past the formal language of

the tax statute to its practical effect. ill Corp., 112 S. Ct. at 1912.

However, as the Court noted in Quill, it is clear that “not all

formalism is alike," and the Court ultimately sustained the bright line

test of National Bellas Hess. Id. at 1914.

16

precise guides to the states is especially important in the

sales and use tax area, which is at issue in this case:

Moreover, a bright-line rule in the area of sales

and use taxes also encourages settled expectations

and, in doing so, fosters investment by businesses

and individuals.

Id. (fn. ref. omitted). A failure to acknowledge this rule,

in contrast, would result in more confusion and

controversy regarding application of the discrimination

prong of the Complete Auto Transit test.

This Court has in fact applied a bright line test of

absolute equality in its precedents, both before and since

the Complete Auto Transit decision. By explicitly ac-

knowledging and adopting the bright line test of absolute

equality which has been already established by this Court

(/.@., a state tax statute must accord to each and every

instance of interstate commerce treatment equal to

intrastate commerce, and cannot impose more burdensome

taxes on interstate commerce than intrastate commerce,

however slight the extent of discrimination might be), this

Court would put to rest any misguided conceptions regard-

ing the meaning of "discrimination" and any attempts by

states and local taxing jurisdictions to evade the Commerce

Clause through creative taxing schemes.

B. Statistical Data Cannot Accurately Quantify

The Extent of Discrimination, and Cannot

Provide a Meaningful and Reliable Test for

Constitutionality

The second fallacious assumption underlying the

Missour: Supreme Court’s analysis is that the extent of dis-

crimination could be ascertained with reasonable accuracy

based on statistical data, and could provide a meaningful

and reliable guide for determining the constitutionality of

the statute. In fact, however, statistical data and informa-

tion that would inevitably be utilized in determining the

extent of discrimination are inherently ambiguous and sus-

17

ceptible to misinterpretation, and would not provide a reli-

able test for constitutionality.

_A good example of the misuse or misinterpretation of

Statistical data is found in the Missouri Supreme Court

majority's reasoning. The record in this case shows that,

in the calendar year 1990, 841 out of 1,573 taxing juris-

dictions in Missouri (53.5 percent) had local sales tax rates

below 1.5 percent, and 26.5 percent of Missouri’s total

population lived in these 841 taxing jurisdictions. The

record further shows that 6.86 percent of the taxable

intrastate sales occurred in these 841 jurisdictions, yielding

2.76 percent of the total sales taxes collected in the state

Associated Industries of Missouri, 857 S.W.2d at 185, Pet.

App. A-5.

From this data, the majority of the Missouri Supreme

Court jumped to the conclusion that only 6.86 percent of

the taxable intrastate sales would have been subject to a

sales tax rate less than the use tax rate. Jd. at 191; Pet.

App. A-16-17. However, as Chief Justice Robertson of

the Missouri Supreme Court pointed out in his dissenting

opinion, this case is an attack on the use tax. See Pet.

App. A-26. Therefore, it is irrelevant what percentage of

intrastate sales occurred in those jurisdictions with local

sales tax rates below 1.5 percent. Jd. While the amount

and percentage of the total out-of-state purchases in those

jurisdiction may be a better indicator of the extent of

discrimination, the record in this case provides no basis

from which to calculate these numbers in 1990. /d

Moreover, even if these numbers were available, they

would essentially be irrelevant because they relate to the

—T in 1990, before the additional use tax came into

effect.~

_ Furthermore, even if the amount and percentage of

interstate purchases after the effective date of the

additional use tax statute were available, they would by no

iv

~ The additional use tax became effective as of July 1, 1992.

18

means reflect the actual impact of discrimination. The

actual impact of discrimination could be measured not by

comparing the amounts of interstate and intrastate pur-

chases, but by the actual economic impact which the dis-

criminatory tax had on the purchasing decisions of

consumers (i.e., whether to buy interstate or intrastate).

This impact is impossible to measure. Even if the

numbers showing the amounts and percentage of interstate

and intrastate purchases during the periods before and after

the effective date of the additional use tax were to be

obtained, such figures would not show the actual impact of

the discriminatory tax, unless all factors affecting purchase

decisions (other than the tax burden factor) could be

identified and neutralized.“

Assuming, arguendo, the actual impact of the

discriminatory tax could be ascertained, such figure would

not answer the very question for which the quantification

was attempted in the first place, i.e., whether the extent of

discrimination is de minimis. In order to answer this

question, the Court would have to: (i) decide where the de

minimis line is to be drawn, and (ii) then apply the de

minimis line test.

Establishing a test based on a “de minimis" level of

discrimination would be akin to establishing a bright line

test but without the bright in the line since what is de

minimis is always open to question. Thus, the Court will

be forced to draw a line one way or another; when the

Court does not adopt the test of absolute equality, howev-

er, the line will be unclear, arbitrary, and without support

in the Commerce Clause. Arbitrariness may be acceptable

where no bright line test is possible (as in the case of the

ia

Furthermore, the impact of such other factors would be legally

irrelevant. In Boston Stock Exchange, for example, this Court rejected

the New York Court of Appeals’s reasoning that higher transfer taxes

on New York residents upon out-of-state sales of securities than in-

state sales would have no “practicai" effect since "it is more than likely

. . . that the sale would be made on a New York exchange in any

event." Boston Stock Exchange, 429 U.S. at 333.

19

fair apportionment prong) or where a bright line test

inevitably carries arbitrariness and artificiality (as in the

case of the substantial nexus prong). In addressing the

discrimination prong, however, the bright line test of

absolute equality not only is possible but also is devoid of

arbitrariness and artificiality; therefore, arbitrariness is not

}——_ Amicus submits that only the bright line test

;

bsolute equality would be devoid of arbitrariness and

administrative problems, and would best reflect the nature

of the discrimination prong of the Complete Auto Transit

test.

Assuming further that a de minimis line could be

determined and somehow justified, the application of such

a line would raise another problem. Statistical data can

and does change over time. Thus, using statistical figures

as the measure of constitutionality would result in the

anomaly of changing the constutionality (thus, the

enforceability) of a statute each year, or even each quarter

or month, as the numbers have changed and will change.”

_ In sum, any attempt to quantify the "extent" of dis-

crimination resulting from the additional use tax, and

indeed any attempt to draw constitutional conclusions from

statistical data, would be essentially futile. Such inquiry

is bound to reach a wrong answer because it started with

a wrong assumption, i.e., that the “extent” of

discrimination can be quantified and is relevant under the

Commerce Clause.

1s

The record in this case shows that, as a matter of fact, local sales

taxes in some jurisdictions were temporarily imposed and then expired

by the passage of time. Joint Appendix, Stipulation Exhibit J. Both

the number of taxing jurisdictions imposing local sales taxes and the

local sales tax rates are subject to change. Thus, as long as the “ex-

tent" of discrimination, as the Missouri Supreme Court understands it,

remains a relevant inquiry, this Court and other courts would be forced

to shoot at a constantly moving target.

20

Il. THIS COURT’S DECISION IN GENERAL

AMERICAN DOES NOT JUSTIFY MISSOURI’S

DISCRIMINATORY ADDITIONAL USE TAX

STATUTE AND, TO THE EXTENT IT CAN BE

INTERPRETED AS SUPPORTING THE

ADDITIONAL USE TAX STATUTE, IT SHOULD

BE OVERRULED

It has been suggested by Respondents and the Missou-

ri Supreme Court that the additional use tax may be

justified by this Court’s decision in General American

Tank Car Corp. v. Day, 270 U.S. 367 (1926). As pointed

out in Chief Justice Robertson’s dissenting opinion in the

decision below, General American does not govern the

outcome of this case because it involved the application of

the Equal Protection Clause rather than the Commerce

Clause, and involved a property tax rather than a sales/use

tax scheme. See Pet. App. A-27-30. However, if and to

the extent that General American is interpreted as suggest-

ing that a discriminatory taxing statute does not violate the

Commerce Clause if it discriminates against interstate

commerce in some but not all instances or if the “extent”

of such discrimination is small, the case should be over-

ruled.

Contrary to the Missouri Supreme Court’s suggestion,

Pet. App. A-13, General American is not the seminal case

of the "complementary" or “in lieu" tax doctrine. The

“complementary” or "in lieu" tax doctrine was recognized

as early as the 19th century. See, e.g., Hinson v. Lott, 75

U.S. (8 Wall.) 148 (1868). It has been more clearly

articulated in Gregg Dyeing Co. v. Query, 286 U.S. 472

(1932), and Henneford v. Silas Mason Co., Inc. , 300 U.S.

577 (1937). Henneford is considered the classic example

of the "in lieu" tax doctrine in the sales/use tax area. See,

e.g., J. Hellerstein & W. Hellerstein, State Taxation,

{ 16.10[1]. Other than in Henneford, General American

has been cited by very few Supreme Court decisions,

21

usually in string citations and always for propositions

unrelated to the issue in this case.”

Reviving General American in the context of this case

would be perceived as an open invitation to the states and

local taxing jurisdictions to devise creative taxing schemes

in an attempt to evade the Commerce Clause. States could

be led to believe that they may generally be able to justify

discriminatory taxes simply by exempting some instances

of interstate commerce from the discrimination, or by

hiding behind local jurisdictions. The potential for such

misinterpretation would not be limited to the sales/use tax

area, but would breed confusion and uncertainty, and

therefore more litigation, in the discrimination prong of the

Commerce Clause in general. Thus, reviving General

American will not only restrict and harm the flow of inter-

State commerce, but also will divert more time and

resources of this Court and other courts, states, and

taxpayers into needless constitutional disputes.”

“General American has been cited for propositions that a state may

apply different modes of tax assessment unless they produce inequality

on persons or property of the same class, Charleston Federal Savings

& Loan Association v. Alderson, 324 U.S. 182, 190 (1945); and that

a state may impose taxes upon the instruments of interstate commerce

(such as rolling stock) and those who are ed in interstate

commerce under its general tax system, Nashville, Chattancons & St.

Louis Railway Co v. Wallace, 288 U.S. 249, 267 (1932); Pacific Co.,

Lid. v. Johnson, 285 U.S. 480, 493 (1932); and in tie Equal

Protection Clause context, Gregg Dyeing Co., 286 U.S. at 482:

Lawrence v. State Tax Commission of Mississippi, 286 U.S. 276, 283

(1932); Salomon v. State Tax Commission of New York, 278 U.S. 484,

491-492 (1929).

“In their Opposition to the Petition for Writ of Certiorari

("Opposition"), Respondents-Intervenors suggested that administrative

convenience justifies the Missouri additional use tax scheme.

Respondents-Intervenors’ Opposition at 19-23. However, judicial

economy should also be taken into account in considering administra-

tive convenience. The increased confusion and room for controversy

that will be caused by upholding the additional use tax in this case does

not warrant the conclusion that the concern for administrative

convenience supports the additional use tax.

22

CONCLUSION

For the foregoing reasons, the decision of the Supreme

Court of Missouri should be reversed.

Dated: January 20, 1994

Respectfully submitted,

PAMELA F. OLSON

SUE C. BAK

1440 New York Ave., NW

Washington, D.C. 20005

(202) 371-7100

DANIEL J. POPEO

RICHARD A. SAMP

(Counsel of Record)

WASHINGTON LEGAL

FOUNDATION

2009 Massachusetts Ave., NW

Washington, DC 20036

(202) 588-0302

Attomeys for amicus

ee