Opposition Brief — Mississippi Tax Commission v. H. J. Wilson Co.

No. 99-22

In The

Supreme Court of the United States

¢

STATE TAX COMMISSION OF

THE STATE OF MISSISSIPPI,

Petitioner,

H.J. WILSON CO., INC.,

Respondent.

¢

On Petition For A Writ Of Certiorari

To The Supreme Court Of Mississippi

4

H.J. WILSON CO., INC.’S, BRIEF IN OPPOSITION

TO MISSISSIPPI TAX COMMISSION’S

PETITION FOR A WRIT OF CERTIORARI

*

CHARLES A. TROST

Counsel of Record

MICHAEL G. STEWART

WALLER LANSDEN DortcH & Davis

A Professional Limited Liability

Company

511 Union Street, Suite 2100

Nashville City Center

Nashville, Tennessee 37219-1760

(615) 244-6380

Counsel for H.J. Wilson Co., Inc.

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

OR CALL COLLECT (402) 342-2831

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TABLE OF CONTENTS

Page

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SEAT EEEOE GIP BEE GAD ec ccccccscccesessensees 1

REASONS FOR DENYING THE WRIT............. 3

1. The decision of the Mississippi Supreme Court

rests on a Mississippi sales and use tax rule

promulgated by Petitioner itself - an adequate

and independent state law ground which is

beyond the scope of this Court’s review ..... 3

2. Postage is an obligation of the United States

which cannot be subjected to state taxes ..... 5

SIE Se apsnncdedpessehevencgnasedesense nas 11

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TABLE OF AUTHORITIES

Page

FEDERAL CASES

American Bank & Trust Co. v. Dallas County, 463

OD. GD Cae co 0000040 000400000 90 eee 7

Amer. Ry. Express v. Kentucky, 273 U.S. 269 (1926)..... 5

Banks v. Mayor, 74 US. 16 (1869). 0... .ccscccccccccses 7

Bank v. Supervisors, 74 U.S. 26 (1868).............. 7, 10

Michigan v. Long, 463 U.S. 1032 (1982)..... enoneeel a5

Rockford Life Insurance Co. v. Illinois Department of

Reeenne, Ge UB. WS TIRE) 0600404008 7, 8,9

Smith v. Davis, 323 U.S. 111 (1944).......... 8, 9, 10, 11

StTaTE CASES

Newark City Bank v. Assessor of Fourth Ward, 30

oie BO CRUE 04 < do eecccctecieeeaeeel eee 7

FEDERAL STATUTES

UA. © OB Ree ost ccvndjecteusiseaee a, & 7,

5 USS. B SG Te 6600519000 eee 3 6&7

Act of June 30, 1864, 13 Stat. 218 (1864) ........... 8, 9

ADMINISTRATIVE RULES

Mississippi Sales and Use Tax Rule 51(b), Code

Miss. R. 48 090 001-43 (1997) ............... ye? i

recat

STATEMENT OF THE CASE

The issues raised by Petitioner, State Tax Commission

of the State of Mississippi (the “Tax Commission” or

“Petitioner”), in its Petition for Writ of Certiorari center

around payment of use tax by Respondent, H.J. Wilson

Co., Inc., a Louisiana corporation doing business as Ser-

vice Merchandise (“SM” or “Respondent”), on United

States postage. SM operated, during the period relevant

to this litigation, six retail stores in the State of Missis-

sippi. As part of this operation, SM contracted to have

advertising material such as catalogs printed both inside

and outside of Mississippi and delivered via the United

States Post Office to Mississippi residents. Mississippi

imposed use tax on the cost of such mailings, including

postage charges, for the period June 1, 1986 through June

30, 1992 (the “Tax Period at Issue”).

After unsuccessfully administratively appealing the

assessments of tax on postage - and the overall assess-

ments on First Amendment grounds - to the Tax Commis-

sion’s Board of Review, to the Tax Commission itself, and

seeking relief in the Chancery Court of Hinds County,

Mississippi, SM appealed to the Mississippi Supreme

Court. That court correctly held that the statute under

which SM’s publications were taxed violated the First

Amendment to the United States Constitution. App. 49.*

With regard to the tax paid by SM on postage, the Missis-

sippi Supreme Court held that Mississippi Sales and Use

* Citations to “App. ___” refer to the Appendix submitted with

the State Tax Commission of Mississippi's Petition for Writ of

Certiorari. Citations to “Pet. __” refer to the text of that

Petition.

Tax Rule 51(b), promulgated by Petitioner itself, effec-

tively exempted postage from tax. App. 48. In so holding,

the court quoted the Tax Commission’s agent, Mr. Eddie

Beck, who testified at trial as follows:

Q: It effectively exempts postage from the

gross proceeds of the sale, does it not?

A: Well it does if you are taking possession of

that postage.

App. 48.

The Mississippi Supreme Court went on to observe that

“the Commission’s position on appeal, that sales tax can |

be imposed if the purchaser does not take possession of |

the postage prepaid printed material is illogical” and

rejected the tax imposed on postage purchased by SM as

violative of Rule 51(b). App. 48.

In addition, the court recognized that federal law

also prohibited taxation of all obligations of the United

States and that postage stamps were specifically defined

in the United States Code as obligations of the United

States government. App. 48 (citing 18 U.S.C. § 8 (1999)).

“As a result, [the court concluded], ‘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 catalog suppliers delivered by the United States

Postal Service and order a refund to Service Merchandise

for the portion of the use tax paid that represented the

imposition of the use tax on postage costs plus interest

and post-payment interest.’” App. 49.

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ail

REASONS FOR DENYING THE WRIT

1. The decision of the Mississippi Supreme Court rests

on a Mississippi sales and use tax rule promulgated

by Petitioner itself - an adequate and independent

state law ground which is beyond the scope of this

Court’s review.

This Court has “long recognized that ‘where the

judgment of a state court rests on two grounds, one of

which is federal and non-federal in character, [its] juris-

diction fails if the non-federal ground is independent of

the federal ground and adequate to support the judg-

ment.’ ” Michigan v. Long, 463 U.S. 1032, 1038 (1982) (quo-

ting Fox Film Corp. v. Muller, 296 U.S. 207, 210 (1935)). The

Mississippi Supreme Court’s holding that the Tax Com-

mission’s imposition of tax on postage charges paid by

Respondent was erroneous rests upon two such grounds

— one state, one federal. The federal ground is 31 U.S.C.

§ 3124(a) (1999), which exempts federal obligations from

tax and thus, as the court correctly determined, insulates

SM from tax on the postage it paid to mail marketing

materials during the Tax Period at Issue. App. 48-49.

However, the second basis for that court’s decision is

derived purely from state law, namely Mississippi Sales

and Use Tax Rule 51(b), promulgated by Petitioner, which

expressly exempts postage from tax. App. 47-48. The

Supreme Court of Mississippi specifically addressed the

Mississippi State Tax Commission’s argument 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 flyers, but instead paid the

printer the full purchase price, including delivery,” and

rejected it out of hand:

There is no specific exemption stated in the

Mississippi Sales Tax Law that provides for an

exemption for the sale of postage stamps. How-

ever, the Mississippi State Tax Commission, in

its Rules and Regulations adopted by the Sales

and Use Tax Division, has adopted Rule 51 gov-

erning taxation of the printing industry. Rule 51

provides the following:

(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.

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

added). Furthermore the State Tax Commis-

sion’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... .

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 possession of the postage pre-paid

printed material is illogical and amounts to a situ-

ation where sales tax can be imposed on a post-

age stamp which is prohibited by federal

statutes.

App. 47-48 (emphasis supplied).

While this is a use tax case, the Mississippi Supreme

Court properly noted that in Mississippi, the first state in

the union to adopt a sales and use tax scheme, sales and

use taxes — and thus Sales and Use Tax Rule 51(b) — in

that state are complimentary and applicable to precisely

the same transactions. App. 46-47. While the Supreme

Court of Mississippi in its opinion went on to emphasize

that federal law also prohibits imposition of tax on post-

age in any form, its reliance on Rule 51(b) in this case

provides an adequate and independent state law ground

for its decision which is not subject to the review of this

Court. Long, 463 U.S. at 1038.! For that reason alone, this

Court should refuse Petitioner’s Petition for Writ of Cer-

tiorari.

2. Postage is an obligation of the United States which

cannot be subjected to state taxes.

Reflecting the Petitioner’s inability to produce a sin-

gle authority supporting the imposition of state taxes of

any kind on postage, the Supreme Court of Mississippi

correctly held that postage is an obligation of the United

States government which cannot be taxed. App. 49. As

the Supreme Court of Mississippi observed, the United

States Code explicitly prohibits the taxation by states of

such obligations. 31 U.S.C. § 3124(a) (commonly referred

1 Given the plain command of Rule 51(b), the Mississippi

Supreme Court effectively had no choice but to reject the tax

imposed by Petitioner. To have upheld the use tax or postage

would have amounted to a refusal to enforce the laws and

regulations of the state of Mississippi. Such an “arbitrary or

capricious exercise of power [would be] in clear conflict with

those fundamental ‘principles which have been established in

our systems of jurisprudence for the protection and

enforcement of private rights’ ” and would thus violate the Due

Process Clause of the United States Constitution. Amer. Ry.

Express v. Kentucky, 273 U.S. 269, 273 (1926).

to as “Section 3701” after the underlying public law)

provides:

Stocks and obligations of the United States govern-

ment 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 obligation, or

both, to be considered in computing a tax,

except - (1) a non-discriminatory franchise tax

or another non-party tax instead of a franchise

tax, imposed on a corporation; and (2) an estate

or inheritance tax.

31 U.S.C. § 3124(a) (1999) (emphasis supplied). The Peti-

tioner has properly conceded that postage is included in

the definition of “obligation” embodied in the United

States Code at 18 U.S.C. § 8. That law explicitly includes

stamps in its list of such obligations:

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,

certificate 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).

While Petitioner states categorically that “the use of this

definition [in 18 U.S.C. § 8] would be inconsistent with

the established law in this area.” This Court and others

aaa Treen,

have specifically held that many of the “obligations” set

out in 18 U.S.C. § 8 are exempt pursuant to § 3124. Thus

for example, certificates of indebtedness, treasury notes,

and United States securities are all exempt from state

taxation. Banks v. Mayor, 74 U.S. 16 (1869) (certificates of

indebtedness); Bank v. Supervisors, 74 U.S. 26 (1868)

(superseded by statute on other grounds as stated in

American Bank & Trust Co. v. Dallas County, 463 U.S. 855

(1983) (national bank notes)); Newark City Bank v. Assessor

of Fourth Ward, 30 N.J.L. 13 (1862) (stocks and securities of

the United States).

In the most recent case to address the breadth of 31

U.S.C. § 3124, this Court left little doubt that direct and

certain obligations like postage do fall within the ambit of

“obligations” protected from state tax by that statute.

Rockford Life Insurance Co. v. Illinois Department of Revenue,

482 U.S. 182, 187 (1987). Noting that that term refers

“only to opligations or securities of the same type as

those specifically enumerated,” this Court held that “Gin-

nie Mae” certificates which bundled home mortgages to

create liquid securities were not exempted from the state

taxes by Section 3124 because, unlike the postage at issue

in this case, they do not impose a direct obligation on the

United States:

GNMaA certificates are fundamentally different

from the securities specifically named in the

statute. Most significantly, they are neither

direct and/or certain obligations of the United

States. As the certificate provides, it is the issuer

that bears the primary obligation to make timely

payments — the United States’ obligation is sec-

ondary and contingent. In short the United

States is the guarantor — not the obligor. This

distinction is more than adequate to support our

conclusion that Ginnie Mae’s do not qualify as

‘other obligations of the United States’ for the

purposes of this statute.

Rockford, 482 U.S. at 187. By contrast, the obligations at

issue in this case —- U.S. postage — impose a direct obliga-

tion on the United States government.

The distinction articulated by this Court in Rockford

Life Insurance Co. thus serves only to underscore the

obvious - that in excluding “obligations” from state taxa-

tion, Congress intended to protect all direct obligations of

the United States, including postage, from state and local

taxation.

Certainly that interpretation is supported by an anal-

ysis of the legislative history of § 3701, which this Court

carefully articulated in the other case relied on by Peti-

tioner, Smith v. Davis, 323 U.S. 111 (1944). In determining

the reach of that statutory exemption, this Court, in

Smith, properly subjected “[t]he seven statutory exemp-

tion provisions from which § 3701 was derived” to careful

analysis. Id. at 117. In so doing, it specifically noted that

the Act of June 30, 1864, 13 Stat. 218, exempting “all

bonds, treasury notes, and other obligations of the United

States” was the “provision [coming] closest to the word-

ing of § 3701.” Id. at 117 n. 9. This Court went on to

specifically set out the language of that predecessor stat-

ute which leaves no doubt that Congress has always

intended to include postage within the “other obliga-

tions” exempt from state tax:

This act, moreover, obviously used the word

‘obligation’ throughout to refer to written docu-

ments, making provisions relating to counter-

feiting, altering, printing and photographing

them. And in Section 13, the Act defines the

words ‘obligation or other security of the United

States,’ as used in this Act, to include and mean

‘all bonds, coupons, national currency, United

States notes, Treasury notes, fractional notes,

checks for money for authorized officers of the

United States, certificates of indebtedness, cer-

tificates of deposit, stamps, and other representa-

tives of value whatever denomination, which have

been or may be issued under any act of Congress.

Smith, 323 U.S. at 117 n. 9 (deriving the meaning of § 3701

by analyzing 13 Stat. 218). This Court’s prior analysis of

§ 3701 thus leaves no doubt that the “other obligations”

protected by that provision have always encompassed

postage.

Petitioners essentially base their entire Petition for

Certiorari on dicta in Smith noting that instrumentalities

heretofore determined to be exempt from state taxation:

Have been characterized by (1) written docu-

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

promise by the United States to pay specified

sums at specific dates and (4) specific Congres-

sional authorization, which also pledge the faith

and credit of the United States’ support of the

promise to pay.

Smith, 323 U.S. at 114. This analysis in Smith applied not

to the federal statute at issue but to the doctrine of

intergovernmental immunity. Id. In 1987, the Rockford Life

court similarly relegated its analysis of these characteris-

tics to an intergovernmental immunity argument. 482 U.S.

10

at 189. Nevertheless, Petitioners point out - correctly -

that postage does not bear interest. Yet, nowhere has this

Court ever suggested that the qualities listed in Smith as

mere characteristics of obligations held exempt are man-

datory even in the governmental immunity context, much

less in the interpretation of Section 3701, to which the

Smith characteristics have never been applied Id. While

typically most obligations will bear interest, there could

be no doubt that postage represents an obligation of the

United States to provide certain valuable services even if

postage were not expressly included in the United States

Code’s definition of federal “obligations.” 18 U.S.C. § 8.

Indeed this Court, in the only other case to address

Section 3701’s (or its predecessors’) application to non-

interest bearing obligations, held that bank notes issued

during the Civil War which did not bear interest were

exempt from state and local taxation under federal law.

Bank v. Supervisors, 74 U.S. 26, 31 (1865) (interpreting one

of the predecessor statutes to Section 3701 discussed at

length by this Court in Davis, 323 U.S. at 117).

The language of Smith can only be properly read in

the context of its facts, which are utterly inapplicable to

this case. 323 U.S. at 111. Smith did not involve any sort

of written security or direct obligation of the United

States. It involved nothing more than a claim by partners

engaged in the construction business who held on their

books an account receivable totaling $29,831.10 for cer-

tain construction projects performed for the United States

Army. 323 U.S. at 112. It was this open account that the

Smith plaintiffs attempted to declare a tax-exempt obliga-

tion. Plainly, an accounts receivable is a far cry from an

obligation by the United States of America to provide

11

postal services, as represented by a postage stamp or

similar postal mark or document. As the Smith court

observed, the accounts receivable at issue was “not evi-

denced by any written document whereby the United

States . . . promised to pay . . . ; nor [was] there any

binding acknowledgment by the United States of the cor-

rectness of the claim.” 323 U.S. at 114. This Court further

emphasized that the receivable was not itself binding on

the United States and might be subject to defenses or

counterlaims. Id. None of these concerns are at all relevant

to postage, which plainly imposes a direct obligation on

the United States. Nothing in Smith suggests that U.S.

postage obligations are somehow excluded from the obli-

gations exempt from taxation under the statute and the

parallel doctrine of intergovernmental immunity.

*

CONCLUSION

For the foregoing reasons, the Petition should be

denied.

Respectfully submitted,

WALLER LANSDEN DortcH & Davis

A Professional Limited Liability

Company

CuHar.es A. Trost, Esa.

MicHAEL G. Stewart, Esa.

511 Union Street, Suite 2100

Nashville, TN 37219

(615) 244-6380

Attorney for Respondent