North Carolina Supreme Court Rules Against Sales and Use Tax Distinction in Wisconsin Taxpayer’s Appeal

The Supreme Court of North Carolina ruled to uphold a sales tax assessment against a Wisconsin based printer, rejecting the taxpayer’s argument that they could not be subject to sales tax under the U.S. Supreme Court decision McLeod v. J.E. Dilworth Co. The 1944 ruling in McLeod created a clear distinction between sales tax and a use tax in interstate commerce, defining sales of goods that occurred outside of a state that were delivered into the state via common carrier as out of state sales that could not be subject to sales tax under the Commerce Clause. In a companion case, General Trading Co. v. State Tax Comm’n, the court clarified that a use tax could be required to be collected in similar circumstances, as the tax was on the in-state consumer’s use of the product rather than on the out of state sales. The printer argued they delivered their sales from out of state to a common carrier, and because the assessment on the business was for sales tax, the assessment was invalid under McLeod.

In their decision, the Supreme Court of North Carolina compared McLeod v. J.E. Dilworth Co. to more recent sales and use tax cases relating to interstate commerce, including Complete Auto Transit v. Brady (1977) and Wayfair v. South Dakota (2018). The court determined that both the four prong test established in Complete Auto and the economic nexus standard established by Wayfair contradicted the 1944 rulings, and overruled their precedent despite not specifically mentioning Dilworth in their decisions. The state’s decision also clarified that, because both the state’s sales and use tax are based on the destination at which the purchaser takes ownership of the property sold, the imposition of sales rather than use tax on out of state sellers fulfilled Complete Auto’s four part test.

In the descent, Justice Philip Berger Jr argued that the sale itself could not be sourced to North Carolina, as the order was approved in Wisconsin and title to the property transferred to the customer when the goods were given to the common carrier for delivery. Transactional nexus, or a transaction’s connection to a taxing state, was not fulfilled, as the sales tax is imposed on the sale itself, which did not occur in North Carolina. He agreed that the transaction could have been taxed under the use tax, but that the state’s decision to assess sales tax was incorrect.

Even after Wayfair and economic nexus, issues like transactional nexus still remain open to questions as remote sellers attempt to comply when sales cross state borders. When some states have different rates, rules, and exemptions for sales and use tax, understanding how to properly collect and remit tax when making a sale into another state can rely on taxpayer interpretations of these concepts.

(Quad Graphics Inc. v. North Carolina Department of Revenue, 407A21-1, North Carolina Supreme Court)

Posted on January 4, 2023