Petition for Writ of Certiorari — Mississippi Tax Commission v. H. J. Wilson Co.

Supreme Court, U.S.

») FILED

)

( 99 22 JUN 29 1999

Office OF THE CLERK

in ine

Supreme Court of the United States

+

STATE TAX COMMISSION

OF THE STATE OF MISSISSIPPI,

Petitioner,

v.

H.J. WILSON CO., INC., St

Respondent.

+

On Petition For Writ Of Certiorari

To The Supreme Court of Mississippi

+

PETITION FOR WRIT OF CERTIORARI

*

Bossy R. LonG

Counsel of Record

Brap D. WILKINSON

Counsel

Mississippi State Tax Commission

P.O. Box 1033

Jackson, MS 39215

(601) 923-7412

Attorneys for Petitioner

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTIONS PRESENTED FOR REVIEW

Does 31 U.S.C. §3124 (1996) prohibit states from

including United States Postage in the tax base when

determining the imposition of use tax on advertising

materials delivered to residents of the taxing state?

Do United States Postage Stamps represent an instru-

mentality or obligation of the United States for pur-

poses of intergovernmental tax immunity as

contemplated by the Constitution and 31 U.S.C.

§3124?

li

PARTIES TO THE PROCEEDINGS

The petitioner in this action is the State Tax Commission

of the State of Mississippi. The respondent in this action

is H.J. Wilson Co., Inc.

—_—

TABLE OF CONTENTS

Page

a iii

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

CITATIONS TO OPINIONS BELOW................ 1

ERE I are a et a 1

CONSTITUTIONAL AND STATUTORY PROVI-

ee Shi ose evssesesccccccce.... 2

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

REASONS FOR GRANTING THE WRIT ........... 4d

I. United States Postage Stamps Are Not Obliga-

tions of the United States Government........ 4

II. Congress Has Not Expressly Provided a Specific

Exemption Under These Circumstances........ 11

Ill. The Use Tax Was Not Imposed Upon United

EE ici cv ewin dss evkeceeeveseces.... 12

RR a eee ee a 16

iv

TABLE OF AUTHORITIES

Page

Cases

California Equalization Board v. Sierra Summit, 490

es Ne CP sh wdeveencekevaveuesaivseebeeres 14, 15

Capital Cities Cable, Inc. v. Crisp, 467 U.S. 691

CPP a vhbceneseeeracensseecesedescensmenerraaera 12

Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163

SPUN icv ccuvcccvassecenerveeensurecusesceeweel 14, 15

First National Bank of Atlanta v. Bartow County

Board of Tax Assessors, 470 U.S. 583 (1985).......... 8

McCullough v. Maryland, 17 U.S. (4 Wheat.) 316

I dcccccsivesivedcieevisestorsdeecesseleusenws 4

Memphis Bank & Trust Co. v. Garner, 459 U.S. 392

CR ce deeesesvusbasesdtuckerenseceeseertesvesse, 8

North Dakota, et al. v. United States, 495 U.S. 423

GE aren banrcanses 6cesinseneenetcnssuaeaereeeet 12

Rockford Life Insurance Company v. Illinois Depart-

ment of Revenue, 482 U.S. 182 (1987) ...7, 8, 9, 10, 12

Roxborough Manayunk Federal Savings and Loan

Association v. Commonwealth, 687 A.2d 1202 (Pa.

oe Me Pere rrr rr erry cress 8

Smith v. Davis, 323 U.S. 107 (1944)....6, 7, 8, 9, 10, 11, 12

United States v. New Mexico, 455 U.S. 720 (1982)..... 15

STATUTES

© Uc te a6 bob ono dc kinase ones cute csevasd ae 4

OS Wa Sa ciccentebeskstuuneseuuipenssewe 2, a

URE WI) cee 5

v

TABLE OF AUTHORITIES - Continued

Page

Pe Ia 5s 0 009 shade Leia > teased eee 5

Oe Se GN Fob cFeccdivaeisses cee 5

OF ME SE) iby 564s cane cantata ee 5

ee We MAS ees etekes Ree 5

Oe Ws BNE ois end ntvcsestectseee da ee 5

OF Ee BR coe anne teakcdyniciseeh ee 5

Oe Ws NES 4dk ds 6 Si Kod eeuudd ee ee 15

31 U.S.C. §742 (R.S. 3701)...................... S, 7,

Oe Seer OND 89 ire de esd ee passim

Miss. Code Ann. 27-67-3(f) i FP eere re rer ces: 2 13

PETITION FOR WRIT OF CERTIORARI

Petitioner, State Tax Commission of the State of Mis-

sissippi (“Petitioner”) requests that a writ of certiorari

issue to review the judgment of the Supreme Court of the

State of Mississippi in H.J. Wilson Company, Inc. v. State

Tax Commission of the State of Mississippi, __ So.2d oe

(Miss. 1998); 1998 WL 427261.

S

CITATIONS TO OPINIONS BELOW

The opinion of the Supreme Court of the State of

Mississippi affirming in part and reversing and remand-

ing in part the judgement of the Chancery Court of Hinds

County, Mississippi, dated December 23, 1996, is reported

at ____ So. 2d ___ (Miss. 1998); 1998 WL 427261, and is set

forth in Appendix 1.

JURISDICTION

The final judgement of the Supreme Court of the

State of Mississippi was entered on July 30, 1999, and the

final judgement on the Motion for Rehearing was entered

on March 31, 1999, by the Supreme Court of the State of

Mississippi. This Petition is filed within the time period

allowed by the Court. The jurisdiction of this Court is

invoked under U.S. Supreme Court Rule 10(c) and 28

U.S.C. §1257(a).

CONSTITUTIONAL AND STATUTORY PROVISIONS

This case involves 18 U.S.C. §8 (1996) which defines

an “obligation” of the United States Government and 31

U.S.C. §3124(a) which exempts obligations of the United

States Government from State taxation. This case involves

the constitutional doctrine of intergovernmental tax

immunity. This case also involves §27-67-3(f) of the Mis-

sissippi Code, which is set forth as Appendix 94-95.

¢

STATEMENT OF THE CASE

Respondent, H.J. Wilson Co., Inc., a Louisiana Corpo-

ration doing business as Service Merchandise (“SM”), is a

subsidiary of Service Merchandise Co., Inc. and operates

retail stores throughout the United States including six in

Mississippi. For purposes of this appeal and by stipula-

tion, SM is considered the taxpayer in this appeal. As an

integral part of creating sales in its retail stores, SM

contracts to produce and distribute advertising materials

such as catalogs, fliers, and inserts to its Mississippi

customers free of charge. SM has the catalogs, fliers, and

inserts delivered to its Mississippi Customers free of

charge. SM first has the catalogs and fliers printed both

inside and outside the State of Mississippi and its

printers then deliver the advertising materials via the

United States Post Office (“USPS”) to Mississippi resi-

dents. The majority of the catalogs at issue in this appeal

were printed outside Mississippi and imported by mail

directly into the State for use. Mississippi was the only

State that collected any sales/use taxes on the catalogs

that were mailed into Mississippi.

The Mississippi State Tax Commission ( “MSTC”) con-

ducted two audits of SM representing two separate

periods, which resulted in an additional assessment of

use tax upon the value of these catalogs, which were

delivered into Mississippi. The first audit revealed addi-

tional tax liability including interest of $263,580.96 and

included the period June 1, 1986 through September 30,

1989. To the benefit of SM, tax on the contract amount

including postage and delivery fees was excluded from

the assessment through error. The second audit indicated

additional liability of $394,569.27 including interest and

represented the period October 1, 1989 to June 30, 1992.

Postal and delivery fees were correctly included in the

second and final audit. Aggrieved by these additional

assessments, SM initiated its administrative appeal proc-

ess.

SM appealed the assessments administratively both

to the MSTC’s Board of Review and the MSTC itself,

failing to receive any relief in both cases. SM alone bore

the burden of the tax by paying same, and then appealed

to the Chancery Court of Hinds County, Mississippi.

Among the issues appealed, was whether the MSTC

could assess use tax on the total contract price of the

goods including shipping.

After a trial de novo, the Chancellor affirmed the

decision of the MSTC finding that SM’s claim for refund

including a partial refund of taxes paid on delivery

charges was meritless. The Chancellor ruled that the

modern interpretation of intergovernmental tax immu-

nity is appropriate only when the tax is on the United

States itself and that this tax was on the plaintiff and not

the United States. The Chancellor further noted that nei-

ther 4 U.S.C. §107 nor 31 U.S.C. §3124 apply to the facts

of this case because Congress has not clearly expressed

an exemption from state taxation under these circum-

stances.

SM further appealed the decision of the lower state

court to the Mississippi Supreme Court. In this appeal,

many issues were raised and the Court affirmed in part

and reversed and remanded in part the decision of the

lower court. The collateral issue relating to the assess-

ment of use tax against the materials brought into Missis-

sippi was affirmed, however, the Court reversed the

decision allowing the inclusion of shipping charges in the

use tax base. The state Supreme Court concluded that

United States Postage is an obligation of the United States

Government thereby exempt from State taxation under 31

U.S.C. §3124(a). The Court noted that it was immaterial

whether the tax was upon the United States Government

or Service Merchandise. The end result was a tax upon

postage, an obligation of the United States.

*

REASONS FOR GRANTING THE WRIT

I. United States Postage Stamps Are Not Obligations

of the United States Government

Respondent relies upon McCullough v. Maryland, 17

U.S. (4 Wheat.) 316 (1819) for the contention that taxing

postage offends the federal doctrine of intergovernmental

tax immunity. The Mississippi Supreme Court found that

the tax immunity of postage is determined by reading 18

U.S.C. §8 and 31 U.S.C. §3124 concurrently. Not only do

these statutes fail to specifically exempt postage from

state taxation but also do not remotely apply to the facts

of this case. A definition of an obligation of the United

States Government, as cited by the Mississippi Supreme

Court, is found in the Crimes and Criminal Procedure

title of the United States Code and reads as follows:

The term “obligation or other security of the

United States” includes all bonds, certificates of

indebtedness, national bank currency, Federal

Reserve notes, Federal Reserve bank notes; cou-

pons, United States notes, Treasury notes, gold

certificates, silver certificates, fractional notes,

certificates of deposit, bills, checks or drafts for

money, drawn by or upon authorized officers of

the United States, stamps and other representa-

tives of value, of whatever denomination, issued

under any Act of Congress, and canceled United

States stamps.

18 U.S.C. §8

The Petitioner concedes that postage is included in the

definition of “obligation or other security of the United

States” (18 U.S.C. §8); however, contends that this section

specifically and exclusively relates to 18 U.S.C. §§471-476,

478, 481, 483, 492, 501, and 504. These sections delineate

criminal offenses prohibiting the counterfeiting and forg-

ing of United States postage stamps and other docu-

ments. Congress has failed to extend the breadth of this

definition into tax exemptions or intergovernmental tax

immunity. This is not the same definition of “obligations

of the United States Government” found in 31 U.S.C.

_§3124(a) which is located in Title 31, Chapter 31, which

covers “Public Debt” and reads as follows:

Stocks and obligations of the United

States Government are exempt from taxa-

tion by a State or political subdivision of a

State. The exemption applies to each form of

taxation that would require the obligation,

the interest on the obligation, or both, to be

considered in computing a tax, except -

(1) a nondiscriminatory franchise tax or another

nonproperty tax instead of a franchise tax,

imposed on a corporation; and

(2) an estate or inheritance tax.

31 U.S.C. §3124(a)

The term “obligation of the United States Government”

found in 31 U.S.C. §3124(a) only applies to interest bear-

ing obligations of the United States. Numerous United

States Supreme Court decisions as well as court decisions

from other states support this conclusion. The exemption

provision of 31 U.S.C. §3124(a) has never been extended

to include postage or any other obligation except those

obligations which are interest bearing obligations of the

United States Government.

This Court discussed in Smith v. Davis, 323 U.S. 107,

111 (1944), the purpose of the statute, as well as the

constitutional exemption! and concluded:

1 At the time this decision was rendered, the predecessor

statute to 31 U.S.C. §3124(a), which was 31 U.S.C. §742 (R.S.

3701), controlled. The United States Supreme Court has

Section 3701 on its face applies only to written

interest-bearing obligations issued pursuant to Con-

gressional authorization. Stocks, bonds and Treas-

ury notes are obviously of that nature. And

under the rule of ejusdem generis, it is reason-

able to construe the general words “other obli-

gations,” which allegedly cover open accounts,

as referring only to obligations or securities of

the same type as those specifically enumerated.

Hibernia Sav. & L. Soc. v. San Francisco, 200 U.S.

310, 50 L. Ed. 495, 26 S.Ct. 265, 4 Ann Cas 934.

Cf. Helvering v. Stockholms Enskilda Bank, 293

U.S. 84, 79 L.Ed. 211, 55 S.Ct. 50. This interpreta-

tion is in accord with the long established Congres-

sional intent to prevent taxes which diminish in the

slightest degree the market value or the investment

attractiveness of obligations issued by the United

States in an effort to secure the necessary credit. It is

unnecessary to extend such tax exemption, at least

through statutory interpretation, to non-interest-

bearing claims or obligations which the United

States does not use or need for credit purposes. Tax

exemptions being the exception rather than the

rule, much clearer language evidencing an

intent to immunize open account claims under

§3701 is necessary under these circumstances.

[Emphasis added]

323 U.S. at 116-117.

specifically concluded that the current version of the statute is

substantially the same as that appearing in 31 U.S.C. §742. See

Rockford Life Insurance Company v. Illinois Department of Revenue,

482 U.S. 182, 96 L.Ed.2d 152, 107 S.Ct. 2312 (1987) (Footnote 1,

482 U.S., 184.)

This Court went on to identify a test to be applied in

determining what obligations are exempt from taxation

pursuant to the constitution and the statutory provision.”

Such obligations in each instance must be characterized

by (1) written documents, (2) the bearing of interest, (3) a

binding promise by the United States to pay specified

sums at specified dates and (4) specific Congressional

authorization which also pledged the faith and credit of

the United States in support of the promise to pay. 323

U.S. at 115. This test was also applied in the case of

Roxborough Manayunk Federal Savings and Loan Association

v. Commonwealth, 687 A.2d 1202 (Pa. Commw. Ct. 1997)

wherein the court held:

(3) The exemption in 31 U.S.C. §3124 has been

interpreted to apply “only to written interest-

bearing obligations issued pursuant to congres-

sional authorization.” Smith v. Davis, 323 U.S.

111, 116, 89 L.Ed. 107, 65 S.Ct. 157, 160 (1944).

[FN8] What is an obligation of the United States

government is determined by a test established

by the Supreme Court in Smith:

Such instrumentalities in each instance

[must be] characterized by (1) written docu-

ments, (2) the bearing of interest, (3) a

2 The Supreme Court originally applied this test to

constitutional immunity but in later cases the Court has

recognized that the statutory immunity, found in 31 U.S.C.

§3124(a), is principally a restatement of the constitutional rule.

See Rockford Life Ins. Co. v. Ill. Department of Revenue, 482 U.S.

182, 96 L.Ed.2d 152, 107 S.Ct. 2312 (1987), Memphis Bank & Trust

Co. v. Garner, 459 U.S. 392, 397, 74 L.Ed. 562, 103 S.Ct. 692 (1983)

and First National Bank of Atlanta v. Bartow County Board of Tax

Assessors, 470 U.S. 583, 596, 84 L.Ed.2d 535, 105 S.Ct. 1516 (1985).

binding promise by the United States to pay

specified sums at specified dates and (4)

specific Congressional authorization, which

also pledged the [full] faith and credit of the

United States in support of the promise to

pay.

323 U.S. at 115, 65 S.Ct. at 159. [FN9] The parties

agree that the demand deposit accounts meet

the second prong of the test, that is, they bear

interest, but the other prongs are in dispute.

687 A.2d at 1205.

Applying this test to the facts of this case, it readily

appears that postage does not satisfy any of the elements

used by the court when defining what is an obligation of

the United States for purposes of 31 U.S.C. §3124. The

clear intent of the statute is to exempt from state taxation

only interest-bearing obligations of the United States

Government which could have an impact on the market

value or the investment attractiveness of obligations

issued by the United States. It was never intended to

cover obligations such as postage.

In applying this exemption provision, the Court

should keep in mind the word of caution it expressed in

Rockford Life Ins. Co. v. Ill. Dept. of Rev. supra, wherein the

Court stated:

A court must proceed carefully when asked to

recognize an exemption from state taxation that

Congress has not clearly established. We do well

to remember the concluding words in Smith,

which although spoken in reference to the stat-

ute, are relevant to our role in applying the

constitutional doctrine as well:

10

All of these related statutes are a clear indi-

cation of an intent to immunize from state

taxation only the interest-bearing obligations

of the United States which are needed to

secure credit to carry on the necessary func-

tions of government. That intent, which is

largely codified in §3701, should not be expanded

or modified in any degree by the judiciary.” 323

U.S. at 119, 89 L.Ed. 107, 65 S.Ct. 157.

[Emphasis added]

482 U.S. at 191-192 (1987).

In this case, the Mississippi Supreme Court adopts

the definition of “obligation of the United States Govern-

ment” as that contained in 18 U.S.C. §8. This Court has

never attempted to use this definition when defining the

scope of 31 U.S.C. §3124(a). In fact, the use of this defini-

tion would be inconsistent with established law in this

area. The case law and Legislative history clearly estab-

lish that 31 U.S.C. §3124(a) was only intended to exempt

interest bearing obligations of the United States Govern-

ment. The lower court’s attempt to expand this exemp-

tion to include postage is contrary to the decisions of this

Court and is in error.

Furthermore, the lower court’s opinion has far reach-

ing consequences. For instance, a consumer who orders a

widget at Sears for delivery to their home will not be

required to pay sales tax on delivery if done by the

United States Postal Service. However, if UPS or FedEx

are used, tax will be due on the total purchase price

including delivery. Additionally, retailers will be required

to exclude shipping by the United States Postal Service

from their product cost when determining the price and

11

tax base of products sold. Clearly, Congress did not have

such a result in mind when it adopted 31 U.S.C. §3124(a)

and its predecessor statute 31 U.S.C. §742.

II. Congress Has Not Expressly Provided a Specific

Exemption Under These Circumstances

The Mississippi Supreme Court’s expansion of the

exemption found in 31 U.S.C. §3124(a) is an attempt to

provide a tax exemption judicially without statutory

authority. This Court has stated that “tax exemptions are

the exception rather than the rule,” and it is clear that if

Congress wished to provide an exemption for United

States Postage it could have done so using clearer lan-

guage. Smith v. Davis, 323 U.S. 107, 111 (1944).3 In Smith,

this Court found it unnecessary to extend the tax exemp-

tions found in §3701,4 through statutory interpretation, to

non-interest bearing claims or obligations which the

United States does not use or need for credit purposes. Id.

at 118. The Court pointed out that the seven statutory

exemption provisions from which §3701 was derived,

confirm that Congress at no time meant to extend these

3 In Smith v. Davis, 323 U.S. 107 (1944), petitioner had

constructed two airports for the United States Army and was

owed money on the projects. The local government sought to

assess ad valorem taxes upon this asset. Petitioner claimed that

it was an account receivable and an instrumentality of the

United States government thereby exempt from state and local

taxation. Court held that this open account was not an

instrumentality as contemplated by the exemptions found in RS

§3701 (successors statutes being 31 U.S.C. §742 and 31 U.S.C.

§3124).

4 See FN 1.

12

exemptions. Id. This intent should not be expanded or

modified in any degree by the judiciary. Id. United States

postage stamps are clearly not interest-bearing claims or

obligations needed to secure credit, therefore, the exemp-

tions should not be extended to encompass this commer-

cial activity of the federal government.

This Court again refused to expand these exemptions

in Rockford Life Ins. Co. v. Illinois Department of Revenue,

482 U.S. 182 (1987), when it stated that “a court must

proceed carefully when asked to recognize an exemption

from state taxation that Congress has not clearly estab-

lished. Id. at 191-192 (1987). The Court must proceed with

particular care when asked to recognize an implied

exemption from state taxation. North Dakota, et al. v.

United States, 495 U.S. 423, 439-440 (1989); see Capital

Cities Cable, Inc. v. Crisp, 467 U.S. 691, 714. Nothing in the

plain language of 31 U.S.C. §3124, its legislative history,

or the doctrine of intergovernmental immunity indicates

that Congress intended to exclude postage from the tax

base when determining the imposition of use taxes on

catalogs delivered into a state for use.

III. The Use Tax Was Not Imposed Upon United States

Postage

The Mississippi Supreme Court found that it was

immaterial whether the tax was imposed upon SM or

upon the United States Government, because the tax was

imposed upon the postage. This is contrary to well-

established case law governing taxation of government

instrumentalities. The MSTC is not attempting to tax the

sale of postage in this case, but the total sales, purchase

13

price, or value of tangible personal property. Purchase

price or sales price, the basis of the use tax, is defined in

Miss. Code Ann. §27-67-3(f) (1972) as:

... the total amount for which tangible personal

property is purchased or sold valued in money

including any additional charges for deferred

payment, installation and service charges, and

freight charges to the point of use within this

state, without any deduction for the cost of

property sold, expenses or losses, or taxes of

any kind except those exempt by the sales tax

law.

[Emphasis added]

The MSTC’s witness, Eddie Beck, testified at trial that:

Q: Now, you indicated, Mr. Beck, that on the

sales tax is assessed on the total compensation

received.

A: Yes.

Q: Would that include postage?

A: Depends on how the postage is used. We

would - the freight and postage in itself is not a

taxable item. The only reason freight or postage

become taxable is the sales tax and use tax law

both add it to the selling price of whatever

you're purchasing. If I decide to ship some of

my furniture someplace within the state of Mis-

sissippi, the shipping cost, that’s not taxable. So

if I mail a letter, obviously that’s not taxable.

Where it becomes taxable is it’s additional cost

as part of the selling price, if you want to look at

it that way, for use tax as part of the cost to ship

it into the State of Mississippi. That’s been in

our law for longer than I’ve been with the Tax

14

Commission, and it doesn’t just cover postage. It

covers anything. If you ship it UPS it’s the same

identical thing. But UPS does not owe a sales tax

on their shipping, any more than the U.S. Post

Office does. It doesn’t have anything to do with

who ships it; it’s simply added to the cost of the

merchandise coming into the State of Missis-

sippi, and it carries the same rate.

[Trial transcript page 73]

SM would contract with a printing company to com-

pile, produce, and deliver advertising materials into Mis-

sissippi for a contracted price. That price is the purchase

price under Mississippi law and forms the basis for the

use tax. It becomes immaterial whether the printing com-

pany utilizes the United States Postal Service or a similar

carrier such as United Parcel Service, the tax is imposed

in a uniform and consistent manner.

In fact, providing an exemption under these circum-

stances, would actually provide the United States Postal

Service a distinct advantage over other competitor ship-

ping companies. The lower court’s decision requires the

MSTC to tax all contracts using an independent delivery

company such as United Parcel Service while providing a

tax savings to those using the USPS as the chosen deliv-

ery method.

This Court has noted that “the doctrine of inter-

governmental tax immunity started a long path of decline

and it has now been thoroughly repudiated.” California

Equalization Board v. Sierra Summit, 490 U.S. 844 (1989);

quoting Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163

eee

15

(1989).5 “Under current intergovernmental tax immunity

doctrine the States can never tax the United States

directly but can tax any private parties with whom it does

business, even though the financial burden falls on the

United States, as long as the tax does not discriminate

against the United States or those with whom it deals.”

Id.; quoting Cotton Petroleum Corp. v. New Mexico, at 523.

Absolute tax immunity is appropriate only when the tax

in on the United States itself “or an agency or instru-

mentality so closely connected to the Government that

the two cannot realistically be viewed as separate entities,

at least insofar as the activity being taxed is concerned.”

Id.; quoting United States v. New Mexico, 455 U.S. 720, 735

(1982).

The tax in this case was neither on the United States

directly or indirectly nor does the financial burden fall

upon the United States or those with whom it deals. SM

was required to pay the same amount of tax as they

would have been bound to pay had their printer utilized

a private delivery company. See California Equalization

Board, 490 U.S. at 849. The tax is imposed irrelative of the

method of delivery; thereby making the tax clearly

5 California Equalization Board v. Sierra Summit, 490 U.S. 844

(1989) dealt with California’s attempt to collect use taxes on

goods obtained from a federal bankruptcy liquidation sale

based on 28 U.S.C. §960 which subjects those conducting

business under the authority of the United States courts to the

same taxation applicable to individuals or corporations. The

respondent argued that this did not apply to essential sales in

liquidation and would burden the essential processes of the

Bankruptcy Court. Court held that nothing in §960 clearly

expressed the exemption claimed by respondent.

16

imposed upon the purchaser, SM, not the United States or

its instrumentalities.

CONCLUSION

For all the reasons set forth above, the petition for

certiorari should be granted.

Respectfully Submitted,

Bossy R. LonG

Counsel of Record

Brap D. WILKINSON

Counsel

Mississippi State Tax Commission

P.O. Box 1033

Jackson, MS 39215

(601) 923-7412

Attorneys for Petitioner

INDEX TO APPENDIX

Opinion of the Mississippi Supreme Court..... App.

Order and Mandate of the Mississippi Supreme

COND vn cncccacabevtsnncrccceesesevcesneceens App.

inion of the Lower Court - The Chancery Court

of the First Judicial District of Hinds County,

Mississippi ...........--ceeee eee eneeeeeeeeees App.

Final Judgement of the Lower Court - The Chan-

cery Court of the First Judicial District of Hinds

County, Mississippi.........--...e0eeee sees App.

Corrected Notice of the Supreme Court and Court

of Appeals of the State of Mississippi ....... App.

Final Order of the Administrative Agency - The

Mississippi State Tax Commission of the State

Of Mississippi ...........--sseeeeeeeeeeeeeees App.

4 U.S.C. § 107 (1996) ...... cece cece eee eeeeeeees App.

I oc vessdvcsuectstecssswses App.

31 U.S.C. § 3124 (1996) ...... cece ee eeneeeeeees App.

Miss. Code Ann. 27-67-3(f) (1972) ......--.0eee: App.

Miss. Code Ann. 27-67-7(b) (1972). ........+e00 App.

State of Mississippi Sales and Use Tax Rule

Number 51........ccccccccvccvcvsccccscccens App.

69

71

86

88

ee ee

App. 1

IN THE SUPREME COURT OF MISSISSIPPI

NO. 97-CA-00121-SCT

H.J. WILSON COMPANY, INC.

vz.

STATE TAX COMMISSION OF THE STATE OF

MISSISSIPPI

DATE OF JUDGMENT:

TRIAL JUDGE:

COURT FROM WHICH

APPEALED:

ATTORNEYS FOR

APPELLANT:

ATTORNEYS FOR

APPELLEE:

NATURE OF THE CASE:

DISPOSITION:

MOTION FOR

REHEARING FILED:

MANDATE ISSUED:

12/23/96

HON. DENISE OWENS

HINDS COUNTY

CHANCERY COURT

CHARLES L. BROCATO

CHARLES A. TROST

BRAD D. WILKINSON

BOBBY R. LONG

CIVIL-STATE BOARDS

AND AGENCIES

AFFIRMED IN PART;

REVERSED AND

REMANDED IN PART. -

7/30/98

8/13/98

4/20/99

BEFORE PRATHER, C.J., SMITH AND WALLER, JJ.

SMITH, JUSTICE, FOR THE COURT:

{1. HJ. Wilson Company, doing business as Service

Merchandise in the State of Mississippi (hereinafter Ser-

vice Merchandise), challenged use tax assessments by the

Mississippi State Tax Commission (hereinafter Commis-

sion) during the taxable periods from June 1, 1986

App. 2

through June 30, 1992, inclusive. The Commission, rely-

ing on Miss. Code Ann. § 27-67-5, denied Service Mer-

chandise all relief requested, and Service Merchandise

paid the assessment levied. Service Merchandise, having

exhausted all of its administrative remedies, filed a com-

plaint in the Hinds County Chancery Court seeking a

refund of the use tax assessments.

{2. Service Merchandise argued that the use tax assess-

ment violated the First Amendment of the United States

Constitution; constituted an unlawful burden on inter-

state commerce in violation of the Commerce Clause;

violated the due process clause of the Fourteenth Amend-

ment; and discriminated against Service Merchandise in

violation of the Equal Protection Clause. Service Mer-

chandise additionally challenged whether the appropri-

ate tax base for purposes of the use tax be the gross cost

of publication or the net cost of publication of the respec-

tive catalogs, fliers, and inserts. The chancery court, Hon-

orable Denise Owens presiding, entered final judgment

denying the refund of use taxes on December 23, 1996.

{3. Service Merchandise now appeals to this Court the

chancery court’s denial of relief and contends that the

chancery court erred by concluding that the Commis-

sion’s examination of periodicals did not constitute a

content-based inquiry and, thus, was not violative of the

First Amendment; by not requiring the Commission to

put forward a compelling justification for its content-

based distinction between Service Merchandise’s publica-

tions and non-taxed newspapers; by not rejecting the

Commission’s justification to satisfy commercial speech

App. 3

scrutiny; and by taking the unprecedented view that Mis-

sissippi could lawfully impose a tax on Service Merchan-

dise’s United States postage costs. The Commission

contends that the chancery court did not err in finding

the Commission’s basis for determining whether a pub-

lication should be afforded exemption from use tax as a

newspaper was content-neutral; even if content-based,

Mississippi's use tax scheme survives constitutional scru-

tiny under a commercial speech analysis; and postage

fees were appropriately included in Service Merchan-

dise’s tax base.

FACTS

14. HJ. Wilson Company, the Appellant, was doing

business in the State of Mississippi as Service Merchan-

dise (hereinafter Service Merchandise) and is a subsidiary

of Service Merchandise Co., Inc. (hereinafter Service Mer-

chandise Company), a Tennessee corporation with its

principal place of business and commercial domicile

located in Tennessee. Service Merchandise operates in the

State of Mississippi as a retail store carrying an extensive

line of jewelry and household appliances. Service Mer-

chandise has no advertising department and depends on

Service Merchandise Company to obtain advertising for

its Mississippi operations.

15. Service Merchandise Company has for many years

contracted with printers to produce an extensive array of

catalogs and fliers which it has mailed to its Mississippi

customers. During the audit period in question, these

catalogs and fliers were used extensively to provide

App. 4

potential customers with prices and descriptions of Ser-

vice Merchandise’s extensive array of products and to

notify customers of upcoming sales, discounts and spe-

cial programs. In order to reach those customers most

likely to benefit from receiving Service Merchandise

information, Service Merchandise Company carefully

compiled lists of Mississippi residents based on the fol-

lowing four criteria: (1) lists compiled of customers based

on records of prior purchasers; (2) lists purchased from

outside vendors of customer lists; (3) lists rented from

outside vendors of customer lists; and (4) customer

requests. During the audit period, Service Merchandise

Company mailed publications to Service Merchandise

customers between twenty-two and twenty-eight times

per year.

16. Service Merchandise Company contracts with

printers to produce publications to be sent to Mississippi

and other states in which its subsidiaries operate stores.

During the audit period, the catalogs sent into Missis-

sippi were all prepared and printed outside Mississippi.

Once printed, the publications at issue were placed in the

United States Mail at post offices located outside Missis-

sippi and then forwarded directly to Mississippi residents

by the United States Postal Service.

17. In 1992, the Mississippi State Tax Commission (here-

inafter the Commission) assessed a use tax of six percent

(6%)! against Service Merchandise for the cost of the

' Starting June 1992, the publications were taxed at a use

tax rate of seven percent (7%) in accordance with the raise in the

applicable Mississippi sales tax rate.

App. 5

publications printed and mailed to the residents of Mis-

sissippi. In assessing what it claimed to be Service Mer-

chandise’s use tax liability, the Commission conducted

two audits. During the first audit, the Commission issued

an assessment for Service Merchandise Company’s pub-

lications which, together with lawful interest on the

amount assessed through the date Service Merchandise

made payment, totaled $263,580.96. In making this

assessment, the Commission excluded the cost of mailing

the Service Merchandise publications to Mississippi.

However, in its second assessment, which totaled

$394,569.27 including interest, the Commission included

use tax on United States Postal charges totaling

$100,965.00 plus interest in the amount of $44,455.00.

18. Service Merchandise challenged the applicability of

the Commission’s use tax assessment and further pro-

tested the assessment charges incident to the application

of the use tax to postage paid, but the Commission

denied all relief requested. As a result, Service Merchan-

dise paid the full tax assessment in the amount of

$658,150.23 on February 14, 1992 and June 25, 1993. Upon

stipulation of both parties, the proper taxpayer in this

controversy is Service Merchandise.

19. Service Merchandise next filed a complaint in the

Chancery Court of the First Judicial District of Hinds

County, Mississippi on July 2, 1992 alleging the following:

The Sales and Use Tax scheme of Mississippi

relative to exemptions for newspapers, televi-

sion and radio advertising, religious publica-

tions, and certain aspects of intrastate printing

industries set forth in Rule 51 of the Mississippi

Sales and Use Tax Rules results in unlawful,

App. 6

discriminatory taxation against this taxpayer in

violation of taxpayers’ rights under the First

Amendment of the United States Constitution.

At the core of Service Merchandise’s contentions before

the chancery court was its contentions that the Commis-

sion’s Sales and Use Tax Rule 51, providing for an exemp-

tion to newspapers, was an unconstitutional content-

based discrimination in violation of the First Amendment

of the United States Constitution and that the Commis-

sion was without authority to impose the portion of the

use tax assessment pertaining to postage costs applied in

the second audit period.

¥10. The chancery court, Honorable Denise Owens pre-

siding, entered final judgment finding Service Merchan-

dise’s claim for refund of use tax and interest was

without merit and, therefore, should be dismissed. The

chancery court first held that the Commission’s computa-

tion of use tax on the inclusion of postage during the

second audit was within the statutory authority of the

Mississippi Use Tax Law. The chancery court next

decided that the appropriate tax base for the use tax

assessment was the gross cost of publication and not the

net cost for Service Merchandise. The chancery court

finally determined that the exemption afforded news-

papers under the sales and use tax scheme was not con-

tent-based discrimination and, thus, not in violation of

the First Amendment of the United States Constitution.

G11. It is from this decision that Service Merchandise

appeals to this Court and raises the following issues:

App. 7

I. WHETHER THE TRIAL COURT ERRED

BY HOLDING THAT THE COMMISSION’S

EXAMINATION OF PERIODICALS DID NOT

CONSTITUTE A CONTENT-BASED INQUIRY

AND THUS NOT VIOLATIVE OF THE FIRST

AMENDMENT OF THE UNITED STATES

CONSTITUTION.

Il. WHETHER THE TRIAL COURT ERRED

BY NOT REQUIRING THE COMMISSION TO

PUT FORWARD A COMPELLING JUSTIFICA-

TION FOR ITS CONTENT-BASED DISTINC-

TION BETWEEN SERVICE MERCHANDISE’S

PUBLICATIONS AND NON-TAXED NEWS-

PAPERS.

III. WHETHER THE TRIAL COURT ERRED

BY NOT REJECTING THE COMMISSION’S

JUSTIFICATION OF A LESSER PROTECTION

FOR COMMERCIAL SPEECH AS CONSTITU-

TIONALLY INADEQUATE.

IV. WHETHER THE APPLICABLE REMEDY

UNDER MISSISSIPPI LAW FOR OVERPAY-

MENT OF USE TAX UNDER AN UNCON-

STITUTIONAL TAX SCHEME REQUIRES

THE REFUND OF ALL PAYMENTS MADE BY

SERVICE MERCHANDISE.

V. WHETHER THE TRIAL COURT ERRED

BY NOT REJECTING THE USE TAX

IMPOSED ON SERVICE MERCHANDISE’S

POSTAGE IN LIGHT OF THE FACT THAT A

SIMILAR SALES TAX WOULD NEVER BE

IMPOSED ON THE SAME PRODUCT.

VI. WHETHER THE TRIAL COURT ERRED

BY TAKING THE VIEW THAT MISSISSIPPI

COULD LAWFULLY IMPOSE A USE TAX ON

App. 8

SERVICE MERCHANDISE’S UNITED STATES

POSTAGE COSTS.

DISCUSSION OF LAW

I. WHETHER THE TRIAL COURT ERRED

BY HOLDING THAT THE COMMISSION’S

EXAMINATION OF PERIODICALS DID NOT

CONSTITUTE A CONTENT-BASED INQUIRY

AND THUS NOT VIOLATIVE OF THE FIRST

AMENDMENT OF THE UNITED STATES

CONSTITUTION.

112. The instant case involves the imposition of a use

tax on Service Merchandise’s importation of certain tang-

ible personal property, i.e., various advertising fliers and

sales catalogs, into the State of Mississippi. The use tax in

question was imposed by the Commission under the fol-

lowing statutory authority:

There is hereby levied, assessed and shall be

collected from every person a tax for the privi-

lege of using, storing or consuming, within this

state, any tangible personal property possession .

of which is acquired in any manner. :

(a) The use tax hereby imposed and levied

shall be collected at the same rates as imposed

under Section 27-65-24, and Sections 27-65-17,

27-65-18, 27-65-19 and 27-65-25 computed on the

purchase or sales price, or value, as defined in

this article.

~~ -

Miss. Code Ann. § 27-67-5(a) (Supp. 1997). Miss. Code

Ann. § 27-67-3 provides the following definitions for |

purposes of imposing the Mississippi use tax:

App. 9

(i) “Tangible personal property” means per-

sonal property perceptible to the human senses

or by chemical analysis, as opposed to real

property or intangibles. “Tangible personal

property” shall include printed, mimeographed,

multigraphed matter, or material reproduced in

any other manner, and books, catalogs, manuals,

publications or similar documents covering the

services of collecting, compiling or analyzing

information of any kind or nature. However,

reports representing the work of persons such as

lawyers, accountants, engineers and similar pro-

fessionals shall not be included. “Tangible per-

sonal property” shall also include tangible

advertising or sales promotion materials such as, but

not limited to, displays, brochures, signs, catalogs,

price lists, point of sale advertising materials and

technical manuals. Tangible personal property

shall also include computer software programs.

(k) “Use” or “consumption” means the first

use or intended use within this state of tangible

personal property and shall include rental or

loan by owners or use by lessees or other per-

sons receiving benefits from use of the property.

“Use” or “consumption” shall include the benefit

realized or to be realized by persons importing or

causing to be imported into this state tangible adver-

tising or sales promotion materials.

Miss. Code Ann. § 27-67-3(i), (k) (1990) (emphasis added).

Furthermore, Miss. Code Ann. § 27-67-7 provides an

exemption from imposition of the use tax on the use of

certain tangible personal property as follows:

The tax levied by this article shall not be col-

lected in the following instances:

App. 10

(b) On the use, storage or consumption of tan-

gible personal property to the extent that sales

of similar property in Mississippi are either

excluded or specifically exempt from sales tax

or are taxed at the wholesale rate.

Miss. Code Ann. § 27-67-7(b) (Supp. 1997). Miss. Code

Ann. § 27-65-111(b) provides the following sales tax

exemption to newspapers:

The tax levied by this chapter shall not apply to

the following:

(b) Sales of daily or weekly newspapers, and

periodicals or publications of scientific, literary

or educational organizations exempt from fed-

eral income taxation under Section 501(c)(3) of

the Internal Revenue Code of 1954, as it exists as

of March 31, 1975, and seen tenes sales of all

magazines.

Miss. Code Ann. § 27-65-111(b) (Supp. 1997). Thus, since

newspapers are afforded an exemption from imposition

of the Mississippi sales tax, they subsequently are

afforded an exemption from imposition of the Mississippi

use tax under the above statutory authority which leads

us to the current controversy before this Court, i.e.,

whether the Commission’s criteria used for determining

whether a publication qualifies for newspaper status and

thus an exemption amounts to content-based discrimina-

tion in violation of the First Amendment of the United

States Constitution.

413. Service Merchandise contends that the Commission

relies on content-based criteria to make the determination

App. 11

of whether a publication qualifies for the sales and use

tax exemption afforded to newspapers in violation of the

First Amendment of the United States Constitution. In

support of this contention, Service Merchandise relies on

the Commission’s response to one of its requests for

admission which stated as follows:

Request for Admission No. 12: Do you admit or

deny the determination of whether a weekly or daily

periodical or publication is or is not a newspaper

requires examination of the content of the periodical

or publication?

Response to Request for Admission No. 12:

Admit. The MSTC admits that MCA § 13-3-31

sets out certain content related criteria in sub-

section (g). The MSTC denies any other or fur-

ther examination of content is required.

The Commission, however, contends that the determina-

tion of whether a publication is a newspaper is made

exclusive of any content-based criteria and that one need

not read the message and expression of ideas in order to

determine whether a publication is a newspaper.

714. When the use tax assessments were assessed

against Service Merchandise, the Commission? deter-

mined whether a publication was a newspaper for sales

and use tax purposes based on the criteria set forth in

Miss. Code Ann. § 13-3-31 (Supp. 1997). Miss. Code Ann.

2 The Commission, by Official Order dated April 25, 1990,

adopted the criteria used in Miss. Code Ann. § 13-3-31(1) to

determine whether a publication qualified for the newspaper

exemption from assessment of Mississippi sales and use tax.

App. 12

§ 13-3-31(1) provides the following definition of a news-

paper, for purposes of publication of legal notice but

adopted by the Commission for sales and use tax pur-

poses, as a publication which:

(a) Maintains a general circulation predomi-

nantly to bona fide paying subscribers within

the political subdivision within which publica-

tion of such legal notice is required. The term

“general circulation” means numerically sub-

stantial, geographically widespread, demo-

graphically diversified circulation to bona fide

paying subscribers. In no event shall the term

“general circulation” be interpreted to require

that legal notices be published in a newspaper

having the greatest circulation. The term “bona

fide paying subscribers” means persons who

have subscribed at a subscription rate which is

not nominal, whether by mail subscriptions,

purchases through dealers and carriers, street

vendors and counter sellers, or any combination

thereof, but shall not include free circulation,

sales at a token or nominal subscription price

and sales in bulk for purposes other than for

resale for individual subscribers.

(b) Maintains a legitimate list of its bona fide

paying subscribers by the following categories

where applicable:

(i) Mail subscribers;

(ii) Dealers and carriers; and

(iii) Street vendors and counter sellers.

(c) Is not published primarily for advertising

purposes and has not contained more than sev-

enty-five percent (75%) advertising in more than

one-half ('/2) of its issues during the period of

App. 13

twelve (12) months next prior to the first pub-

lication of any legal notice therein, excluding

separate advertising supplements inserted into

but separately identifiable from any regular

issue or issues.

(d) Has been established and published contin-

uously for at least twelve (12) months next prior

to the first publication of such matter to be

published, is regularly issued at stated intervals

no less frequently than once a week, bears a

date of issue, and is numbered consecutively;

provided, however, that publication on legal

holidays of this state or of the United States and

on Saturdays and Sundays shall not be required,

and failure to publish not more than two (2)

regular issues in any calendar year shall not

disqualify a paper otherwise qualified.

(e) Is issued from a known office of publica-

tion, which shall be the principal public busi-

ness office of the newspaper and need not be the

place at which the newspaper's printing presses

are physically located. A newspaper shall be

deemed to be “published” at the place where its

known office of publication is located.

(f) Is formed of printed sheets. However, the

word “printed” does not include reproduction

by the stencil, mimeograph or hectograph pro-

cess.

(g) Is originated and published for the dissemina-

tion of current news and intelligence of varied, broad

and general public interest, announcements and

notices, opinions as editorials on a regular or irregu-

lar basis, and advertising and miscellaneous reading

matter.

App. 14

(h) Is not designed primarily for free circula-

tion or for circulation at nominal rates.

Miss. Code Ann. § 13-3-31(1) (Supp. 1997) (emphasis

added). The Mississippi legislature has since then

adopted a similar criteria for purposes of determining

whether a publication qualifies for an exemption from

sales and use tax based on its classification as a news-

paper.*

3 Miss. Code Ann. § 27-65-3(l) defines newspaper for

purposes of the sales and use tax as follows:

(1) “Newspaper” means a periodical which:

(i) Is not published primarily for advertising

purposes and has not contained more than seventy- |

five percent (75%) advertising in more than one-half

('/2) of its issues during any consecutive twelve-

month period excluding separate advertising

supplements inserted into but separately identifiable

from any regular issue or issues;

(ii) Has been established and published

continuously for at least twelve (12) months;

(iii) Is regularly issued at stated intervals no less

frequently than once a week, bears a date of issue,

ard is numbered consecutively; provided, however,

that publication on legal holidays of this state or of

the United States and on Saturdays and Sundays shall

not be required, and failure to publish not more than

two (2) regular issues in any calendar year shall not

exclude a periodical from this definition;

(iv) Is issued from a known office of publication,

which shall be the principal public business office of

the newspaper and need not be the place at which the

periodical is printed and a newspaper shall be

deemed to be “published” at the place where its

known office of publication is located;

App. 15

q15. Many state jurisdictions provide an exemption for

newspapers from imposition of sales and use tax under

(v) Is formed of printed sheets; provided, however,

that a periodical that is reproduced by the stencil,

mimeograph or hectograph process shall not be

considered to be a “newspaper”; and

(vi) Is originated and published for the dissemination of

current news and-intelligence of varied, broad and general

public interest, announcements and notices, opinions as

editorials on a regular or irregular basis, and advertising

and miscellaneous reading matter.

The term “newspaper” shall include periodicals

which are designed primarily for free circulation or

for circulation at nominal rates as well as those which

are designed for circulation at more than a nominal

rate.

The term “newspaper” shall not include a publication

or periodical which is published, sponsored by, is

directly supported financially by, or is published to

further the interests of, or is directed to, or has a

circulation restricted in whole or in part to any

particular sect, denomination, labor or fraternal

organization or other special group or class or

citizens.

For purposes of this paragraph, a periodical designed

primarily for free circulation or circulation at nominal

rates shall not be considered to be a newspaper unless

such periodical has made an application for such

status to the Tax Commission in the manner

prescribed by the commission and has provided to

the Tax Commission documentation satisfactory to

the commission showing that such periodical meets

the requirements of the definition of the term

“newspaper.” However, if such periodical has been

determined to be a newspaper under action taken by

the State Tax Commission on or before April 11, 1996,

such periodical shall be considered to be a newspaper

App. 16

the applicable state statutes, and several states have

determined their respective sales and use tax schemes

unconstitutional as being in violation of the First Amend-

ment of the United States Constitution because of the

application of content-based criteria to determine

whether publications qualified as a newspaper for

exemption from imposition of sales and use tax. See, e.g.,

Department of Revenue v. Magazine Publishers of Am.,

Inc., 604 So. 2d 459, 463 (Fla. 1992) (holding Florida sales

tax scheme for publications unconstitutional under the

First Amendment as content-based and not narrowly

drawn to achieve a compelling governmental interest);

Emmis Publ’g Corp. v. Indiana Dep't of State Revenue,

612 N.E.2d 614, 622 (Ind. Tax Ct. 1993) (holding Indiana

sales tax scheme granting exemption to newspapers

unconstitutional as being content-based and “neither nec-

essary to serve a compelling state interest nor narrowly

drawn to achieve that end”); Southern Living, Inc. v.

Celauro, 789 S.W.2d 251, 253 (Tenn. 1990) (ruling uncon-

stitutional Tennessee’s Sales and Use Tax scheme allow-

ing exemption for newspapers as content-based and

failing to meet the heightened scrutiny of narrowly

drawn to achieve a compelling government interest);

Newsweek, Inc. v. Celauro, 789 S.W.2d 247, 250 (Tenn.

1990) (same). But see Gallacher v. Commissioner of Reve-

nue Servs., 602 A.2d 996, 1005 (Conn. 1992) (holding that

without the necessity of applying for such status. A

determination by the State Tax Commission that a

publication is a newspaper shall be limited to the

application of this chapter and shall not establish that

the publication is a newspaper for any other purpose.

Miss. Code Ann. § 27-65-3(!) (1997) (emphasis added).

App. 17

Connecticut tax scheme of “exempting newspapers from

the generally applicable use tax while not exempting

other media does not violate the first amendment”);

Hearst Corp. v. lowa Dep’t of Revenue & Fin., 461

N.W.2d 295, 304 (Iowa 1990) (holding that “lowa tax

scheme which exempts ‘newspapers,’ but not ‘magazines’

or ‘periodicals,’ from the generally-applicable Iowa retail

sales and use tax is not the type of suspect tax that

violates the first amendment”); Magazine Publishers of

Am. v. Commonwealth Dep’t of Revenue, 654 A.2d 519,

523 (Pa. 1995) (ruling that the Pennsylvania tax scheme

“distinction between newspapers and magazines, as set

forth in the newspaper exemption and the provisions that

relate to it, is based on the format and frequency of

publication, not the content” and thus not unconstitu-

tional).

416. In Newsweek, Inc. v. Celauro and Southern Living,

Inc. v. Celauro, two companion cases decided by the

Tennessee Supreme Court on March 5, 1990, the Tennes-

see Supreme Court held that the Tennessee Sales and Use

Tax Statutes’ exemption for newspapers from imposition

of the sales and use tax was unconstitutionaily content-

based discrimination. Newsweek, Inc., 789 S.W.2d at 249;

Southern Living, Inc., 789 S.W.2d at 252. The supreme

court held that the Tennessee Sales and Use Tax scheme’s

use of criteria that “a publication ‘must contain matters of

general interest and reports of current events’ ” in order

to qualify for the newspaper exemption was “not a con-

tent-neutral requirement,” and the tax scheme was thus

invalid, for it was not narrowly drawn to achieve a com-

pelling state interest. Newsweek, Inc., 789 S.W.2d at 249.

In reaching this conclusion, the supreme court relied

App. 18

heavily on the United States Supreme Court’s decision in

Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221

(1987), for the rule of law that

[S]elective taxation of the press — either singling out

the press as a whole or targeting individual members

of the press — poses a particular danger of abuse by

the State. ‘A power to tax differentially, as opposed

to a power to tax generally, gives a government a

powerful weapon against the taxpayer selected.

When the State imposes a generally applicable

tax, there is little cause for concern. We need not

fear that a government will destroy a selected

group of tax payers by burdensome taxation if it

‘must impose the same burden on the rest of its

constituency.’

Id. at 249-50 (emphasis added) (quoting Arkansas

Writers’ Project, Inc. v. Ragland, 481 U.S. 221, 228 (1987)

(quoting Minneapolis Star & Tribune Co. v. Minnesota

Comm’r of Revenue, 460 U.S. 575, 585 (1983))). The

supreme court concluded that

The tax that singles out the press, or that targets

individual publications within the press, places

a heavy burden on the State to justify its action.

Minneapolis Star, [460 U.S. at 592-93]. In this

case the State has tailed to meet this heavy

burden. It has advanced no compelling justifica-

tion for selective, content based taxation of

plaintiff's publication. We hold therefore the tax

is invalid under the First Amendment.

Newsweek, Inc., 789 S.W.2d at 250.

117. In Department of Revenue v. Magazine Publishers

of America, Inc., the Florida Supreme Court similarly

invalidated the Florida use tax scheme providing an

App. 19

exemption for newspapers as being content-based dis-

crimination and in violation of the First Amendment of

the United States Constitution. Department of Revenue v.

Magazine Publishers of Am., Inc., 604 So. 2d 459, 463 (Fla.

1992). The tax scheme at issue in Magazine Publishers of

America, Inc. was “a tax of general applicability, which

applie[d] to receipts from the sales of all tangible per-

sonal property unless specifically exempted, and [did]

not single out the press for special treatment,” and thus,

the tax scheme did “not discriminate either by singling

out the press for a special tax or by targeting a small

group within the press to bear the burden of the tax.”

Magazine Publishers of Am., Inc., 604 So. 2d at 461.

However, the Florida Supreme Court found that the tax

scheme was unconstitutional because it determined

whether a publication was a newspaper on content-based

criteria. Id.

418. The Florida sales tax scheme for determining

whether a publication qualified for the newspaper

exemption included five different elements in which the

court found that four of the elements related to the “form

and frequency of publication.” Id. at 462. However, the

fifth element? required “the Department [of Revenue] to

3 The fifth element, set forth in Florida Administrative

Code Rule 12A-1.008(1)(b)5., used to determine classification of

a publication as a newspaper provides in full:

It must routinely contain reports of current events

and matters of general interest which appeal to a

wide spectrum of the general public. If the

publication is intended for general circulation to the

public and is devoted primarily to matters of

specialized interests such as legal, mercantile,

App. 20

evaluate the contents of the publication to determine

whether it contain[ed] ‘reports of current events and

matters of general interest which appeal to a wide spec-

trum of the general public.’” Id. (quoting Fla. Admin.

Code R. 12A-1.008(1)(b)5). Thus, the Florida Supreme

Court held that “[b]Jecause Florida’s differential taxation

of the press is content-based, the tax must withstand

heightened scrutiny under the First Amendment.” Id.

(citing Leathers v. Medlock, 499 U.S. 439, 447 (1991)). “In

order to pass this strict scrutiny muster, the tax must

serve some compelling state interest and must be nar-

rowly drawn to achieve that end.” Magazine Publishers

of America, Inc., 604 So. 2d at 462 (citing Arkansas

Writers’ Project, Inc., 481 U.S. at 231). The supreme court

concluded that “[nJeither of the reasons advanced by the

State constitutes a compelling justification for the con-

temt-based taxation of publications,” and thus, the tax

scheme was invalid under the First Amendment. Id. at

463

419. The Mississippi Sales and Use Tax statutes provid-

ing an exemption for newspapers from imposition of the

sales and use tax in the case sub judice is inherently

similar to the Indiana sales tax provisions that afforded

newspapers an exemption from imposition of the Indiana

political, religious, or sporting matters, and it

contains in addition thereto general news of the day,

information of current events, and news of

importance and of current interest to the general

public, it is entitled to be classed as a newspaper.

Magazine Publishers of Am., Inc., 604 So. 2d at 462 n. 2.

App. 21

sales tax which the Indiana Tax Court ruled was uncon-

stitutionally content-based in violation of the First

Amendment. See Emmis Publ’g Corp., 612 N.E.2d at 622.

In Emmis Publishing Corp., the Indiana Department of

State Revenue’s regulation addressing the sales tax

exemption for newspapers set forth the following criteria

for determining whether a publication qualified for the

sales tax exemption provided for newspapers:

(a) General Rule. In general, sales of all pub-

lications irrespective of format are taxable. The

exemption provided by this rule . . . is limited to

sales of newspapers.

(b) Application of the general rule. For pur-

poses of [sales] tax, the term ‘newspaper’ means

only those publications which are:

(1) commonly understood to be newspapers;

(2) published for the dissemination of news of

importance and of current interest to the general

public, general news of the day, and information of

current events;

(3) circulated among the general public;

(4) published at stated short intervals;

(5) entered or are qualified to be admitted and

entered as second class mail matter at a post

office in the county where published; and

(6) printed for resale and are sold.

(c) Publications which are primarily devoted

to matters of specialized interest such as busi-

ness, political, religious, or sporting matters

may qualify for exemption if they also satisfy

the criteria listed in subsection 26 of this

App. 22

(d) Magazines, periodicals, journals, bulletins,

advertising supplements, handbills, circulars, or

the like are not newspapers until distributed as

a part of a publication which is a newspaper

within the meaning of this rule. . . .

(1) Magazines are not construed to be news-

papers. The retail sales of all magazines and

periodicals are subject to sales tax. The sale of

magazines by subscription is subject to sales tax

without regard to the price of a single copy, and

sales tax must be collected by the seller from the

person who subscribes to the magazine on the

full subscription price.

(2) For purposes of [sales] tax, the term ‘news-

paper’ shall include advertising inserts. Adver-

tising inserts shall mean only those publications

which are:

(A)(i) produced for a person by a private

printer and delivered to the newspaper pub-

lishers, or

(ii) produced and printed by a newspaper pub-

lisher, or

(iii) produced and printed by a person and

delivered to the newspaper publisher, and

(B) inserted by the newspaper publisher into

the newspapers and distributed along with the

newspapers.

Any distribution not meeting the above test

does not qualify for the newspaper insert

exemption. Examples of items distributed along

with a newspaper that do not qualify for the

exemption include: gum, shampoo, and deter-

gent samples.

App. 23

(e) Publications issued monthly, bimonthly, or

at longer or irregular intervals are generally not

considered to be newspapers.

(f) Racing forms and tip sheets are not news-

papers.

(g) A preponderance of advertising, lack of

authorization to carry legal advertizing, [sic] or

lack of a masthead setting forth the publisher,

editor, circulation, and place of publication are

characteristics of publications other than news-

papers.

Id. at 616-17 (citations omitted) (emphasis added) (quot-

ing 45 I.A.C. 2.2-5-26). In reviewing precedent setting

forth the “circumstances in which a tax upon the press

will run afoul of the First Amendment, regardless of the

legislature’s good or bad motives,” the Indiana Tax Court

discussed the following three circumstances:

First, a tax that singles out the press for differen-

tial treatment is presumptively unconstitutional.

See Minneapolis Star, 460 U.S. at 585... .

Second, selective taxation of the press that tar-

gets a “small group” of members of the press or

singles out a “few members” of the press may

offend the First Amendment. Id. at 591-92... .

And third, “fer reasons that are obvious, a tax will

trigger heightened scrutiny under the First Amend-

ment if it discriminates on the basis of the content of

speech.” Leathers, [499 U.S. at 447.]

Emmis Publ’g Corp., 612 N.E.2d at 617 (emphasis added)

(footnotes omitted). The tax court, after reviewing the

divergence within jurisdictions over the issue of whether

App. 24

sales and use tax exemptions for newspapers were con-

tent-based or content-neutral,* found that the particular

language used by the Indiana State Department of Reve-

nue’s criteria for determining which publications quali-

fied for the newspaper exemption was unconstitutionally

content-based and, thus, had to be narrowly drawn to

achieve a compelling state interest. Id. at 620. The tax

court specifically found subsection (b)(2) of the State

Department of Revenue’s regulation constituted an

unconstitutional content-based criteria to determine

whether a publication qualified for the newspaper

exemption. Id.

120. After finding that the criteria used by the Indiana

Department of State Revenue was based on the content of

the publication, the Indiana Tax Court applied height-

ened scrutiny to the discriminatory content-based crite-

ria. Id. at 621. The Department of State Revenue asserted

the following interests as compelling state interests: (1)

“the newspaper exemption is a form of subsidy that

makes available inexpensive sources of news, thus,

enhancing the knowledge and literacy of the public” and

(2) “the Department, by virtue of the newspaper exemp-

tion, is relieved of the administrative burden and expense

* The Indiana Tax Court discussed and compared the State

Department of Revenue’s regulation used to determine if a

publication was a newspaper with the similar criteria used in

Magazine Publishers of America, Inc.; Southern Living, Inc.;

Newsweek, Inc.; Gallacher; and Hearst Corp. The tax court did

not discuss the Pennsylvania Supreme Court’s decision in

Magazine Publishers of America v. Commonwealth Dep't of

Revenue as it was decided subsequent to Emmis Publishing

Corp.

App. 25

of regulating hundreds of newspaper carriers in the cwi-

lection and remittance of sales tax.” Id. at 621-22. After

weighing the importance of the interests asserted by the

Department of State Revenue and the application of the

newspaper exemption to achieve those interests, the tax

court concluded that “the content-based distinction

among publications in 45 I.A.C. 2.2-5-26(b)(2) [was] nei-

ther necessary to serve a compelling state interest nor

narrowly drawn to achieve that end.” Emmis Publ’g

Corp., 612 N.E.2d at 622.

121. However, several states have found that the news-

paper exemption from imposition of the respective sales

and use tax levies was not content-based but rather con-

tent-neutral, and thus, the tax schemes were held to be

constitutionally valid. See Gallacher v. Commissioner of

Revenue Servs., 602 A.2d 996, 1005 (Conr. 1992) (holding

that Connecticut tax scheme of “exempting newspapers

from the generally applicable use tax while not exempt-

ing other media does not violate the first amendment”);

Hearst Corp. v. lowa Dep’t of Revenue & Fin., 461

N.W.2d 295, 304 (lowa 1990) (holding that “Iowa tax

scheme which exempts ‘newspapers,’ but not ‘magazines’

or ‘periodicals,’ from the generally-applicable Iowa retail

sales and use tax is not the type of suspect tax that

violates the first amendment”); Magazine Publishers of

Am. v. Commonwealth Dep’t of Revenue, 654 A.2d 519,

523 (Pa.1995) (ruling that the Pennsylvania tax scheme

“distinction between newspapers and magazines, as set

forth in the newspaper exemption and the provisions that

relate to it, is based on the format and frequency of

publication, not the content” and, thus, not invalid).

App. 26

122. In Hearst Corp. v. lowa Department of Revenue &

Finance, the lowa Supreme Court held that Iowa’s news-

paper exemption from imposition of sales and use taxes

was based on content-neutral criteria and, thus, was a

constitutional taxing scheme. Hearst Corp., 461 N.W.2d at

304. The lowa Supreme Court found that the term “news-

paper” was not defined in the statutes, but the Depart-

ment of Revenue and Finance in 1981 adopted the

definition of a newspaper from Webster’s Third New

International Dictionary to determine which publications

qualified for the sales and use tax exemption. Id. at 300.

The definition used by the department provided as fol-

lows:

A newspaper is defined as a paper that is

printed and distributed daily, weekly, or at some

other regular and usually short interval and that

generally contains news, articles of opinion (edi-

torials), features, advertising, or other matter

regarded as of current interest.

Id. (quoting 701 Iowa Admin. Code 18.42(1) (1981)

(amended 1982 striking “generally” from definition)). In

concluding that the tax scheme was one of general appli-

cability, was not content-based, and was constitutionally

valid, even though language in the definition required

that in order to be a newspaper the publication had to

contain news, editorials, features, advertising, or other

matter regarded as of current interest, the lowa Supreme

Court reasoned: .

While the classification of the writing as “news,

articles of opinion (editorials), features, adver-

tising, or other matter regarded as of current

interest” is a consideration, the focus is not on

the content of the journalism. Rather, the form

App. 27

and frequency of the publication are the pri-

mary factors for determining whether a publica-

tion qualifies for the Iowa sales and use tax

exemption. Hearst, or anyone else for that mat-

ter, is free under the rule to publish and sell

whatever content they choose and to choose

whatever form they desire. The lowa law does

not scrutinize the content, but rather the form

and frequency of publication. There is no cen-

sorial threat, motive, or element imposed by the

rules in this case. Because the form of a publica-

tion is a noncontent based consideration, the

lowa statute complies with the standards set

forth by the Supreme Court in Arkansas

Writers’ Project.

Id. at 303.

q23. In Gallacher v. Commissioner of Revenue Services,

the Connecticut Supreme Court held that Connecticut's

newspaper exemption was not content-based but rather

content-neutral. Gallacher, 602 A.2d at 1005. The

supreme court found that

because the Connecticut sales and use tax is a

general tax that does not target the media or

discriminate among media sources of the same

type and therefore does not subject only a small,

select number of publications to the tax, and

because the exemption contained in the statute

is not content-based, the tax, which exempts

newspapers but not the plaintiffs’ publications,

is not a suspect tax.

Id. at 1004-05. However, the Connecticut sales and use tax

scheme did not specifically contain language defining the

criteria required to qualify as a newspaper, and thus, the

supreme court applied generally accepted definitions of a

App. 28

newspaper and “common understanding of what one

would envision as a newspaper” to conclude that the

determination of what constitutes a newspaper was con-

tent-neutral. Id. at 1002. The court based its decision that

the criteria used to determine whether a publication was

a newspaper revolved around the subject matter contents,

i.e., whether the publication contained news and other

common inclusions in newspapers, and since that deter-

mination did not require a review of the viewpoint of the

content, the determination was content-neutral. Id. at

1002-03.

124. In Magazine Publishers of America v. Common-

wealth Department of Revenue, the Pennsylvania

Supreme Court upheld the Pennsylvania sales and use

tax exemption for newspapers, but excluded such exemp-

tion to magazines, as content-neutral and not a discrimi-

natory content-based criteria for determining whether a

publication qualified as a newspaper. Magazine Pub-

lishers of Am., 654 A.2d at 523. The Pennsylvania sales

and use tax scheme defined the term newspaper as fol-

lows:

Newspaper is defined as:

(1) A printed paper or publication, bearing a

title or name, and conveying reading or pictorial

intelligence of passing events, local or general

happenings, printing regularly or irregularly

editorial comment, announcements, miscella-

neous reading matter, commercial advertising,

classified advertising, legal advertising, and

other notices, and which has been issued in

numbers of four or more pages at short inter-

vals, either daily, twice or oftener each week, or

weekly, continuously during a period of at least

App. 29

six months, or as the successor of such a printed

paper or publication issued during an immedi-

ate prior period of at least six months, and

which has been circulated and distributed from

an established place of business to subscribers

or readers without regard to number, for a defi-

nite price or consideration, either entered or

entitled to be entered under the Postal Rules

and Regulations as second class matter in the

United States mails, and subscribed for by

readers at a fixed price for each copy, or at a

fixed price per annum. A newspaper may be

either a daily newspaper, weekly newspaper,

newspaper of general circulation, official news-

paper, or a legal newspaper, as defined in this

section. Continuous publication within the

meaning of this section shall not be deemed

interrupted by any involuntary suspension of

publication resulting from loss, destruction, fail-

ure or unavailability of operating facilities,

equipment or personnel from whatever cause,

and any newspaper so affected shall not be dis-

qualified to publish official and legal advertis-

ing in the event that publication is resumed

within one week after it again becomes possible.

(2) A printed paper or publication, regardless

of size, contents, or time of issue, or number of

copies issued, distributed and circulated gratu-

itously, is not a newspaper.

(3) A printed paper or publication, not entitled

to be entered, or which has been denied entry,

as second class matter in the United States mails

under the Postal Rules and Regulations of the

United States is not a newspaper.

Id. at 522 n.6 (quoting 45 Pa.C.S. § 101(a)). In concluding

that the Pennsylvania sales and use tax scheme did not

App. 30

constitute a discriminatory content-based scheme, the

Pennsylvania Supreme Court stated:

[T]he distinction between newspapers and mag-

azines, as set forth in the newspaper exemption

and the provisions that relate to it, is based on

the format and frequency of publication, not the

content. The exemption provides that all pub-

lications which fit within the definition of news-

paper shall be exempt from the six per cent sales

tax. Newspaper means “a ‘legal newspaper’ or a

publication containing matters of general inter-

est and reports of current events which qualifies

as a ‘newspaper of general circulation’ qualified

to carry a ‘legal advertisement’ as those terms

are defined in 45 Pa.C.S. § 101 (relating to defi-

nitions), not including magazines.” 72 P.S.

§ 7204(30) (emphasis added). It is clear from this

language that all magazines, regardless of their

content, are subject to taxation. Thus, we reject

Appellants’ contention that content is the basis

for the inclusion of magazines in the items of

tangible personal property that are subject to the

sales tax.

Id. at 523 (footnotes omitted).

q25. Thus, when faced with the issue of whether a

state’s sales and use tax scheme, which provides an

exemption to newspapers, uses content-based criteria to

determine whether a publication qualifies as a newspaper

and should be provided the exemption from sales and use

tax, the ultimate inquiry should be whether the criteria

used by the state’s taxing authority requires a review of

the content of the publication. At the time the use tax was

assessed against Service Merchandise, the Mississippi

State Tax Commission had adopted as part of its criteria

App. 31

the determination of whether the publication was “origi-

nated and published for the dissemination of current

news and intelligence of varied, broad and general public

interest, announcements and notices, opinions as edi-

torials on a regular or irregular basis, and advertising and

miscellaneous reading matter.” Miss. Code Ann.

§ 13-3-31(1)(g) (Supp. 1997). We hold that where such

criteria was employed by the Commission to qualify pub-

lications as a newspaper and provide an exemption from

the sales and use tax, such criteria required an analysis of

the content of the publication and, thus, was content-

based in violation of the First Amendment of the United

States Constitution.

{26. This conclusion is supported by the Tennessee

Supreme Court's decisions in Newsweek, Inc. v. Celauro

and Southern Living, Inc. v. Celauro, the Florida Supreme

Court’s decision in Department of Revenue v. Magazine

Publishers of America, Inc., and the Indiana Tax Court's

decision in Emmis Publishing Corp. v. Indiana Depart-

ment of State Revenue which all found similar criteria

involving a determination of whether the publication

contained matters of general interest and reports of cur-

rent events to be unconstitutional content-based distinc-

tions. See Magazine Publishers of Am., Inc., 604 So. 2d at

463; Emmis Publ’g Corp., 612 N.E.2d at 622; Southern

Living, Inc., 789 S.W.2d at 253; Newsweek, Inc., 789

S.W.2d at 250.

{27. This conclusion is distinguishable from the Con-

necticut Supreme Court’s decision in Gallacher v. Com-

missioner of Revenue Services and the lowa Supreme

Court’s decision in Hearst Corp. v. lowa Department of

Revenue & Finance which involved sales and use tax

App. 32

schemes that did not provide a definition of the term

newspaper, and, thus, there were no criteria, other than

the dictionary definition of newspaper, to be classified as

content-based. See Gallacher, 602 A.2d at 1002; Hearst

Corp., 461. N.W.2d at 304.

128. This conclusion is also distinguishable from the

Pennsylvania Supreme Court's holding in Magazine Pub-

lishers of America v. Commonwealth Department of Rev-

enue in which the court found that the criteria was

content-neutral despite the inclusion in the definition of

newspaper language referring to a newspaper as a pub-

lication “conveying reading or pictorial intelligence of

passing events, local or general happenings, printing reg-

ularly or irregularly editoriak comment, announcements,

miscellaneous reading matter, commercial advertising,

classified advertising, legal advertising, and other

notices.” Magazine Publishers of Am., 654 A.2d at 522 n.6

(quoting 45 Pa.C.S. § 101(a)). The court, nevertheless,

held that the criteria were content-neutral as determina-

tion of whether a publication qualified as a newspaper

was based on the form and frequency characteristics of

the publication. Id. at 523.

129. However, we find that an important distinction

exists between the statutory language in Magazine Pub-

lishers of America and the case sub judice. In Magazine

Publishers of America, the statute defining newspaper

also contained the following description of a newspaper:

“A printed paper or publication, regardless of size, con-

tents, or time of issue, or number of copies issued, distrib-

uted and circulated gratuitously, is not a newspaper.” Id.

at 522 n.6 (emphasis added) (quoting 45 Pa.C.S. § 101(a)).

The criteria used by the Commission at the time of the

App. 33

use tax assessment against Service Merchandise did not

include such language specifically stating that a publica-

tion distributed and circulated gratuitously regardless of

its contents was not a newspaper. Thus, we find that in the

case sub judice it is not clear whether or not the contents

of the publication were reviewed by the Commission to

determine whether the publication should be granted the

sales and use tax exemption for newspapers, but it is

apparent that the Commission’s criteria used to deter-

mine whether a publication qualified as a newspaper

consisted of content-based criteria.

q30. Asa result, we hold that the trial court erred when

it determined that the criteria used by the Commission to

determine whether a publication were a newspaper was

content-neutral. Specifically, we hold that subsection (g)

of Miss. Code Ann. § 13-3-31(1), used by the Commission

at the time of assessment in the case sub judice for

determining whether a publication qualified as a news-

paper for purposes of receiving the sales or use tax

exemption, was an unconstitutional content-based criteria

for determining which publications qualify for the news-

paper sales and use tax exemption. Likewise, we hold

that Miss. Code Ann. § 27-65-3(I)(vi), the later adopted

counterpart to Miss. Code Ann. § 13-3-31(1)(g) for the

function of defining a newspaper for sales and use tax

purposes, is also an unconstitutional content-based crite-

ria.

431. However, this Court has consistently held that:

It is the Court’s duty in passing on the constitu-

tionality of a statute to separate the valid from

the invalid part, if this can be done, and to

App. 34

permit the valid part to stand unless the differ-

ent parts of the statute are so intimately con-

nected with and dependent upon each other as

to warrant a belief that the legislature intended

them as a whole, and that if all cannot be carried

into effect it would not have enacted the residue

independently.

Wilson v. Jones County Bd. of Supervisors, 342 So.2d

1293, 1296 (Miss. 1977) (citing Howell v. State, 300 So. 2d

774, 781 (Miss. 1974); American Express Co. v. Beer, 107

Miss. 528, 536, 65 So. 575 (1914); Adams v. Standard Oil

Co., 97 Miss. 879, 53 So. 692 (1910); Campbell v. Missis-

sippi Union Bank, 7 Miss. 625 (1842)). Adhering to this

duty, we hold that the other criteria listed in Miss. Code

Ann. § 27-65-3(l) are content-neutral and can stand alone

as objective criteria to determine whether a publication

qualifies for the newspaper exemption from the imposi-

tion of sales and use tax. This conclusion is consistent

with the legislature’s intention of providing newspapers

with an exemption from the sales and use tax as set forth

in Miss. Code Ann. §§ 27-65-111(b) & 27-67-7(b). Thus, we

hold that Miss. Code Ann. § 27-65-3(1)(vi) is severed from

the rest of the statute as being an invalid content-based

criteria for determining whether a publication should be

afforded the newspaper exemption from the imposition

of sales and use tax, but the remainder of § 27-65-3(/) is to

remain in effect as a constitutional content-neutral crite-

ria for determining whether a publication qualifies as a

newspaper.

App. 35

Il. WHETHER THE TRIAL COURT ERRED BY

NOT REQUIRING THE COMMISSION TO PUT

FORWARD A COMPELLING JUSTIFICATION FOR

ITS CONTENT-BASED DISTINCTION BETWEEN

SERVICE MERCHANDISE’S PUBLICATIONS

AND NON-TAXED NEWSPAPERS.

Ill. WHETHER THE TRIAL COURT ERRED BY

NOT REJECTING THE COMMISSION’S JUSTI-

FICATION OF A LESSER PROTECTION FOR

COMMERCIAL SPEECH AS CONSTITU-

TIONALLY INADEQUATE.

q32. Service Merchandise contends that the trial court

erred by failing to require the Commission to set forth a

compelling justification for its content-based distinction

between its publications and newspapers that are exempt

from the sales and use tax. Service Merchandise further

contends that the chancellor erred by attempting to jus-

tify its holding on the state supreme court cases that

upheld newspaper sales and use tax exemptions because

all of the cases relied on by the chancellor found that the

taxing schemes in question did not involve determina-

tions based on the publication’s content but were rather

determinations based on the content-neutral criteria of

the form and frequency of the publication. As a result,

Service Merchandise argues that because the Mississippi

taxation scheme utilized content-based criteria, such cri-

teria had to be narrowly drawn to achieve a compelling

state interest and that no compelling interest has been set

forth by the Commission.

q33. The Commission, in the alternative to its position

that the criteria used to determine newspaper status are

content-neutral, argues that if the criteria are content-

App. 36

based then the appropriate constitutional analysis, rather

than strict scrutiny, i.e., narrowly drawn to achieve a

compelling governmental interest, would be the lesser

standard of review that is afforded restrictions on com-

mercial speech, i.e., narrowly drawn regulation directly

and materially advancing a substantial government inter-

est. Thus, the Commission contends that since the speech

discriminated against in the instant case is commercial

speech then it should be afforded the lesser standard of

review, intermediate scrutiny. In support of this conten-

tion, the Commission asserts the following interests as

substantial and, thus, contends that the discriminatory

tax should pass constitutional scrutiny because news-

papers serve the critical functions of: (1) disseminating

news and events in an immediate fashion; (2) promoting

general welfare and awareness; and (3) encouraging pub-

lic involvement. The Commission further argues that the

sales and use tax exemption provided for newspapers

directly advances these critical interests.

134. However, the Commission’s arguments are unsup-

ported and, at the same time, in contradiction to the

overwhelming weight of authority of United States

Supreme Court decisions dealing with content-based dis-

crimination between protected First Amendment speech.

The Commission, nevertheless, argues that because the

party challenging the newspaper exemption from sales

and use tax imposition was distributing commercial

speech that the lesser standard of review afforded com-

mercial speech should be applied if the exemption consti-

tutes content-based discrimination. To the contrary, the

United States Supreme Court has held that “for reasons

that are obvious, a tax will trigger heightened scrutiny under

App. 37

the First Amendment if it discriminates on the basis of the

content of taxpayer speech.” See Leathers, 499 U.S. at 447

(emphasis added) (citing Arkansas Writers’, 481 U.S. at

229-31). Moreover, application of the intermediate scru-

tiny afforded commercial speech is appropriate when

there is a challenge made by a party against a statute or

ordinance that regulates, burdens or restricts commercial

speech in some shape, form or fashion. See Florida Bar v.

Went-For-It, Inc., 515 U.S. 618, 623 (1995) (stating “we

engage in ‘intermediate’ scrutiny of restrictions on com-

mercial speech, analyzing them under the framework set

forth in [Central Hudson Gas & Elec. Corp. v. Public Serv.

Comm’n of N.Y., 447 U.S. 557 (1980)]”).

q35. In the case sub judice, however, Service Merchan-

dise does not challenge a regulation restricting commer-

cial speech but rather challenges a content-based

discriminatory sales and use tax scheme that affords a

different form of First Amendment speech an exemption

from the sales and use tax. Therefore, since the sales and

use tax scheme that provides an exemption for news-

papers involves content-based criteria, such taxing

scheme discriminates based on the content of taxpayer

speech, and thus, the tax is unconstitutional unless it

survives heightened scrutiny.

136. In order to survive this heightened scrutiny stan-

dard of review, the tax must serve some compelling state

interest and must be narrowly drawn to achieve that end.

See Leathers, 499 U.S. at 447; Arkansas Writers’, 481 U.S.

at 231. The Commission asserts the following interests as

compelling justifications for the newspaper sales and use

tax exemption: (1) the dissemination of news and events

in an immediate fashion; (2) promoting general welfare

App. 38

and awareness; and (3) encouraging public involvement.

However, we hold that the compelling interests asserted

by the Commission do not pass constitutional scrutiny,

and thus, the tax scheme is unconstitutional as a content-

based discrimination between different forms of pro-

tected First Amendment speech.

137. In support of this conclusion, similar asserted

interests have been rejected by other state courts apply-

ing strict scrutiny analysis to discriminatory content-

based tax schemes. See, e.g., Department of Revenue v.

Magazine Publishers of Am., Inc., 604 So. 2d 459, 462-63

(Fla. 1992) (rejecting Department’s contention “that the

newspaper exemption furthers the compelling state inter-

est of encouraging the literacy and general knowledge of

Florida’s citizens” based on the conclusion that such

interest was merely a legitimate interest and that “the tax

scheme [was] not narrowly iailored to achieve that end”);

Emmis Publ’g Corp. v. Indiana Dep't of State Revenue,

612 N.E.2d 614, 621-22 (Ind. Tax Ct. 1993) (holding con-

tent-based tax scheme unconstitutional as not being nar-

rowly tailored toward achieving asserted interests that

newspaper exemption was “a form of subsidy that makes

available inexpensive sources of news, thus, enhancing

the knowledge and literacy of the public” and provided

“relie[f] of the administrative burden and expense of

regulating hundreds of newspaper carriers in the collec-

tion and remittance of sales tax”); Southern Living, Inc. v.

Celauro, 789 S.W.2d 251, 253 (Tenn. 1990) (holding that

“[t]he immediate and timely dissemination of informa-

tion to the public” was not a compelling governmental

interest and that, “[mJjoreover, the exemption statute

App. 39

[was] not narrowly tailored to meet the asserted govern-

mental interest”); Newsweek, Inc. v. Celauro, 789 S.W.2d

247, 250 (Tenn. 1990) (same). Thus, analogous to the

above decisions, in particularly the two companion cases

decided by the Tennessee Supreme Court, we hold that

the Commission's asserted interests that the newspaper

exemption serves the critical functions of (1) disseminat-

ing news and events in an immediate fashion, (2) promot-

ing general welfare and awareness, and (3) encouraging

public involvement are not compelling governmental

interests.

138. Furthermore, in Department of Revenue v. Maga-

zine Publishers of America, Inc., the Florida Supreme

Court held that Florida’s content-based sales and use tax

scheme affording newspapers an exemption was not nar-

rowly tailored to achieve those ends because “(t]he State

need not look to the content of the publications to attain

the desired goal of increased public knowledge and liter-

acy. Moreover, magazines and other publications not eli-

gible for the exemption also provide a wealth of

information to the public.” Magazine Publishers of Am.,

Inc., 604 So. 2d at 463. Analogously, we hold that the

Mississippi sales and use tax scheme is not narrowly

tailored to achieve its asserted interests because there is

no logical reason to require a review of the content of a

publication to achieve its asserted interests.

139. As a result, we hold that Mississippi's sales and

use tax scheme providing newspapers an exemption uti-

lizes discriminatory content-based criteria to determine

whether a publication qualifies as a newspaper, and thus,

the tax scheme violates the First Amendment of the

United States Constitution.

App. 40

IV. WHETHER THE APPLICABLE REMEDY

UNDER MISSISSIPPI LAW FOR OVERPAYMENT

OF USE TAX UNDER AN UNCONSTITUTIONAL

TAX SCHEME REQUIRES THE REFUND OF ALL

PAYMENTS MADE BY SERVICE MERCHANDISE.

140. Service Merchandise contends that in order to keep

with federal due process requirements, Mississippi law

mandates that the State refund all payments made by a

taxpayer under a taxing scheme subsequently deemed

unconstitutional or otherwise illegal. In support of this

position, Service Merchandise cites to this Court’s deci-

sion in Marx v. Broom, 632 So. 2d 1315 (Miss. 1994),

where this Court granted a full refund for overpayment

of taxes under an unconstitutional taxing scheme. Marx,

632 So. 2d at 1318. 7

441. The Commission, however, argues that the appro-

priate remedy if the newspaper exemption of the sales

and use tax scheme is found unconstitutional is not a

refund but instead the striking of the newspaper exemp-

tion from the sales and use tax statutes. The Commission

further attempts to distinguish Marx v. Broom on the

basis that Marx involved the wrongful levy of a tax and

not the wrongful granting of an exemption. In support of

its position, the Commission cites to a Tennessee Supreme

Court decision in 1986, Sears, Roebuck & Co. v. Woods,

708 S.W.2d 374 (Tenn. 1986), which held:

However, even if this Court were to find that the

exemptions for newspapers and shoppers

advertisers are violative of the Equal Protection

Clause, it would provide Sears no remedy. Strik-

ing down of the exemptions for these publica-

tions would simply bring them within the ambit

App. 41

of the tax and would not remove preprints from

the coverage of the tax. Courts cannot create a

tax exemption where the legislature has not pro-

vided one.

Sears, Roebuck & Co., 708 S.W.2d at 383.

142. This Court, in Marx v. Broom, held that where a tax

was levied under an unconstitutional taxing scheme the

applicable remedy was to give a full refund to the tax-

payers who had the tax levied on them under the uncon-

stitutional scheme. Marx, 632 So. 2d at 1322-23. In-Marx,

the chancery court held that “state residents who were

also federal retirees were entitled to a refund of state

income taxes paid under the state’s unconstitutional tax

scheme which taxed federal retirees while exempting the

state’s own retired employees,” and the Mississippi State

Tax Commission appealed to the Supreme Court. Id. at

1316. The applicable refund statute in Marx was Miss.

Code Ann. § 27-7-313 which provided:

In the case of any overpayment of any tax, inter-

est or penalty levied or provided for in article 1

of this chapter, or in this article, whether by

reason of excessive withholding, error on the

part of the taxpayer, erroneous assessment of

tax, or otherwise, the excess shall be refunded to

the taxpayer.

Id. at 1317 (quoting Miss. Code Ann. § 27-7-313

(Supp.1993)). The Court rejected the Commission’s argu-

ment that “refunds are not to be given for a constitutional

challenge but only for other errors or excessive withhold-

ing” by holding that “[t]he plain words of the statute say

that any overpayment of Mississippi taxes for any reason

shall be refunded to the taxpayer.” Id. at 1318. Thus,

App. 42

under applicable Mississippi case law, where a tax is

assessed under an unconstitutional taxing scheme, the

appropriate remedy is for the taxpayer to be given a

refund from the levy of the unlawful tax. Id.

143. However, the case sub judice is distinguishable

from Marx on the grounds that the taxpayers in Marx

were challenging the tax as being unlawful and not the

exemption. See Thayer v. South Carolina Tax Comm'n,

413 S.E.2d 810, 815 (S.C. 1992). In Thayer v. South Caro-

lina Tax Commission, the South Carolina Supreme Court

held that South Carolina’s sales and use tax scheme

granting an exemption from use tax to religious publica-

tions was in violation of the establishment clause of the

First Amendment. Thayer, 413 S.E.2d at 813-14. However,

the court, in determining that the taxpayer, which was

assessed a use tax on its real estate advertising publica-

tion, was not entitled to a refund, reasoned:

Appellant asserts that McKesson v. Division of

Alcoholic Beverages & Tobacco, 496 US. 18, 110

S.Ct. 2238, 110 L.Ed.2d 17 (1990), mandates that

her tax assessment be forgiven. She claims that

any attempt to subject her to tax after an exemp-

tion is removed would deprive her of due pro-

cess. We disagree. McKesson must be read in

conjunction with its companion case, American

Trucking Associations, Inc. v. Smith, 496 U.S.

167, 110 S.Ct. 2323, 110 L.Ed.2d 148 (1990). The

Court in American Trucking makes it clear that

McKesson requires relief as a matter of federal

law only when taxpayers involuntarily pay a tax

that is unconstitutional under existing prece-

dents. McKesson is inapplicable when, as here,

taxpayers have been subjected to a constitu-

tional tax. The fact that we have found section

App. 43

12-35-550(7) as it pertains to religious publica-

tions to be unconstitutional does not render

appellant’s tax burden unconstitutional. The

language of a tax exemption statute must be

given its plain, ordinary meaning and must be

strictly construed against the claimed exemp-

tion. John D. Hollingsworth on Wheels, Inc. v.

Greenville County Treasurer, 276 S.C. 314, 278

S.E.2d 340 (1981). Appellant was not entitled to

an exemption in the past; nor is she entitled to

an exemption now that we have severed that

portion of section 12-35-550(7) relating to reli-

gious publications. This Court cannot create an

exemption by reading something into the statute

which the Legislature did not intend. See Creech

v. South Carolina Public Service Authority, 200

S.C. 127, 146, 20 S.E.2d 645, 652 (1942).

Id. at 815. Likewise, we adopt the reasoning of the South

Carolina Supreme Court to hold that Service Merchandise

is not entitled to a refund of the use tax assessments in

this case.

144. In the case sub judice, we agree with the South

Carolina Supreme Court’s conclusion that McKesson is

inapplicable when taxpayers have been subjected to a

constitutional tax. By finding a portion of the criteria

used by the Commission as unconstitutionally content-

based and severing that unconstitutional criteria from the

definition of a newspaper, as contained in Miss. Code

Ann. § 27-65-3(l), we do not render that the use tax

imposed on Service Merchandise was an unconstitutional

tax burden. This Court, in Mississippi State Tax Commis-

sion v. Medical Devices, Inc., stated that:

App. 44

“When the statute purports to grant an exemp-

tion from taxation, the universal rule of con-

struction is that the tax exemption provision is

to be construed strictly against the one who

asserts the claim of exemption, in the absence of

expressed legislative intent that the exemption

is to be construed otherwise.”

Mississippi State Tax Comm'n v. Medical Devices, Inc.,

624 So. 2d 987, 991 (Miss. 1993) (quoting Monaghan v.

Jackson Casket Co., 242 Miss. 840, 850-51, 136 So. 2d 603,

606 (1962)). Service Merchandise was not entitled to the

newspaper exemption from imposition of the use tax in

the past, nor is it entitled to the exemption now that Miss.

Code Ann. § 27-65-3(/)(vi) has been severed from the

definition of a newspaper for purposes of determining

which publications qualify for the exemption. Analogous

to Thayer, we cannot create an exemption by reading

something into the statute which the Legislature did not

intend. See State v. Heard, 246 Miss. 774, 781, 151 So. 2d

417, 420 (1963). As a result, Service Merchandise is not

entitled to a full refund for the amount of use tax

assessed against it.

V. WHETHER THE TRIAL COURT ERRED BY NOT

REJECTING THE USE TAX IMPOSED ON SERVICE

MERCHANDISE’S POSTAGE IN LIGHT OF THE

FACT THAT A SIMILAR SALES TAX WOULD

NEVER BE IMPOSED ON THE SAME PRODUCT.

VI. WHETHER THE TRIAL COURT ERRED BY

TAKING THE VIEW THAT MISSISSIPPI COULD

LAWFULLY IMPOSE A USE TAX ON SERVICE MER-

CHANDISE’S UNITED STATES POSTAGE COSTS.

App. 45

145. Service Merchandise, in the alternative to a full

refund based on the unconstitutionality of the content-

based use tax exemption, contends that the trial court

erred by not rejecting the use tax imposed on the amount

paid to the federal government for postage costs and by

taking the view that the Commission could impose the

use tax on the part of the purchase price used to pay for

the United States postage costs. In support of its argu-

ment, Service Merchandise contends that the use tax was

imposed improperly and not in accordance with Missis-

sippi’s sales and use tax scheme because the use tax is not

to be imposed on items that no sales tax is imposed on.

Service Merchandise also supports its argument by citing

to Rule 51(b) of the Mississippi State Tax Commission

which provides that “ ‘[w]here stamped envelopes or

post cards are purchased and printed for the customers,

the amount of the postage may be deducted from the

total charge [for purposes of computing the sales tax to

be collected].’ ” Code Miss. R. 48090 001-43 (1997). Fur-

thermore, Service Merchandise argues that such an

assessment of use tax on United States postage is in effect

a state tax ona federal instrumentality which is expressly

prohibited by 31 U.S.C. § 3124(a) (1996). As a result,

Service Merchandise requests a refund of the amount of

use tax assessed against it in proportion to the amount of

United States postage that was paid for the delivery of

the catalogs and advertisement fliers into Mississippi in

the amount of $145,420.00 in which it was assessed in tax

and interest for use tax on postage, plus post-payment

interest which has accrued.

App. 46

146. The Commission on the other hand argues that the

use tax was properly imposed because Service Merchan-

dise paid as total charges under the contract the delivery

costs which included the chosen method of delivery as

the United States Postal Service, and in support of this

position, the Commission asserts authority to do so under

Miss. Code Ann. § 27-67-3(f) which provides:

“Purchase price” or “sales price” means the

total amount for which tangible personal prop-

erty is purchased or sold, valued in money,

including any additional charges for deferred

payment, installation and service charges, and

freight charges to the point of use within this

state, without any deduction for cost of prop-

erty sold, expenses or losses, or taxes of any

kind except those exempt by the sales tax law.

“Purchase price” or “sales price” shall not

include cash discounts allowed and taken or

merchandise returned by customer when the

total sales price is refunded either in cash or by

credit, and shall not include amounts allowed

for a trade-in of similar property.

Miss. Code Ann. § 27-67-3(f) (1990) (emphasis added).

The Commission also argues that the reason that Rule

51(b) is not applicable is because Service Merchandise did

not take actual physical possession of the catalogs and

advertising fliers but instead paid the printer the full

purchase price, including delivery. Furthermore, the

Commission argues that it is not taxing the United States

government, its instrumentalities, or obligations but,

instead, the purchase price paid by Service Merchandise.

147. The sales tax and use tax in Mississippi are col-

lected in a complementary manner, i.e., where the sales

App. 47

tax is not collected on the sale of tangible personal prop-

erty then a use tax is similarly not collected on the use of

that same type of property in the State of Mississippi.

This taxing scheme is set forth in Miss. Code Ann.

§ 27-67-7(b) which provides:

The tax levied by this article shall not be col-

lected in the following instances:

(b) On the use, storage or consumption of tan-

gible personal property to the extent that sales

of similar property in Mississippi are either

excluded or specifically exempt from sales tax

or are taxed at the wholesale rate.

This exemption shall be confined to the use of

property the sale of which is an itemized

exemption in the Mississippi Sales Tax Law, or

to use by persons who are listed in said law as

being exempt from sales tax.

Miss. Code Ann. § 27-67-7(b) (Supp.1997). There is no

specific exemption stated in the Mississippi Sales Tax

Law that provides for an exemption for the sale of post-

age stamps. However, the Mississippi State Tax Commis-

sion, in its Rules and Regulations adopted by the Sales

and Use Tax Division, has adopted Rule 51 governing

taxation of the printing industry. Rule 51 provides the

following:

Sales. Gross proceeds of sales by persons engag-

ing in the printing business are taxable at the

regular retail rate of tax on the total charge with

the following exceptions:

(b) Where stamped envelopes or post cards are pur-

chased and printed for the customers, the amount of

the postage may be deducted from the total charge.

App. 48

Code Miss. R. 48 090 001-43 (1997) (emphasis added).

Furthermore, the State Tax Commission’s agent, Eddie

Beck, at trial in the lower court, when questioned about

the effect of Rule 51(b) conceded that there was no sales

tax imposed on postage:

Q: It effectively exempts postage from the

gross proceeds of sale, does it not?

A: Well, it does if you’re taking possession of

that postage.

Mr. Beck’s response admits that sales tax is not imposed

on postage, but we hold that his attempted distinction,

and also the Commission's position on appeal, that sales

tax can be imposed if the purchaser does not take posses-

sion of the postage pre-paid printed material is illogical

and amounts to a situation where sales tax can be

imposed on a postage stamp which is prohibited by fed-

eral statutes. 31 U.S.C. § 3124(a) provides:

Stocks and obligations of the United States Gov-

ernment are exempt from taxation by a State or

political subdivision of a State. The exemption

applies to each form of taxation that would

require the obligation, the interest on the obliga-

tion, or both, to be considered in computing a

tax, except —

(1) a nondiscriminatory franchise tax or

another nonproperty tax instead of a franchise

tax, imposed on a corporation; and

(2) an estate or inheritance tax.

31 U.S.C. § 3124(a) (1994). An obligation of the United

States Government is defined in 18 U.S.C. § 8 as follows:

App. 49

The term “obligation or other security of the

United States” includes all bonds, certificates of

indebtedness, national bank currency, Federal

Reserve notes, Federal Reserve bank notes, cou-

pons, United States notes, Treasury notes, gold

certificates, silver certificates, fractional notes,

certificates of deposit, bills, checks, or drafts for

money, drawn by or upon authorized officers of

the United States, stamps and other representa-

tives of value, of whatever denomination, issued

under any Act of Congress, and canceled United

States stamps.

18 U.S.C. § 8 (1994). Thus, we find that whether the sales,

or in this case use, tax is imposed on the United States

Government or Service Merchandise the end result is that

there is a tax imposed on postage, which is an obligation

of the United States Government and violates 31 U.S.C.

§ 3124(a) (1994).

148. As a result, we hold that the trial court erred by

upholding the Commission’s imposition of the use tax on

Service Merchandise for the portion related to postage

costs incurred by Service Merchandise to have the cata-

logs and fliers delivered by the United States Postal Ser-

vice and order a refund to Service Merchandise for the

portion of the use tax paid that represented the imposi-

tion of the use tax on the postage costs plus interest and

post-payment interest.

CONCLUSION

149. We hold that the criteria used by the Commission

for determining whether a publication qualified for the

newspaper exemption from imposition of sales and use

App. 50

tax included unconstitutional content-based criteria in

violation of the First Amendment of the United States

Constitution. However, in accordance with Wilson v. Jones

County Board of Supervisors, we are inclined to sever the

invalid, unconstitutional portion of the definition of

newspaper, i.e., Miss. Code Ann. § 27-65-3(/)(vi), and

leave intact the remainder of the definition for determin-

ing whether a publication qualifies for the newspaper

exemption as a valid content-neutral criteria. Further-

more, Service Merchandise is not entitled to a full refund

of the use tax assessment paid, for to do so would create

a tax exemption where the legislature did not intend for

there to be an. exemption.

750. However, we hold that Service Merchandise is enti-

tled to a refund for the amount of use tax, including pre-

payment and post-payment interest, that was assessed in

proportion to the charge of United States postage costs

for delivery into the State of Mississippi the advertising

fliers and sales catalogs, because to not do so would

effectively result in the imposition of a sales and use tax

on United States postage in violation of 31 U.S.C.

§ 3124(a). This cause is remanded to the chancery court

for the determination of the appropriate refund.

751. AFFIRMED IN PART, REVERSED AND

REMANDED IN PART FOR PROCEEDINGS NOT

INCONSISTENT WITH THIS OPINION.

PRATHER, C.J., ROBERTS, MILLS AND WALLER, JJ.,

CONCUR. BANKS, J., DISSENTS WITH SEPARATE

WRITTEN OPINION JOINED BY SULLIVAN AND

PITTMAN, P.JJ., AND McRAE, J. McRAE, J., DISSENTS

App. 51

WITH SEPARATE WRITTEN OPINION JOINED IN

PART BY SULLIVAN, P.J.

BANKS, JUSTICE, DISSENTING:

952. For the reasons and rationale embodied in the

opinion of the chancery court, a copy of which is annexed

hereto and incorporated herein by reference, I dissent.

IN THE CHANCERY COURT OF THE

FIRST JUDICIAL DISTRICT

OF HINDS COUNTY, MISSISSIPPI

H.J. WILSON CO., INC., PLAINTIFF

v. 149,278 O/3

(CONSOLIDATED)

STATE TAX COMMISSION OF THE

STATE OF MISSISSIPPI] DEFENDANT

OPINION OF THE COURT

Plaintiff, H.J. Wilson Co., Inc., initiated this action to

recover Mississippi use tax allegedly improperly charged

and paid. Plaintiff filed two separate complaints against

defendant, State Tax Commission of the State of Missis-

sippi, pursuant to Mississippi Code Annotated § 27-67-25

(Rev. 1990), which were subsequently consolidated for all

purposes by order of this Court. Following discovery, the

case was tried. At trial, plaintiff called two witnesses: Ms.

Donna Adams, director of tax for plaintiff's corporate

parent. Service Merchandise, Inc., a Tennessee corpora-

tion (“SMC”), and Mr. Stephen Handy, director of store

marketing, national promotions and media distribution

for SMC. Defendant called as its only witness Mr. Eddie

App. 52

Beck, Assistant to its Chairman. Numerous exhibits were

introduced. Both parties submitted post-trial briefs. Pur-

suant to the express language of section 27-67-25, this

Court's jurisdiction of this case is original.

The material facts are not in dispute. The parties’ stipu-

lated facts include the following:

1. Plaintiff is a Louisiana corporation that is qualified to

do business in this State, where it operates six retail

establishments. Plaintiff is wholly owned by SMC.

2. Defendant is charged with the duty of administering

and enforcing the Mississippi Use Tax Law, and is sued

here in its official capacity.

3. Plaintiff seeks to recover the total sum of $658,150.23

consisting of use tax and interest paid by SMC on plain-

tiff’s behalf, pursuant to defendant's audit and assess-

ment against plaintiff for the taxable periods June 1, 1986

through September 30, 1989 (“First Audit Period”), and

October 1, 1989 through June 30, 1992 (“Second Audit

Period”), respectively.

4. The challenged use-tax assessments are based upon

the cost of plaintiff’s advertisements, specifically catalogs

and flyers, which were mailed from outside Mississippi

directly to Mississippi residents by the United States

Postal Service (“USPS”), at no cost to the recipients. The

parties’ agreed pretrial order and joint statement indi-

cates these materials were mailed by the printers, pur-

suant to contract with SMC.

5. Advertising circulars were also inserted into certain

Mississippi newspapers and delivered as a part of the

newspaper, pursuant to contract between SMC and the

App. 53

newspapers. Pursuant to its interpretation of the statu-

tory use-tax exemption for daily or weekly newspapers,

no Mississippi use tax was levied by defendant on these

newspaper advertising inserts.

6. Advertising catalogs, flyers and inserts were also

mailed to plaintiff’s six stores in Mississippi for customer

use. Plaintiff does not contest the use tax imposed by

defendant on these advertising materials.

7. SMC controls the business operations of its subsid-

iaries, including plaintiff. These operations include

advertising. SMC allocates its costs for these operations

among its subsidiaries, including plaintiff, based upon

the subsidiary’s pro rata share of total corporate monthly

sale.

8. Plaintiff bore the burden of the challenged use tax

and interest. Other than the challenged tax, no sales or

use tax was paid on the direct-mail advertising materials

at issue.

9. Prior to initiating this action, plaintiff pursued timely,

albeit unsuccessful, appeals from the challenged use-tax

assessments to defendant’s Board of Review and to

defendant.

Use Tax

The Mississippi Use Tax Law is codified at Mississippi

Code Annotated §§ 27-65-1 through -35 (Rev. 1990 &

Supp. 1996). The use tax is levied upon the user’s privi-

lege of using, storing or consuming tangible personal

property within this state, possession of which is

acquired in any manner. Sections 27-65-5 and 27-67-13.

App. 54

The tax base is “the purchase or sales price, or value, as

defined in [the Mississippi Use Tax Law].” Section

27-67-5(a). “Purchase price” or “sales price” is defined as

the total amount for which the tangible personal property

is sold, “including any additional . . . freight charges to -

the point of use within Mississippi, without deduction for

cost of property sold, expenses or losses, or taxes of any

kind except those exempt by the sales tax law.” Section

27-67-3(f). Accord Mississippi Sales and Use Tax Rule 42.

“Value” of imported sales promotion or advertising mate-

rials is defined as “an amount not less than the cost paid

by the transferor.” Section 27-67-3(h).

Arguments

Plaimiff bears the burden to show the assessment of the

tax paid was incorrect. Section 27-67-25. Plaintiff chal-

lenges both the computation of the use-tax base and the

constitutionality of the tax Because constitutional issues

are not reached unless necessary for the decision of a

case, this Court first addresses plaintiff's non-constitu-

tional claims. Robinson v. Robinson, 554 So. 2d 300 (Miss.

1989).

I. Computation of use-tax base

(A) Inclusion of postage

The parties stipulated that, with respect to the Second

Audit Period only, the use-tax base included plaintiff's

postal charges incurred in mailing catalogs and flyers to

Mississippi residents. The stipulated amount of use tax

allocable to said postage charges is $100,965.00, plus

App. 55

interest of $44,455.00. Plaintiff raises several arguments

challenging the inclusion of postage in the use-tax base.

Relying upon Mississippi Sales and Use Tax Rule 51(b)

and Mr. Beck’s testimony, plaintiff asserts it was error to

impose a compensating use tax on postage where no sales

tax would be imposed. This argument fails because plain-

tiff fails to establish its premise, i.e., that no sales tax

would be imposed. Although Mr. Beck testified that no

sales tax would be imposed on the sale of postage, he also

testified that postage would be subject to sales or use tax

when included in the sales price as a cost of shipment.

Statutory support for Mr. Beck’s testimony may be found

at section 27-67-3(f) (defining “purchase price” or “sales

price” for use-tax purposes to include freight charges to

the point of use), section 27-65-3(h) (defining “gross pro-

ceeds of sales” for sales-tax purposes to include delivery

charges), and section 27-65-13 (levying sales tax on the

gross proceeds of sales or gross income or values, as

applicable). Further, Mr. Beck testified that Rule 51(b),

which provides that printers may reduce their gross pro-

ceeds of retail sales by the amount of postage where

stamped envelopes or post cards are purchased and

printed for the customer, is applied only where the cus-

tomer takes possession of the postage-paid envelopes or

post cards from the printer. In contrast, the evidence

showed that plaintiff did not take possession of the

advertising which is the subject of the challenged tax, but

that the printer arranged for a distribution of the finished

advertising materials in accordance with plaintiff’s mail-

ing profile. Sey ‘viai Exhibit Number 6, “Plaintiff's Exam-

ple Printing Contract.”

App. 56

Citing, McCullough v. Maryland, 17 U.S. (4 Wheat.) 316

(1819), plaintiff summarily argues that taxing postage

conclusively offends the venerable federal doctrine of

intergovernmental tax immunity, as implemented by 4

U.S.C. § 107 and 31 U.S.C. § 3124. This argument is not

persuasive. The modern interpretation of this doctrine is

that “[aJbsolute tax immunity is appropriate only when

the tax is on the United States itself ‘or on an agency or

instrumentality so closely connected to the Government

that the two cannot realistically be viewed as separate

entities, at least insofar as the activity being taxed is

concerned.’ ” California State Board of Equalization v. Sierra

Summit, Inc., 490 U.S. 844, 848 (1989) (quoting United

States v. New Mexico, 455 U.S. 720 (1982)). Significantly,

the tax at issue in the present case was on plaintiff, not

the United States or any inseparable entity thereof.

Further, there is no clear showing that either section 107

or section 3124 applies on the facts of this case. See

generally Calif. State Bd. of Equalization, 490 U.S. 844

(observing that courts must proceed carefully when

asked to recognize an exemption from state taxation that

Congress has not clearly expressed). Section 107 pre-

serves the doctrine of intergovernmental-tax immunity

where state use tax is imposed on or from the United

States or any instrumentality thereof or any “authorized

purchaser” therefrom, the latter term denoting purchases

from commissaries, ship’s stores, or certain organizations

of Armed Forces personnel. United States v. State Tax

Commission of the State of Mississippi, et al., 421 U.S. 599

(1975). In the present case, the challenged tax was

imposed on plaintiff, not a federal agency or “authorized

App. 57

purchaser.” Section 3124 exempts from state taxation cer-

tain interest-bearing obligations of the United States

which are needed to secure credit to carry on the neces-

sary functions of government. Rockford Life Ins. Co. v.

Department of Revenue, 482 U.S. 182 (1987) (decided under

prior formulation of section 3124. which was without

substantive changes). This Court is aware of no authority

extending the section 3124 exemption to postage.

(B) Inclusion of reimbursed costs

As the parties stipulated, during both audit periods the

use-tax base included certain production costs for which

SMC was reimbursed by the individual vendors pursuant

to separate advertising cooperative agreements between

them. The stipulated amount of use tax allocable to the

reimbursed costs is $81,493.00, plus interest of $49,392.00,

in the First Audit Period, and $120,986.00, plus interest of

$53,270.00, in the Second Audit Period. Plaintiff argues it

was error to tax its gross, rather than its net, cost of

production. This argument is unsupported by reference

to persuasive statutory or decisional law. As previously

noted, by express statutory language, the use-tax base is

defined as the purchase or sales price, or value, without

any reference to deduction for reimbursed costs that are

ultimately recovered by the user. Sections 27-65-3(f) and

(h); Section 27-67-5(a).

II. Constitutional Issues

Statutes are presumed to be constitutional. Jones v. Harris,

So. 2d 120 (Miss. 1984). A statute will not be held uncon-

stitutional unless the evidence is clear and convincing

App. 58

that it violates a constitutional limitation. Illinois Central

Railroad Co. v. Williams, 242 Miss. 586 (1961).

(A) Definition of “use”

Citing Connally v. General Construction Co., 269 U.S. 385

(1926), plaintiff argues the Mississippi Use Tax Law’s

definition of “use” is unconstitutionally vague because it

provides no standard for application. Section 27-67-3(k),

which sets forth the challenged definition, reads in full as

follows:

(k) “Use” or “consumption” means the first use or

intended use within this state of tangible personal prop-

erty and shall include rental or loan by owners or use by

lessees or other persons receiving benefits from use of the

property. “Use” or “consumption” shall include the bene-

fit realized or to be realized by persons importing or

causing to be imported into this state tangible advertising

or sales promotion materials.

More specifically, plaintiff contends the statutory term

“benefit realized” is impermissibly vague, for which rea-

son the use tax is computed on a cost basis even though

cost bears no reasonable or necessary correlation to the

“benefit realized.”

Plaintiff’s vagueness challenge presumably arises from

the protection against state deprivation of property with-

out due process of law found in the United States Consti-

tution’s Fourteenth Amendment. The standards for

evaluating such a challenge have been summarized as

follows:

App. 59

Vague laws offend several important values. First,

because we assume that man is free to steer between

lawful and unlawful conduct, we insist that laws give the

person of ordinary intelligence a reasonable opportunity

to know what is prohibited, so that he may act accord-

ingly. Vague laws trap the innocent by not providing fair

warning. Second, if arbitrary and discriminatory enforce-

ment is to be prevented, laws must provide explicit stan-

dards for those who apply them. A vague law

impermissibly delegates basic policy matters to police-

men, judges, and juries for resolution on an ad hoc and

subjective basis, with the attendant dangers of arbitrary

and discriminatory applications.

Village of Hoffman Estates v. Flipside Hoffman Estates, Inc.,

455 U.S. 498 (1982) (quoting Grayned v. City of Rockford,

408 U.S. 104 (1972)).

In applying these standards, the degree of vagueness that

the Constitution tolerates depends on the nature of the

challenged statute. Village of Hoffman Estates, 455 U.S. 498.

In the present case, the challenged legislation regulates

business behavior. Economic legislation is subject to a

less-strict vagueness test, in part, because businesses can

be expected to plan behavior carefully and consult rele-

vant legislation in advance of action. Id.

This Court concludes that section 27-67-3(k), in its

entirety, is not unconstitutionally vague and affords a

person of ordinary intelligence a reasonable opportunity

to know that importation of tangible advertising mate-

rials into Mississippi may constitute a taxable event for

use-tax purposes. Further, plaintiff's argument is unper-

suasive that the use tax is computed on a cost basis

App. 60

because the term “benefit realized” is unconstitutionally

vague. As previously noted, the measure of the use-tax

base is clearly defined elsewhere in the Mississippi Use

Tax Law, specifically section 27-67-5(a) and the attendant

definitional sections 27-67-3(f) and (h).

(B) Use-Tax Exemption for Newspapers

It is undisputed that daily and weekly newspapers are

statutorily exempt from Mississippi's use tax. See Miss.

Code Ann. § 27-65-111(b) (exempting newspapers from

sales tax); section 27-67-7(b) (exempting from use tax

tangible personalty if its sale is specifically exempted

from sales tax). It is also undisputed that no such exemp-

tion is provided for advertising materials, subject to the

proviso that defendant interprets the statutory exemption

for newspapers to include advertising inserts that are

delivered by the printer to the newspaper and sold or

distributed as a part of the newspaper. Plaintiff argues

that, because newspapers and advertising inserts in

newspapers are exempt, but its direct-mail advertising

materials are subject to tax, the use-tax scheme violates

its federal constitutional rights to free speech, free press

and equal protection. United States Constitution, arts. I

and XIV. On this basis, plaintiff prays for a full refund of

the entire $658,150.23 at issue. This Court finds no merit

to plaintiff’s constitutional arguments.

Plaintiff inaccurately cites Minneapolis Star and Tribune Co.

v. Minnesota Comm'r of Revenue, 460 U.S. 575 (1983), for

the proposition that differential taxation, in and of itself,

is a presumptively unconstitutional form of regulation.

The tax at issue in that case was a Minnesota special-use

App. 61

tax on the cost of paper and ink consumed in the produc-

tion of publications, which was held unconstitutional

because it singled out the press for special treatment and

targeted a small group of newspapers to bear the tax

burden. Leathers v. Medlock, 499 U.S. 439 (1991). In con-

trast, the Mississippi use tax at issue in the present case is

a tax of general applicability that applies to the use,

storage or consumption of all tangible personal property,

unless within a group of specific exemptions. Cf. id. (find-

ing the Arkansas sales tax is a tax of general appli-

cability). There is no evidence to demonstrate that the

Mississippi use tax singles out the press or any small

group thereof for special treatment. Where a state

imposes a generally applicable tax, there is little cause for

concern. Minneapolis Star and Tribune Co., 460 U.S. 575.

Plaintiff argues the Mississippi use-tax scheme violates

the First Amendment because the newspaper exemption

is applied on the basis of the publication’s content. This

Court finds no clear and convincing evidence of constitu-

tionally-invalid content-based discrimination. It is undis-

puted that the Mississippi Use Tax Law contained no

definition of “newspaper” at the times pertinent to this

case. Instead, as the evidence showed, defendant was

guided by Mississippi Code Annotated § 13-3-31 (Supp.

1996), which sets forth the factors for identifying publica-

tions for the placement of summons, order, citation,

advertisement or other legal notice required to be pub-

lished in a newspaper in this state. These factors include

° This Court is aware that the Mississippi Legislature

recently amended Mississippi Code Annotated § 27-65-3 to

define the term “newspaper,” in language substantially similar

App. 62

distinctions based on both form and content. On similar

facts, other jurisdictions have upheld statutory tax

exemptions for newspapers reasoning that the news-

papers may be identified by constitutionally-permissible

distinctions based upon format, such as frequency of

publication. E.g., Magazine Publishers of American v. Com-

monwealth of Pennsylvania, 539 Pa. 563, 654 A. 2d 519

(1995); Gallacher, et. at. [sic] v. Comm’r of Revenue Services,

221 Conn., 166, 602 A.2d 996 (1992). See also Hearst Corp.

v. Iowa Dep't of Revenue and Finance, 461 N.W. 2d 295

(lowa 1990), cert. denied, 499 U.S. 983 (1991) (holding that,

while classification of the publication’s writing as news

was a consideration, its form and frequency of publica-

tion were the primary factors for determining its quali-

fication for the tax exemption for newspapers).

Certainly, heightened scrutiny under the First Amend-

ment is triggered if a tax discriminates on the basis of the

content of taxpayer speech. Leathers, 499 U.S. 439. Citing

Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221

(1987), Minneapolis Star and Tribune Co., 460 U.S. 575, and

Grosjean v. American Press Co., Inc., 297 U.S. 233 (1936),

plaintiff contends a state taxation scheme that discrimi-

nates between “two different types of political speech,”

absent an overriding government interest that cannot be

achieved without such differential taxation, is forbidden.

Unlike the taxpayer speech at issue in these cited authori-

ties, however, advertising is generally categorized as

commercial speech and accorded “a measure of First

Amendment protection” that is satisfied if a narrowly-

to section 13-3-31, for the purpose of the Mississippi Sales Tax

Law and for related purposes.

8 a

a ee ee SE, eel erro ee

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eer eS ee ee ee ee ee ee

App. 63

drawn regulation directly and materially advances a sub-

stantial governmental interest. Florida Bar v. Went For It,

Inc., _ U.S. __, __, 115 S.Ct. 2371, 1275 (1995). As the

United States Supreme Court there explained.

We have always been careful to distinguish commercial

speech from speech at the First Amendment's core. ”

‘(C]ommercial speech [enjoys] a limited measure of pro-

tection, commensurate with its subordinate position in

the scale of First Amendment values,’ and is subject to

‘modes of regulation that might be impermissible in the

realm of noncommercial expression.’” . . . We have

observed that “ ‘[t]o require a parity of constitutional

protection for commercial and noncommercial speech

“dé

alike could invite dilution simply by a leveling process, of

the force of the Amendment's guarantee with respect to

the latter type of speech.’ ”

Id. (citations omitted).

In the present case, plaintiff cites no persuasive authority

for the issue at hand, i.e., whether a state tax of general

applicability that differentiates between noncommercial

speech (newspaper) and commercial speech (advertising)

violates the First Amendment. Although denial of a state-

tax exemption constitutes a violation of the First Amend-

ment where the taxpayer engaged in certain political

speech and the denial was aimed at “the suppression of

dangerous ideas,” Speiser v. Randall, 357 U.S. 513 (1958),

there is no evidence of such conduct here. Thus, in the

absence of any clear authority applicable on the facts of

this case and being mindful of the aforementioned pre-

sumption of constitutionality, this Court is not persuaded

App. 64

the Mississippi use-tax exemption for newspapers imper-

missibly infringes upon the limited First Amendment

protection afforded plaintiff's commercial speech. See also

Redwood. Empire Publishing Co., et al. v. State Board of

Equalizat’n, 207 Cal. App. 3d 1334, 255 Cal. Rptr. 514 (Ct.

App. 1989) (Surveying federal decisional law addressing

the constitutionality of differential regulation of commer-

cial and noncommercial speech).

Finally, plaintiff argues the statutory newspaper exemp-

tion, as well as defendant’s interpretation of it to cover

newspaper advertising inserts, violates its federal consti-

tutional equal-protection guarantee because there is no

rational basis for such differential treatment. Generally,

the Equal Protection Clause is satisfied where there is a

plausible policy reason for the classification, the legisla-

tive facts on which the classification is apparently based

rationally may have been considered true by the govern-

ment, and the relationship of the classification to its goal

is not so attenuated as to render the distinction arbitrary

or irrational. Nordlinger v. Hahn, __ U.S. __, 112 S.Ct.

2326 (1992). This Court, applying the test to this case,

finds the statutory use-tax exemption for newspapers and

defendant’s interpretation that it encompasses newspaper

advertising inserts are rationally related to the legislative

policy of subsidizing newspapers as a vital source of

public information and interpreter between the govern-

ment and the people. Grosjean v. American Press Co., 297

U.S. 23.

App. 65

Conclusion

For the reasons stated above, this Court concludes plain-

tiff’s consolidated claim for refund of use tax and interest

is without merit and, therefore, should be and it is dis-

missed. Defendant's counsel is directed to prepare a final

judgment in conformity with this opinion and in accor-

dance with Mississippi Rule of Civil Procedure 58 and

Uniform Chancery Court Rule 5.

IT IS SO ORDERED AND ADJUDGED THIS the 21st day

of November, 1996.

DENISE OWENS

CHANCELLOR

SULLIVAN AND PITTMAN, P.JJ., AND McRAE, |»

JOIN THIS OPINION.

McRAE, JUSTICE, DISSENTING:

153. Perhaps the majority fails to recognize that H.J.

Wilson Company was doing business as Service Merchan-

dise, but Service Merchandise Company was paying the

applicable taxes. The majority ignores the fact that nei-

ther H.J. Wilson Company nor Service Merchandise Com-

pany satisfies the statutory requirements of publishing a

newspaper and are therefore not entitled to a tax exemp-

tion. As a result, I respectfully dissent.

154. H.J. Wilson Company, which operates a Service

Merchandise franchise, does not have a mailing depart-

ment. Instead, it relies on its parent company, Service

Merchandise Company, to send out flyers, inserts, and

advertising circulars, using postage paid for by Service

Merchandise. H.J. Wilson Company does not receive

App. 66

credit for the postage, but it receives credit for the gross

amount as defined by the State Tax Commission.

155. The majority attempts to “analyze” the content of

the publications sent out by Service Merchandise Com-

pany, on behalf of H.J. Wilson Company, without first

determining if either H.J. Wilson Company or Service

Merchandise publishes “newspapers.” A clear review of

the applicable statute reveals that neither company pub-

lishes a “newspaper”; accordingly, neither is entitled to

an exemption.

156. To meet the requirements of being a “newspaper”

pursuant to Miss. Code Ann. § 13-3-31(1), a publication,

inter alia, cannot be “published primarily for advertising

purposes” and cannot be “designed primarily for free

circulation or for circulation at nominal rates.”” Miss.

Code Ann. § 13-3-31(1)(c), (h) (Supp. 1997). The adver-

tisements paid for and mailed by Service Merchandise do

not disseminate “current news and intelligence of varied,

broad and general public interest.” Miss. Code Ann.

§ 13-3-31(1)(g) (Supp. 1997). They are published not only

primarily for advertising purposes, but purely for adver-

tising purposes. Moreover, the advertisements are

designed for free circulation. Accordingly, for sales and

use tax purposes, those publications are not newspapers,

and neither H.J. Wilson Company nor Service Merchan-

dise Company qualify as publishers. Without meeting

7 Similarly, under recently amended Miss. Code Ann.

§ 27-65-3(1) (Supp. 1997), if a publication is “published

primarily for advertising purposes,” it cannot qualify as a

“newspaper.”

App. 67

this threshold requirement, they cannot receive the news-

paper exemption from assessment of Mississippi sales

and use tax. Further, the majority cannot reach its discus-

sion of whether the Commission made its determination

using content-based criteria.

157. Additionally, H.J. Wilson Company used the ser-

vices of Service Merchandise to send out all the flyers

and advertisements. However, H.J. Wilson Company is

not even the proper party to question the constitu-

tionality of the Tax Commission’s tax assessments.

Wilson, doing business as Service Merchandise, is a

wholly separate and distinct corporation. In this case

Service Merchandise Company receives a complete write-

off of the advertisements as an expenditure, and H.J.

Wilson Company receives a write-off against the total

gross amount that Service Merchandise Company charges

them for printing and mailing the advertisements. Appar-

ently, the majority does not recognize this tax “shell

game” being played and does not pick up on the effect of

what these companies were doing, as the Tax Commis-

sion did.

458. Service Merchandise Company controls the busi-

ness operations of its franchisees, including the advertis-

ing operations of H.J. Wilson Company. It is undisputed

that no use tax exemption exists for advertising materials.

It follows that the applicable statute does not allow an

exemption for the advertisements mailed out by Service

Merchandise Company for H.J. Wilson Company. Because

the majority totally misses the point that the advertise-

ments under review do not meet the statutory require-

ments of a newspaper and neither company is a ~

App. 68

newspaper publisher, and because the majority unneces-

sarily addresses the question of whether this is a case of

content-based discrimination, I respectfully dissent.

SULLIVAN, P.J., JOINS THIS OPINION IN PART.

App. 69

[SEAL]

CORRECTED

MANDATE

SUPREME COURT OF MISSISSIPPI

To the Hinds County Chancery Court Ist Judicial District

~ GREETINGS:

In proceedings held in the Courtroom, Carroll Gartin

Justice Building, in the City of Jackson, Mississippi, the

Supreme Court of Mississippi entered a final judgment as

follows:

Supreme Court Case #97-CA-00121-SCT

Trial Court Case #149278

H. J. Wilson Company, Inc. v. State Tax Commission of the

State of Mississippi

Thursday, 30th day of July, 1998

Affirmed in Part; Reversed and Remanded in Part for

proceedings not inconsistent with the Opinion of this

Court. Appellant and Appellee taxed with costs of

appeal.

Wednesday, 31st day of March, 1999

Motions for rehearing, denied. Sullivan and Pittman, P.JJ.,

Banks and McRae, JJ., would grant.

YOU ARE COMMANDED, that execution and fur-

ther proceedings as may be appropriate forthwith be had

App. 70

consistent with this judgment and the Constitution and

Laws of the State of Mississippi.

WITNESS, the Honorable Lenore L.

Prather, Chief Justice of the Supreme

Court of Mississippi; also the

signature of the Clerk and the Seal

of said Court hereunto affixed, in the

City of Jackson, on April 20, 1999,

A.D.

/s/ Charlotte S. Williams

Clerk

App. 71

IN THE CHANCERY COURT OF THE FIRST

JUDICIAL DISTRICT OF

HINDS COUNTY, MISSISSIPPI

H. J. WILSON CO., INC. PLAINTIFF

v. 149,278 O/3

STATE TAX (CONSOLIDATED)

COMMISSION OF THE DEFENDANT

STATE OF MISSISSIPPI

OPINION OF THE COURT

(Filed Nov. 21, 1996)

Plaintiff, H.J. Wilson Co., Inc., initiated this action to

recover Mississippi use tax allegedly improperly charged

and paid. Plaintiff filed two separate complaints against

defendant, State Tax Commission of the State of Missis-

sippi, pursuant to Mississippi Code Annotated § 27-67-25

(Rev. 1990), which were subsequently consolidated for all

purposes by order of this Court. Following discovery, the

case was tried. At trial, plaintiff called two witnesses: Ms.

Donna Adams, director of tax for plaintiff’s corporate

parent, Service Merchandise, Inc., a Tennessee corpora-

tion (“SMC”), and Mr. Stephen Handy, director of store

marketing, national promotions and media distribution

for SMC. Defendant called as its only witness Mr. Eddie

Beck, Assistant to its Chairman. Numerous exhibits were

introduced. Both parties submitted post-trial briefs. Pur-

suant to the express language of section 27-67-25, this

Court’s jurisdiction of this case is original.

The material facts are not in dispute. The parties’

stipulated facts include the following:

App. 72

1. Plaintiff is a Louisiana corporation that is quali-

fied to do business in this state, where it operates six

retail establishments. Plaintiff is wholly owned by SMC.

2. Defendant is charged with the duty of adminis-

tering and enforcing the Mississippi Use Tax Law, and is

sued here in its official capacity.

3. Plaintiff seeks to recover the total sum of

$658,150.23 consisting of use tax and interest paid by

SMC on plaintiff's behalf, pursuant to defendant’s audit

and assessment against plaintiff for the taxable periods

June 1, 1986 through September 30, 1989 (“First Audit

Period”), and October 1, 1989 through June 30, 1992

(“Second Audit Period”), respectively.

4. The challenged use-tax assessments are based

upon the cost of plaintiff's advertisements, specifically

catalogs and flyers, which were mailed from outside Mis-

sissippi directly to Mississippi residents by the United

States Postal Service (“USPS”), at no cost to the recip-

ients. The parties’ agreed pretrial order and joint state-

ment indicates these materials were mailed by the

printers, pursuant to contract with SMC.

5. Advertising circulars were also inserted into cer-

tain Mississippi newspapers and delivered as a part of

the newspaper, pursuant to contract between SMC and

the newspapers. Pursuant to its interpretation of the stat-

utory use-tax exemption for daily or weekly newspapers,

no Mississippi use tax was levied by defendant on these

newspaper advertising inserts.

6. Advertising catalogs, flyers and inserts were also

mailed to plaintiff’s six stores in Mississippi for customer

#

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4

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Ps

3

App. 73

use. Plaintiff does not contest the use tax imposed by

defendant on these advertising materials.

7. SMC controls the business operations of its sub-

sidiaries, including plaintiff. These operations include

advertising. SMC allocates its costs for these operations

among its subsidiaries, including plaintiff, based upon

the subsidiary’s pro rata share of total corporate monthly

sales.

8. Plaintiff bore the burden of the challenged use

tax and interest. Other than the challenged tax, no sales

or use tax was paid on the direct-mail advertising mate-

rials at issue.

9. Prior to initiating this action, plaintiff pursued

timely, albeit unsuccessful, appeals from the challenged

use-tax assessments to defendant’s Board of Review and

to defendant.

Use Tax

The Mississippi Use Tax Law is codified at Missis-

sippi Code Annotated §§ 27-65-1 through -35 (Rev. 1990 &

Supp. 1996). The use tax is levied upon the user’s privi-

lege of using, storing or consuming tangible personal

property within this state, possession of which is

acquired in any manner. Sections 27-65-5 and 27-67-13.

The tax base is “the purchase or sales price, or value, as

defined in [the Mississippi Use Tax Law].” Section

27-67-5(a). “Purchase price” or “sales price” is defined as

the total amount for which the tangible personal property

is sold, “including any additional . . . freight charges to

the point of use within Mississippi, without deduction for

App. 74

cost of property sold, expenses or losses, or taxes of any

kind except those exempt by the sales tax law.” Section

27-67-3(f). Accord Mississippi Sales and Use Tax Rule 42.

“Value” of imported sales promotion or advertising mate-

rials is defined as “an amount not less than the cost paid

by the transferor.” Section 27-67-3(h).

Arguments

Plaintiff bears the burden to show the assessment of

the tax paid was incorrect. Section 27-67-25. Plaintiff chal-

lenges both the computation of the use-tax base and the

constitutionality of the tax. Because constitutional issues

are not reached unless necessary for the decision of a

case, this Court first addresses plaintiff's non-constitu-

tional claims. Robinson v. Robinson, 554 So. 2d 300 (Miss.

1989).

I. Computation of use-tax base

(A) Inclusion of postage

The parties stipulated that, with respect to the Sec-

ond Audit Period only, the use-tax base included plain-

tiff’s postal charges incurred in mailing catalogs and

flyers to Mississippi residents. The stipulated amount of

use tax allocable to said postage charges is $100,965.00,

plus interest of $44,455.00. Plaintiff raises several argu-

ments challenging the inclusion of postage in the use-tax

base.

Relying upon Mississippi Sales and Use Tax Rule

51(b) and Mr. Beck’s testimony, plaintiff asserts it was

error to impose a compensating use tax on postage where

App. 75

no sales tax would be imposed. This argument fails

because plaintiff fails to establish its premise, i.e., that no

sales tax would be imposed. Although Mr. Beck testified

that no sales tax would be imposed on the sale of postage,

he also testified that postage would be subject to sales or

use tax when included in the sales price as a cost of

shipment. Statutory support for Mr. Beck’s testimony

may be found at section 27-67-3(f) (defining “purchase

price” or “sales price” for use-tax purposes to include

freight charges to the point of use), section 27-65-3(h)

(defining “gross proceeds of sales” for sales-tax purposes

to include delivery charges), and section 27-65-13 (levy-

ing sales tax on the gross proceeds of sales or gross

income or values, as applicable). Further, Mr. Beck testi-

fied that Rule 51(b), which provides that printers may

reduce their gross proceeds of retail sales by the amount

of postage where stamped envelopes or post cards are

purchased and printed for the customer, is applied only

where the customer takes possession of the postage-paid

envelopes or post cards from the printer. In contrast, the

evidence showed that plaintiff did not take possession of

the advertising which is the subject of the challenged tax,

but that the printer arranged for distribution of the fin-

ished advertising materials in accordance with plaintiff's

mailing profile. See Trial Exhibit Number 6, “Plaintiff’s

Example Printing Contract.”

Citing McCullough v. Maryland, 17 U.S. (4 Wheat.) 316

(1819), plaintiff summarily argues that taxing postage

conclusively offends the venerable federal doctrine of

intergovernmental tax immunity, as implemented by 4

U.S.C. § 107 and 31 U.S.C. § 3124. This argument is not

persuasive. The modern interpretation of this doctrine is

App. 76

that “[a]bsolute tax immunity is appropriate only when

the tax is on the United Sates itself ‘or on an agency or

instrumentality so closely connected to the government

that the two cannot realistically be viewed as separate

entities, at least insofar as the activity being taxed is

concerned.’ ” California State Board of Equalization v. Sierra

Summit, Inc., 490 U.S. 844, 848 (1989) (quoting United

States v. New Mexico, 455 U.S. 720 (1982)). Significantly,

the tax at issue in the present case was on plaintiff, not

the United States or any inseparable entity thereof.

Further, there is no clear showing that either section

107 or section 3124 applies on the facts of this case. See

generally Calif. State Bd. of Equalization, 490 U.S. 844

(observing that courts must proceed carefully when

asked to recognize an exemption from state taxation that

Congress has not clearly expressed). Section 107 pre-

serves the doctrine of intergovernmental-tax immunity

where state use tax is imposed on or from the United

States or any instrumentality thereof or any “authorized

purchaser” therefrom, the latter term denoting purchases

from commissaries, ship’s stores, or certain organizations

of Armed Forces personnel. United States v. State Tax

Commission of the State of Mississippi, et al., 421 U.S. 599

(1975). In the present case, the challenged tax was

imposed on plaintiff, not a federal agency or “authorized

purchaser.” Section 3124 exempts from state taxation cer-

tain interest-bearing obligations of the United States

which are needed to secure credit to carry on the neces-

sary functions of government. Rockford Life Ins. Co. v.

Department of Revenue, 482 U.S. 182 (1987) (decided under

prior formulation of section 3124, which was without

he NRG RoE IIO IEW Pe) Cg >

App. 77

substantive change). This Court is aware of no authority

extending the section 3124 exemption to postage.

(B) Inclusion of reimbursed costs

As the parties stipulated during both audit periods

the use-tax base included certain production costs for

which SMC was reimbursed by the individual vendors

pursuant to separate advertising cooperative agreements

between them. The stipulated amount of use tax allocable

to the reimbursed costs is $81,493.00, plus interest of

$49,392.00, in the First Audit Period, and $120,986.00,

plus interest of $53,270.00, in the Second Audit Period.

Plaintiff argues it was error to tax its gross, rather than its

net, cost of production. This argument is unsupported by

reference to persuasive statutory or decisional law. As

previously noted, by express statutory language, the use-

tax base is defined as the purchase or sales price, or

value, without any reference to deduction for reimbursed

costs that are ultimately recovered by the user. Sections

27-65-3(f) and (h); section 27-67-5(a).

II. Constitutional Issues

Statutes are presumed to be constitutional. Jones v.

Harris, [sic] So. 2d 120 (Miss. 1984). A statute will not be

held unconstitutional unless the evidence is clear and

convincing that it violates a constitutional limitation. IIIi-

nois Central Railroad Co. v. Williams, 242 Miss. 586 (1961).

App. 78

(A) Definition of “use”

Citing Connally v. General Construction Co., 269 U.S.

385 (1926), plaintiff argues the Mississippi Use Tax Law’s

definition of “use” is unconstitutionally vague because it

provides no standard for application. Section 27-67-3(k),

which sets forth the challenged definition, reads in full as

follows:

(k) “Use” or “consumption” means the first use

or intended use within this state of tangible

personal property and shall include rental or

loan by owners or use by lessees or other per-

sons receiving benefits from use of the property.

“Use” or “consumption” shall include the bene-

fit realized or to be realized by persons import-

ing or causing to be imported into this state

tangible advertising or sales promotion mate-

rials.

More specifically, plaintiff contends the statutory term

“benefit realized” is impermissibly vague, for which rea-

son the use tax is computed on a cost basis even though

cost bears no reasonable or necessary correlation to the

“benefit realized.”

Plaintiff’s vagueness challenge presumably arises

from the protection against state deprivation of property

without due process of law found in the United States

Constitution’s Fourteenth Amendment. The standards for

evaluating such a challenge have been summarized as

follows:

Vague laws offends several important values.

First, because we assume that man is free to

steer between lawful and unlawful conduct, we

insist that laws give the person of ordinary

i eran amnpnmnnenennrnennn i corre nee

App. 79

intelligence a reasonable opportunity to know

what is prohibited, so that he may act accord-

ingly. Vague laws trap the innocent by not pro-

viding fair warning. Second, if arbitrary and

discriminatory enforcement is to be prevented,

laws must provide explicit standards for those

who apply them. A vague law impermissibly

delegates basic policy matters to policemen,

judges, and juries for resolution on an ad hoc

and subjective basis, with the attendant dangers

of arbitrary and discriminatory applications.

Village of Hoffman Estates v. Flipside, Hoffman Estates, Inc.,

455 U.S. 498 (1982) (quoting Grayned v. City of Rockford,

408 U.S. 104 (1972)).

In applying these standards, the degree of vagueness that

the Constitution tolerates depends on the nature of the

challenged statute. Village of Hoffman Estates, 455 U.S. 498.

In the present case, the challenged legislation regulates

business behavior. Economic legislation is subject to a

less-strict vagueness test, in part, because businesses can

be expected to plan behavior carefully and consult rele-

vant legislation in advance of action. Id.

This Court concludes that section 27-67-3(k), in its

entirety, is not unconstitutionally vague and affords a

person of ordinary intelligence a reasonable opportunity

to know that importation of tangible advertising mate-

rials into Mississippi may constitute a taxable event for

use-tax purposes. Further, plaintiff’s argument is unper-

suasive that the use tax is computed on a cost basis

because the term “benefit realized” is unconstitutionally

vague. As previously noted, the measure of the use-tax

base is clearly defined elsewhere in the Mississippi Use

App. 80

Tax Law, specifically section 27-67-5(a) and the attendant

definitional sections 27-67-3(f) and (h).

(B) Use-Tax Exemption for Newspapers

It is undisputed that daily and weekly newspapers

are statutorily exempt from Mississippi’s use tax. See

Miss. Code Ann. § 27-65-111(b) (exempting newspapers

from sales tax); section 27-67-7(b) (exempting from use

tax tangible personalty if its sale is specifically exempted

from sales tax). It is also undisputed that no such exemp-

tion is provided for advertising materials, subject to the

proviso that defendant interprets the statutory exemption

for newspapers to include advertising inserts that are

delivered by the printer to the newspaper and sold or

distributed as a part of the newspaper. Plaintiff argues

that, because newspapers and advertising inserts in

newspapers are exempt, but its direct-mail advertising

materials are subject to tax, the use-tax scheme violates

its federal constitutional rights to free speech, free press

and equal protection. United States Constitution, arts. I

and XIV. On this basis, plaintiff prays for a full refund of

the entire $658,150.23 at issue. This Court finds no merit

to plaintiff's constitutional arguments.

Plaintiff inaccurately cites Minneapolis Star and Trib-

une Co. v. Minnesota Comm'r of Revenue, 460 U.S. 575

(1983), for the proposition that differential taxation, in

and of itself, is a presumptively unconstitutional form of

regulation. The tax at issue in that case was a Minnesota

special-use tax on the cost of paper and ink consumed in

the production of publications, which was held uncon-

stitutional because it singled out the press for special

OOO

PORN STS BR

App. 81

treatment and targeted a small group of newspapers to

bear the tax burden. Leathers v. Medlock, 499 U.S. 439

(1991). In contrast, the Mississippi use tax at issue in the

present case is a tax of general applicability that applies

to the use, storage or consumption of all tangible per-

sonal property, unless within a group of specific exemp-

tions. Cf. id. (finding the Arkansas sales tax is a tax of

general applicability). There is no evidence to demon-

strate that the Mississippi use tax singles out the press or

any small group thereof for special treatment. Where a

state imposes a generally applicable tax, there is little

cause for concern. Minneapolis Star and Tribune Co., 460

U.S. 575.

Plaintiff argues the Mississippi use-tax scheme vio-

lates the First Amendment because the newspaper

exemption is applied on the basis of the publication’s

content. This Court finds no clear and convincing evi-

dence of constitutionally-invalid content-based discrimi-

nation. It is undisputed that the Mississippi Use Tax Law

contained no definition of “newspaper” at the times per-

tinent to this case. Instead, as the evidence showed,

defendant was guided by Mississippi Code Annotated

§ 13-3-31 (Supp. 1996), which sets forth the factors for

identifying publications for the placement of summons,

order, citation, advertisement or other legal notice

required to be published in a newspaper in this state.!

1 This Court is aware that the Mississippi Legislature

recently amended Mississippi Code Annotated § 27-65-3 to

define the term “newsaper,” in language substantially similar to

section 13-3-31, for the purpose of the Mississippi Sales Tax Law

and for related purposes.

App. 82

These factors include distinctions based on both form and

content. On similar facts, other jurisdictions have upheld

statutory tax exemptions for newspapers reasoning that

the newspapers may be identified by constitutionally-

permissible distinctions based upon format, such as fre-

quency of publication. E.g., Magazine Publishers of Ameri-

can v. Commonwealth of Pennsylvania, 539 Pa. 563, 654 A.

2d 519 (1995), Gallacher , et al. v. Comm’r of Revenue Ser-

vices, 221 Conn. 166, 602 A.2d 996 (1992). See also Hearst

Corp. v. lowa Dep't of Revenue and Finance, 461 N.W. 2d 295

(Iowa 1990), cert. denied, 499 U.S. 983 (1991) (holding that,

while classification of the publication’s writing as news

was a consideration, its form and frequency of publica-

tion were the primary factors for determining its quali-

fication for the tax exemption for newspapers).

Certainly, heightened scrutiny under the First

Amendment is triggered if a tax discriminates on the

basis of the content of taxpayer speech. Leathers, 499 U.S.

439. Citing Arkansas Writers’ Project, Inc. v. Ragland, 481

U.S. 221 (1987), Minneapolis Star and Tribune Co., 460 U.S.

575, and Grosjean v. American Press Co., Inc., 297 U.S. 233

(1936), plaintiff contends a state taxation scheme that

discriminates between “two different types of political

speech,” absent an overriding government interest that

cannot be achieved without such differential taxation, is

forbidden. Unlike the taxpayer speech at issue in these

cited authorities, however, advertising is generally cate-

gorized as commercial speech and accorded “a measure

of First Amendment protection” that is satisfied if a nar-

rowly-drawn regulation directly and materially advances

a substantial governmental interest. Florida Bar v. Went for

App. 83

It, Inc., __ U.S. __, __, 115 S.Ct. 2371, 1275 (1995). As

the United States Supreme Court there explained:

We have always been careful to distinguish com-

mercial speech from speech at the First Amend-

ment’s core. ‘ “[C]ommercial speech [enjoys] a

limited measure of protection, commensurate

with its subordinate position in the scale of First

Amendment values,’ and is subject to ‘modes of

regulation that might be impermissible in the

realm of noncommercial expression.’” . . . We

have observed that ‘“[t]o require a parity of

constitutional protection for commercial and

noncommercial speech alike could invite dilu-

tion simply by a leveling process, of the force of

the Amendment's guarantee with respect to the

latter type of speech.’ ”

Id. (citations omitted).

In the present case, plaintiff cites no persuasive

authority for the issue at hand, i.e., whether a state tax of

general applicability that differentiates between noncom-

mercial speech (newspaper) and commercial speech

(advertising) violates the First Amendment. Although

denial of a state-tax exemption constitutes a violation of

the First Amendment where the taxpayer engaged in

certain political speech and the denial was aimed at “the

suppression of dangerous ideas,” Speiser v. Randall, 357

U.S. 513 (1958), there is no evidence of such conduct here.

Thus, in the absence of any clear authority applicable on

the facts of this case and being mindful of the aforemen-

tioned presumption of constitutionality, this court is not

persuaded the Mississippi use-tax exemption for news-

papers impermissibly infringes upon the limited First

Amendment protection afforded plaintiff's commercial

App. 84

speech. See also Redwood Empire Publishing Co., et al. v.

State Board of Equalizat'n, 207 Cal. App. 3d 1334, 255 Cal.

Rptr. 514 (Ct. App. 1989) (surveying federal decisional

law addressing the constitutionality of differential regula-

tion of commercial and noncommercial speech).

Finally, plaintiff argues the statutory newspaper

exemption, as well as defendant’s interpretation of it to

cover newspaper advertising inserts, violates its federal

constitutional equal-protection guarantee because there is

no rational basis for such differential treatment. Gener-

ally, the Equal Protection Clause is satisfied where there

is a plausible policy reason for the classification, the

legislative facts on which the classification is apparently

based rationally may have been considered true by the

government, and the relationship of the classification to

its goal is

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