Quad Graphics, Inc. v. N.C. Dep't of Revenue

2021 NCBC 37

• Court: North Carolina Business Court
• Decided: June 23, 2021
• Docket: 20-CVS-7449
• Status: Published

Opinion

Quad Graphics, Inc. v. N.C. Dep’t of Revenue, 2021 NCBC 37.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION WAKE COUNTY 20 CVS 7449

QUAD GRAPHICS, INC.,

Petitioner,

v. ORDER AND OPINION ON FIRST AMENDED PETITION FOR JUDICIAL NORTH CAROLINA DEPARTMENT REVIEW OF REVENUE,

Respondent.

THIS MATTER is before the Court on Quad Graphics, Inc.’s (“Petitioner”) First

Amended Petition for Judicial Review. (“Amended Petition for Judicial Review,” ECF

No. 9.) Pursuant to § 105-241.16 of the North Carolina General Statutes (“N.C.G.S.”),

Petitioner seeks review of the June 24, 2020 Final Decision of the North Carolina

Office of Administrative Hearings (“OAH”) (“Final Decision,” Rec., at pp. 938–47). 1

On February 2, 2021, the Court held a hearing on the Amended Petition for Judicial

Review.

THE COURT, having considered the Petition, the briefs and supplemental

briefs filed in support of and in opposition to the Petition, the official record of

proceedings in the OAH, the arguments of counsel at the hearing, the applicable law,

and other appropriate matters of record, concludes that the Petition should be

GRANTED and the Final Decision should be REVERSED.

1 The Official Record on Judicial Review is filed in 10 parts on the electronic docket at ECF

Nos. 27–36, each part consisting of 100 pages. For example, Official Record Part 1 (ECF No. 27) contains pages 1–100 of the Official Record on Judicial Review; Official Record Part 2 (ECF No. 28) contains pages 101–200; and so on. Hereinafter, ECF Nos. 27–36 are referred to as the “Rec.”. Graebe Hanna & Sullivan, PLLC by Douglas W. Hanna and Akerman, LLP by Michael Bowen for Petitioner Quad Graphics, Inc.

The North Carolina Department of Justice by Terence Friedman and Matthew Sommer for Respondent North Carolina Department of Revenue.

McGuire, Judge.

I. FACTS AND PROCEDURAL BACKGROUND

1. The facts giving rise to this lawsuit are not in dispute. Petitioner is an

S-Corporation headquartered in Sussex, Wisconsin. Petitioner is engaged in the

business of the commercial printing of books, magazines, catalogs, and items for

direct mail (“printed materials”) to customers throughout the United States. (Rec.,

at pp. 192–93, 200.) Petitioner sold printed materials to customers in North Carolina

and to customers who had printed materials delivered to third-party recipients with

North Carolina addresses (“direct mail”) during the period September 1, 2009

through December 31, 2011 (the “Sales at Issue”). (Id. at pp. 245, 551–56.)

Petitioner’s customers provided Petitioner with the addresses for the direct mail

recipients in North Carolina via mailing lists. (Id. at pp. 200–01, 244.)

2. It is undisputed that Petitioner received the orders for the Sales at Issue

from a customer, produced the printed materials at facilities located outside of North

Carolina, and then delivered the printed materials to the United States Postal

Service (“USPS”) or another common carrier at sites outside of North Carolina. 2 (Id.

at p. 224.) The USPS or common carrier would, in turn, deliver the printed materials

2 Petitioner did not have a printing facility in North Carolina until 2013 when it purchased

the assets of a company called Vertis. (Rec., at p. 224.) to either the customers or the third-party direct mail recipients inside North

Carolina. (Id. at pp. 200–01, 244.) The contracts between Petitioner and its

customers stated that title to the printed materials, and risk of loss, passed from

Petitioner to the customers when the printed materials were deposited on the

carrier’s shipping dock. 3 (Id. at pp. 326, 335, 684–85.)

3. In August 2009 Petitioner hired a North Carolina resident, Edward

Waters (“Waters”), as a sales representative. Waters “solicited orders for printed

materials from North Carolina customers[.]” (Id. at pp. 245, 260, 555.) Waters did

not have authority to accept or approve orders, as all orders were approved and

accepted at Petitioner’s headquarters in Wisconsin. (Id. at p. 244.) Prior to hiring

Waters, Petitioner had no employees nor any other physical presence in North

Carolina. (Id. at pp. 202, 224, 239.)

4. In or around 2011, Respondent North Carolina Department of Revenue

(the “Department”) notified Petitioner of its intent to conduct an audit related to

Petitioner’s business activities within North Carolina. (Id. at p. 480.) On November

12, 2015, the Department issued a Notice of Sales and Use Tax Assessment to

Petitioner for uncollected and unremitted sales tax arising from sales of printed

materials to North Carolina customers for the period January 1, 2007 to December

31, 2011 (the “Initial Assessment”). (Id. at p. 635.) Petitioner appealed the Initial

Assessment by filing a request for Departmental Review. (Id. at p. 43.)

3 This type of contractual shipping arrangement is commonly referred to as Free On Board

or Freight On Board Shipping Point (“FOB Shipping”). 5. During the Departmental Review, the Department received additional

information from Petitioner and concluded that certain sales should be excluded from

the Initial Assessment. (Id.) Specifically, the Department removed those sales

shipped to North Carolina customers for which Petitioner provided sufficient

documentation demonstrating that the transactions were sales for resale by those

customers. (Id.) The Department also removed those sales that occurred before

Petitioner hired Waters in August 2009. 4 (Id.) The Department adjusted the

Proposed Assessment to reflect these changes, and on November 30, 2018 issued a

Notice of Final Determination. (“NOFD,” Rec., at pp. 686–93; upholding the

assessment of sales tax on the Sales at Issue.)

6. Petitioner appealed the NOFD by filing a Petition for Contested Tax

Case with the OAH. (Id. at pp. 5–12.) Petitioner and the Department both moved

for summary judgment, and on June 24, 2020, the OAH issued its Final Decision

granting summary judgment in favor of the Department, denying Petitioner’s motion

for summary judgment, and upholding the assessment of sales tax on the Sales at

Issue. (Id. at pp. 938–947.) The OAH concluded that the Petitioner was a “retailer”

as defined under N.C.G.S. § 105-164.3(35)(a) (2010) 5 (Id. at p. 942), and that the

4 The Department determined that, prior to Petitioner’s hiring of its resident sales representative in North Carolina, Petitioner did not have a sufficient sales tax nexus with North Carolina. (Rec., at p. 641.)

5 For purposes of this Order and Opinion, the Court refers to the provisions of the North

Carolina Sales and Use Tax Act (the “Act”) in effect during the period September 1, 2009 through December 31, 2011. The Court’s use of the present tense in discussing these statutes is not intended to mean that the discussion applies to the current version of the statute to the extent the statute has been amended effective after December 31, 2011. Sales at Issue were properly sourced to North Carolina under N.C.G.S. §§ 105-

164.4B(a)(2) and (d)(2)(b) (2010). (Id. at pp. 944–45.) In addition, while

acknowledging that she was “barred” from ruling on Petitioner’s constitutional

challenges to the NOFD, the administrative law judge (“ALJ”) nevertheless opined

that the physical presence of Petitioner’s sales representative in North Carolina

created a sufficient constitutional nexus with the State to support the State’s

imposition of sales tax on the Sales at Issue. 6 (Id. at pp. 942–44.)

7. On July 24, 2020, Petitioner timely filed its Petition for Judicial Review

of the Final Decision pursuant to N.C.G.S. §§ 105-241.16 and 7A-45(b)–(f). (ECF No.

3.) On the same day, the case was designated as a mandatory complex business case,

and assigned to the Honorable Louis A. Bledsoe, III, Chief Business Court Judge.

(ECF Nos. 1–2.) On August 20, 2020, Petitioner filed the Amended Petition for

Judicial Review. (ECF No. 9.)

8. On September 24, 2020, the parties filed the stipulated official record of

the proceedings in the Office of Administrative Hearings. (Stipulation Regarding

Contents of Record, ECF No. 26; Official Record, ECF Nos. 27–36.)

9. On October 2, 2020, the Court issued an Order and Opinion on various

motions filed by Petitioner and the Department which, among other things, denied

the Department’s motion to dismiss the Amended Petition for Judicial Review. (Ord.

6 It is well established that in North Carolina, constitutional questions must be resolved by

the courts and not by the State’s administrative agencies. In re Redmond, 369 N.C. 490, 493 (2017). and Op. on Respd.’s Mot. to Dism. Petition, Respd.’s Mot. to Stay, and Petitioner’s

Mot. for Ext. Time to Serve Resp. with Pet. For Jud. Rev., ECF No. 41.) 7

10. On October 26, 2020, Petitioner filed its Brief in Support of Petition for

Judicial Review. (“Brief in Support,” ECF No. 42.) On November 30, 2020, the

Department filed its Response in Opposition to Petitioner’s Petition for Judicial

Review on the Merits. (“Response Brief,” ECF No. 43.) On December 10, 2020,

Petitioner filed its Reply Brief. (“Reply Brief,” ECF No. 45.)

11. On January 6, 2021, this matter was reassigned to the undersigned.

(Reassignment Ord., ECF No. 46.) The parties came before the Court for a hearing

on the Amended Petition for Judicial Review on February 2, 2021.

12. On May 27, 2021, the Court issued a Notice to Provide Supplemental

Briefing. (ECF No. 49.) On June 11, 2021, Petitioner and the Department filed

supplemental briefs. (Respondent’s Suppl. Br., ECF No. 50; Petitioner’s Suppl. Br.,

ECF No. 51.)

13. The matter is now ripe for review.

II. LEGAL STANDARD

14. Petitioner appeals the Final Decision granting summary judgment in

favor of the Department. “A party aggrieved by the final decision in a contested case

commenced at the Office of Administrative Hearings may seek judicial review of the

decision in accordance with Article 4 of Chapter 150B of the General Statutes.”

7 The Court also granted Petitioner’s Motion for Extension of Time to Serve Respondent with

Petition for Judicial Review (ECF No. 20) and denied the Department’s Motion to Stay (ECF No. 13). (ECF No. 41, at ¶ 22.) N.C.G.S. § 105-241.16. Under Chapter 150B, the task before this Court is to

“determine whether the petitioner is entitled to the relief sought in the petition based

on [a] review of the final decision and the official record.” N.C.G.S. § 150B-51(c).

15. “In reviewing a final decision allowing . . . summary judgment, the court

may enter any order allowed by . . . Rule 56” of the North Carolina Rules of Civil

Procedure. N.C.G.S. § 150B-51(d). “Appeals arising from summary judgment orders

are decided using a de novo standard of review.” Midrex Techs., Inc. v. N.C. Dep’t of

Revenue, 369 N.C. 250, 257 (2016) (citation omitted). “Under the de novo standard of

review, the [Court] ‘consider[s] the matter anew[ ] and freely substitut[es] its own

judgment for’ [that of the lower court].” Id. at 257 (alterations in original) (citation

omitted).

16. Under North Carolina law, summary judgment “shall be rendered

forthwith if the pleadings, depositions, answers to interrogatories, and admissions on

file, together with the affidavits, if any, show that there is no genuine issue as to any

material fact and that any party is entitled to a judgment as a matter of law.”

N.C.G.S. § 1A-1, Rule 56(c). A genuine issue is “one that can be maintained by

substantial evidence.” Dobson v. Harris, 352 N.C. 77, 83 (2000). A material fact is

one that “would constitute or would irrevocably establish any material element of a

claim or defense.” Abner Corp. v. City Roofing & Sheetmetal Co., 73 N.C. App. 470,

472 (1985). Summary judgment is appropriate if “the facts are not disputed and only

a question of law remains.” Wal-Mart Stores East v. Hinton, 197 N.C. App. 30, 37

(2009) (citation omitted). 17. Further, with respect to the standards applicable to this Court’s

consideration of constitutional challenges, our appellate courts have held that “[a]

law is presumed constitutional until the contrary is shown and the burden is on the

party claiming that the law is unconstitutional to show why it is unconstitutional as

applied to him.” Perry v. Perry, 80 N.C. App. 169, 176 (1986).

III. ANALYSIS

18. In this appeal, Petitioner raises two arguments. First, Petitioner

contends that the OAH erroneously held that Petitioner was a “Retailer” under the

provisions of N.C.G.S. § 105-164.3(35)(a) (2010) that was required to pay sales taxes

to North Carolina on the Sales at Issue under the Act. (Id. at pp. 6–12.) Petitioner

argues that “this set of facts forms the basis for use tax liability for the customers of

Petitioner” but “not a retail sales tax assessment.” 8 (Id., at p. 2 (emphasis in

original).)

19. Second, Petitioner argues that the Department’s assessment of sales

taxes on the Sales at Issue is unconstitutional under the Due Process Clause and the

Commerce Clause of the United States Constitution. (Id. at pp. 12–22.) Both of

Petitioner’s arguments are grounded in its position that although the printed

materials were sold to customers for use or consumption in North Carolina, it is

undisputed that title and possession of the printed materials took place outside the

8 The North Carolina Sales and Use Tax Act “imposes a use tax on items purchased outside

the state and thus not subject to [sales] tax, which are brought into the state for ‘storage use and consumption’ here.” In re Assessment of Additional North Carolina & Orange County Use Taxes, 312 N.C. 211, 215 (1984), appeal dismissed, 472 U.S. 1001, 105 S. Ct. 2693, 86 L. Ed. 2d (1985); see also N.C.G.S. § 105-164.6 (2010). The Department is not seeking to assess a use tax on the Sales at Issue. State. Petitioner contends that since title and possession passed outside of North

Carolina, the “sales” occurred outside of North Carolina.

20. The Court will first analyze Petitioner’s claim that the OAH misapplied

the provisions of the Act in deciding that Petitioner is a “retailer” subject to North

Carolina’s sales tax, and second, the Court will analyze whether the imposition of

sales tax on the Sales at Issue comports with the requirements of the United States

Constitution.

A. OAH’s conclusion that Petitioner was a “Retailer” under N.C.G.S. § 105-164.3(35) (2010)

21. Determination of Petitioner’s statutory argument will require the Court

to interpret the relevant and overlapping provisions of the Act regarding the sales

and use taxes that were in effect during the relevant time period. The Supreme Court

of North Carolina summarized the basic principles used by our courts when

interpreting the language in a statute as follows:

[q]uestions of statutory interpretation are ultimately questions of law for the courts . . . . The principal goal of statutory construction is to accomplish the legislative intent. The best indicia of that intent are the language of the statute, the spirit of the act and what the act seeks to accomplish. The process of construing a statutory provision must begin with an examination of the relevant statutory language. It is well settled that where the language of a statute is clear and unambiguous, there is no room for judicial construction and the courts must construe the statute using its plain meaning. In other words, if the statutory language is clear and unambiguous, the court eschews statutory construction in favor of giving the words their plain and definite meaning. Wilkie v. City of Boiling Spring Lakes, 370 N.C. 540, 547 (2018) (cleaned up); see also

N.C. Dep't of Corr. v. N.C. Med. Bd., 363 N.C. 189, 201 (2009) (“When the language

of a statute is clear and without ambiguity, it is the duty of this Court to give effect

to the plain meaning of the statute, and judicial construction of legislative intent is

not required. However, when the language of a statute is ambiguous, this Court will

determine the purpose of the statute and the intent of the legislature in its

enactment.”).

22. “Usually, words of a statute will be given their natural, approved, and

recognized meaning.” Wilkie, 370 N.C. at 550. “Courts should give effect to the words

actually used in a statute and should neither delete words used nor insert words not

used in the relevant statutory language during the statutory construction process.”

Midrex Techs., 369 N.C. at 258 (cleaned up). The court should “give every word of the

statute effect, presuming that the legislature carefully chose each word used.” N.C.

Dep't of Corr., 363 N.C. at 201.

23. Finally, special rules of construction apply where the statute at issue is

one concerning taxation. Accordingly, “[t]ax statutes are to be strictly construed

against the State and in favor of the taxpayer.” Wal-Mart Stores East, Inc., 197 N.C.

App. at 42 (internal citations omitted). “If a taxing statute is susceptible to two

constructions, any uncertainty in the statute or legislative intent should be resolved

in favor of the taxpayer.” Lenox, Inc. v. Tolson, 353 N.C. 659, 664 (2001).

24. There are several statutory provisions relevant to the determination of

Petitioner’s first argument. The Act imposes a privilege tax on the net taxable sales or gross receipts of “tangible personal property” by a “retailer.” N.C.G.S. § 105-164.4

(2010). 9 Under the Act, a “retailer” is defined, in pertinent part, as follows:

A person engaged in the business of any of the following:

a. Making sales at retail, offering to make sales at retail, or soliciting sales at retail of tangible personal property, digital property, or services for storage, use or consumption in this State.

N.C.G.S. § 105-164.3(35)(a) (2010).

25. The Act further defines various terms within the definition of “retailer.”

A “person” is defined as “[a]n individual, . . . a limited liability company, a corporation,

. . . or another group acting as a unit.” Id. at § 105-164.3(26) (referring to N.C.G.S. §

105-228.90 (2010)). A “sale” is defined as “[t]he transfer for consideration of title or

possession of tangible personal property or digital property or the performance for

consideration of a service.” Id. at § 105-164.3(36) (2010). A “sale at retail” or “retail

sale” is “[t]he sale, lease, or rental for any purpose other than for resale, sublease, or

subrent.” Id. at § 105-164.3(34) (2010). “Tangible personal property” is defined as

“personal property that may be seen, weighed, measured, felt, or touched or is in any

other manner perceptible to the senses” Id. at § 105-164.3(46) (2010), which includes

“direct mail,” defined as “printed material delivered or distributed by the [USPS] or

other delivery service to a mass audience or to addresses on a mailing list by the

purchaser or at the direction of the purchaser when the cost of the items is not billed

9 The Act also clarifies that a “Complimentary use tax” at the same rate that applies to the

sale of a product under § 105-164.4 is imposed where property is purchased outside the State for “storage, use, or consumption in this State.” N.C.G.S. § 105-164.6 (2010). “A product is subject to [a complimentary use tax] only if it is subject to tax under [§] 105-164.4.” Id. directly to the recipients.” Id. at § 105-164.3(7c) (2010). A retailer is “engaged in

business” in North Carolina if it “permanently or temporarily” maintains “any

representative, agent, sales representative, or solicitor operating in this State in the

selling or delivering” of tangible personal property. Id. at § 105-164.3(9)(a) (2010).

26. Here, it is undisputed that Petitioner is a “person” (Rec., at pp. 192, 248);

that the Sales at Issue involve “tangible personal property” or “direct mail” (Id. at p.

553); that the Sales at Issue were “sales” as defined in N.C.G.S. § 105-164.3(36) (Id.

at p. 276); that Petitioner “engaged in business” in North Carolina by having a

resident sales representative in North Carolina selling its products; and that the

printed materials were stored, used, and consumed in this State (ECF No. 42, at p.

11).

27. Nevertheless, Petitioner argues that the OAH improperly held that

Petitioner was a “retailer” under § 105-164.3(35)(a) (2010) because Petitioner did not

make the Sales at Issue in North Carolina. Petitioner first argues that the Act defines

a “sale” as “the transfer for consideration of title or possession of tangible personal

property.” (ECF No. 42, at p. 8.) Petitioner contends that it is undisputed that under

the terms of its agreements with its customers, title and possession of the printed

materials occurred when Petitioner delivered the printed materials to the USPS or

other common carrier outside of North Carolina for delivery to customers and third-

party recipients in North Carolina. 10 (Id. at p. 10.)

10 The undisputed facts show that Petitioner delivered its printed materials to USPS or other

common carrier “F.O.B.” at the point of shipment. North Carolina has held that such terms mean that title to the shipped goods transfers at the place of shipment. Duke Power Co. v. Clayton, 274 N.C. 505, 516–517 (1968); Petrus Machinery, Inc. v. Radiator Specialty Co., 257 28. Petitioner next argues that in order to be a “retailer” under § 105-

164.3(35) a person must make sales “in this State,” and because the transfer of title

and possession to the printed materials took place outside of North Carolina,

Petitioner cannot be a “retailer” under § 105-164.3(35). (ECF No. 42, at p. 9; ECF No.

45, at p. 3.) In other words, under Petitioner’s interpretation, in order to be classified

as a “retailer” under § 105-164.3(35), it must be making sales in which transfer of

title or possession of the tangible personal property occurs in North Carolina.

29. In response, the Department contends that “it is without question that

Petitioner is a ‘retailer’” under § 105-164.3(35). (ECF No. 43, at p. 13.) Specifically,

the Department argues that Petitioner attempts to impermissibly “expand[ ] the

definition of ‘sale’ to require that transfer of title and possession occur in the state

before [North Carolina] can impose sales tax on the transaction,” which is

“inconsistent with the General Assembly’s intent that [North Carolina] be a

destination-based sales tax state[.]” (Id. at p. 15.) In support of this argument, the

Department cites to § 105-164.4B, which “expressly provides the principles for

determining ‘where to source the sale of a product.’” (Id. (emphasis in original) (citing

to N.C.G.S. § 105-164.4B(a) (2010)).) The Department also cites to § 106-164.8, which

imposes, inter alia, obligations on a retailer to collect sales and use tax in certain

circumstances where sales are contracted or accepted outside North Carolina with

N.C. 85, 86 (1962) (“Where the contract of sale provides for a sale f.o.b. the point of shipment, the title is generally held to pass, in the absence of a contrary intention between the parties, at the time of the delivery of the goods for shipment at the point designated.”). the intent that they be brought into North Carolina for storage, use, or consumption

in this State. (Id. at p. 16 (citing N.C.G.S. § 105-164.8(a)(2), (4), (6) (2010).)

30. The Court has closely considered the arguments raised by both parties

and concludes that Petitioner’s contention that the term “in this State”, as used in §

105-164.3(35), requires that transfer of title or possession must take place within

North Carolina in order for a person to be considered a “retailer” is untenable. First,

and most significantly, the Act imposes both a sales and a use tax on retailers. In

other words, a retailer, as defined by N.C.G.S § 105-164.3(35), includes persons

making sales of tangible personal property that is used, consumed, or stored in North

Carolina whether or not the sale occurs inside North Carolina.

31. In addition, a plain reading of the sentence at issue makes clear that the

term “for storage, use, or consumption in this State” applies to the language in the

phrase in which it is situated and does not limit the terms “[m]aking sales at retail,

offering to make sales at retail, or soliciting sales at retail” in the first phrase in the

sentence. See N.C.G.S. § 105-164.3(35) (emphasis added). “Ordinary rules of

grammar apply when ascertaining the meaning of a statute[.]” Winkler v. N.C. State

Bd. of Plumbing, 261 N.C. App. 106, 111 (2018). The “last antecedent rule” is one

such example. See HCA Crossroads Residential Ctrs. v. N.C. Dep’t of Human

Resources, etc., 327 N.C. 573, 578 (1990); Wilkie, 370 N.C. at 546–49; Novant Health,

Inc. v. Aetna U.S. Healthcare of the Carolinas, Inc., 2001 NCBC LEXIS 1, at *12 (N.C.

Super. Ct. Mar. 8, 2001); R.R. Friction Prods. Corp. v. N.C. Dep’t of Revenue, 2019 NCBC LEXIS 13, at *28 (N.C. Super. Ct. Feb. 21, 2019), aff’d per curiam, 374 N.C.

208 (2020).

32. Under the last antecedent rule, “relative and qualifying words, phrases,

and clauses ordinarily are to be applied to the word or phrase immediately preceding

and, unless the context indicates a contrary intent, are not to be construed as

extending to or including others more remote.” HCA Crossroads Residential Ctrs.,

327 N.C. at 578. Here, applying the term “in this State” to its last antecedent in the

sentence, the statute expands the scope of the definition of “retailer” to include

persons making sales of tangible personal property outside of North Carolina where

that property will be used, consumed, or stored within North Carolina. It does not

limit “retailer” only to persons making sales within North Carolina.

33. In addition, the definition of “retailer” must be read in conjunction with

the other provisions of the Act. See Huntington Props., LLC v. Currituck Cty., 153

N.C. App. 218, 224 (2002) (“Portions of the same statute dealing with the same subject

matter are to be considered and interpreted as a whole, and in such case it is the

accepted principle of statutory construction that every part of the law shall be given

effect if this can be done by any fair and reasonable intendment․” (cleaned up).

Section 105-164.6, titled “Complimentary use tax,” expressly provides the authority

for North Carolina to collect a use tax from retailers on tangible personal property

sold outside of North Carolina for use, consumption, or storage in North Carolina.

Section 105-164.6 provides, in pertinent part, as follows:

(a) Tax. – An excise tax at the applicable rate set in [N.C.]G.S. [§] 105-164.4 is imposed on the products listed below. The applicable rate is the rate and maximum tax, if any, that would apply to the sale of a product. A product is subject to tax under this section only if it is subject to tax under [N.C.]G.S. [§] 105-164.4.

(1) Tangible personal property or digital property purchased inside or outside this State for storage, use, or consumption in this State.

N.C.G.S. § 105-164.6 (2010) (emphasis added). The logical construction of these two

separate sections of the Act leads to the conclusion that the definition of “retailer”

does not include the requirement that a retailer’s “sales” occur solely “in this State.”

34. Section 105-164.8 also lends support to the Court’s construction of the

definition of “retailer.” That section provides, in pertinent part, as follows:

A retailer is required to collect the tax imposed by this Article notwithstanding any of the following: ...

(2) That the purchaser’s order or the contract of sale is made or closed by acceptance or approval outside this State, or before any tangible personal property or digital property that is part of the order or contract enters this State. ...

(4) That the property is mailed to the purchaser in this State or a point outside this State or delivered to a carrier outside this state f.o.b. or otherwise and directed to the purchaser in this State regardless of whether the cost of transportation is paid by the retailer or by the purchaser. ...

(6) Any combination in whole or in part of any two or more of the foregoing statements of fact, if it is intended that the property purchased be brought into this State for storage, use, or consumption in this State.

N.C.G.S. §§ 105-164.8(a)(2), (4), (6) (2010). 35. These provisions directly address a retailer’s obligation to collect taxes

under the precise circumstances present here, where a seller transfers title or

possession of the products to North Carolina purchasers at a location outside of North

Carolina on F.O.B. terms. Again, these requirements are not consistent with

Petitioner’s construction of N.C.G.S. § 105-164.3(35) (2010).

36. Therefore, the Court concludes that the OAH correctly found Petitioner

to be a “retailer” within the meaning of N.C.G.S. § 105-164.3(35) (2010).

B. Constitutional Arguments

37. Petitioner next argues that North Carolina’s assessment of sales tax on

the Sales at Issue—where it is undisputed that title and possession transferred to

North Carolina purchasers and third-party recipients outside of the State—is

unconstitutional under the Commerce Clause in light of the United States Supreme

Court’s holding in McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944) (precluding sales

tax liability on Commerce Clause grounds where out-of-state goods were delivered by

common carrier into the state and title and possession to the goods transferred to

purchaser outside of the taxing state) (further analyzed infra). (ECF No. 42, at pp.

12–22; ECF No. 45, at pp. 4–12.) 11 The Department, of course, argues that the Sales

at Issue were properly sourced to North Carolina under N.C.G.S. § 105-164.4B (2010),

and that “it is readily apparent that N.C.’s sales tax statutes meet the constitutional

requirements under . . . the Commerce Clause[.]” (ECF No. 43, at pp. 20–24.)

11 Petitioner also brought a Due Process Clause challenge; however, the Court need only

address Petitioner’s Commerce Clause argument to reach its decision. 38. Preliminarily, the Court will address whether the Commerce Clause

issue poses either a facial or an as-applied challenge to North Carolina’s sales and

use tax statutes. The Supreme Court of North Carolina has held:

[a]n as-applied challenge contests whether the statute can be constitutionally applied to a particular defendant, even if the statute is otherwise generally enforceable. A facial challenge maintains that no constitutional applications of the statute exist, prohibiting its enforcement in any context. The constitutional standards used to decide either challenge are the same.

State v. Packingham, 368 N.C. 380, 383 (2015). Although Petitioner does not

expressly label its constitutional challenges as either as-applied or facial, it does state

that

[i]n this case, the Department assessed sales tax to the Petitioner based on the fact that the property was used – or enjoyed – by Petitioner's customers in North Carolina. The assessment in this case violates the Commerce Clause because it imposes a sales tax on transactions – the passage of title and possession – occurring wholly outside North Carolina.

(ECF No. 9, at p. 2 (emphasis added).) Accordingly, the Court interprets Petitioner’s

constitutional argument as an “as-applied” challenge and will assess whether the

Department’s application of North Carolina’s then-applicable sales and use tax

statutes to the Sales at Issue was constitutional under the Commerce Clause.

39. To reach its decision, the Court need only answer one question: is the

holding in Dilworth the controlling law. At the request of the Court, the parties

submitted supplemental briefing on this issue. (ECF Nos. 50 and 51.) Before directly

addressing this question, the Court will first provide necessary background. i. The Department’s sourcing of the Sales at Issue to North Carolina

40. Here, the Department in the NOFD and the OAH in the Final Decision

found that the Sales at Issue were properly sourced to North Carolina under N.C.G.S.

§ 105-164.4B (2010) and, therefore, concluded that the State properly assessed a sales

tax on Petitioner for the Sales at Issue. (Rec., at pp. 17, 944–45.) This sourcing

statute provides, in relevant part, as follows:

(a) General Principles – The following principles apply in determining where to source the sale of a product.

...

(2) Delivery to a specified address –When a purchaser receives a product at a location specified by the purchaser . . . , the sale is sourced to the location where the purchaser receives the product.

N.C.G.S. § 105-164.4B(a)(2) (2010). The sourcing principles also provide that “direct

mail . . . is sourced to the location where the property is delivered” where “the

purchaser provides the seller with information to show the jurisdictions to which the

direct mail is to be delivered.” N.C.G.S. § 105-164.4B(d)(2) (2010).

41. Under the language in §§ 105-164.4B(a)(2) and (d)(2), the Sales at Issue

are sourced to the location where the purchaser “receives” the printed materials, or

the address where the printed materials are “delivered.” Petitioner contends that the

printed materials are “receive[d]” or “delivered” at the location where title and

possession transfers, which in the case of the Sales at issue, was a location outside

North Carolina. (ECF No. 45, at pp. 3–4.) The Department contends that the printed

materials are “received” or “delivered” at their ultimate destination, which in the case of the Sales at Issue, was North Carolina. (ECF No. 43, at p. 20.) While framed as

statutory arguments, the parties’ arguments regarding N.C.G.S. § 105-164.4B have

constitutional implications. If Petitioner’s Commerce Clause argument prevails, the

Department’s reading of the statute would lead to an unconstitutional application

against Petitioner for the imposition of sales tax on the Sales at Issue.

42. While neither “receives” nor “delivered” is defined in the Act, our

Supreme Court has stated:

[t]he cardinal principal of statutory construction is to save and not to destroy. We have repeatedly held that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the act. Even to avoid a serious doubt the rule is the same.

In re Dairy Farms, 289 N.C. 456, 465 (1976) (citation and internal quotation marks

omitted) (emphasis added); see also State v. T.D.R., 347 N.C. 489, 498 (“Where one of

two reasonable constructions of a statute will raise a serious constitutional question,

it is well settled that our courts should adopt the construction that avoids the

constitutional question.”); Appeal of Arcadia Dairy Farms, Inc., 289 N.C. 456, 465–

66 (applying the same principle to an as-applied challenge to the North Carolina

constitution). Thus, the Court inevitably must determine whether the Department’s

interpretation of N.C.G.S. § 105-164.4B (2010) to source the Sales at Issue to North

Carolina comports with the Commerce Clause.

ii. Commerce Clause

43. The Commerce Clause of Article Three of the United States Constitution

authorizes Congress to “regulate Commerce with foreign Nations, and among the several States.” U.S. CONST. art. I, § 8, cl. 3. Along with its affirmative application,

the Commerce Clause also includes a “negative sweep” which “prohibits certain state

actions that interfere with interstate commerce.” Quill Corp v. North Dakota, 504

U.S. 298, 309 (1992). Under the so-called “dormant” Commerce Clause, in order for

a state to impose a tax on an interstate transaction, the tax must (1) be “applied to

an activity with a substantial nexus with the taxing state”; (2) be “fairly apportioned”;

(3) “not discriminate against interstate commerce”; and (4) be “fairly related to the

services provided by the state.” Complete Auto Transit, Inc. v. Brady, 430 U.S. 274,

279 (1977).

44. There are two considerations in determining whether a “substantial

nexus” exists between a state and the tax it wishes to impose: a “personal nexus” (i.e.,

a nexus between the state and the taxpayer) and a “transactional nexus” (i.e., a nexus

between the state and the activity being taxed). Hayes R. Holderness, Navigating

21st Century Tax Jurisdiction, 79 MD. L. REV. 1, 7–18 (2019); see also R. Rosen &

Marc D. Bernstein, State Taxation of Corporations: The Evolving Danger of

Attributional Nexus, 41 TAX EXECUTIVE 533, 534 (1989) (referring to the concepts as

“presence nexus” and “transactional nexus”); Walter Hellerstein, Jurisdiction to Tax

Income and Consumption in the New Economy: A Theoretical and Comparative

Perspective, 38 GA. L. REV. 1, 3 (2003) (referring to the concepts as “enforcement

jurisdiction” and “substantive jurisdiction”); see also MeadWestvaco Corp. v. Ill. Dep't

of Revenue, 553 U.S. 16, 25 (2008) (“Where, as here, there is no dispute that the

taxpayer has done some business in the taxing State, the inquiry shifts from whether the State may tax to what it may tax” (emphasis added)); Allied-Signal, Inc. v. Dir.,

Div. of Taxation, 504 U.S. 768, 778 (1992) (“[A]lthough our modern . . . jurisprudence

rejects a rigid, formalistic definition of minimum connection, we have not abandoned

the requirement that, in the case of a tax on an activity, there must be a connection

to the activity itself, rather than a connection only to the actor the State seeks to

tax.”); American Bus USA Corp. v. Dep’t of Rev., 151 So. 3d. 67 (Fl. Ct. App. 2014)

(finding that the taxpayer had a nexus with Florida, but holding that the taxing

statute as applied to the taxpayer violated the nexus mandate of Complete Auto; that

is, the “activity” must have a nexus with the taxing state).

45. Here, Petitioner concedes that it has a personal nexus with North

Carolina. (ECF No. 45, at p. 6.) Nevertheless, Petitioner argues that this is “only

half of the constitutional inquiry. The remaining dispositive question . . . is whether

North Carolina has a constitutionally sufficient nexus with the disputed

transactions.” (Id. (emphasis in original).) Specifically, Petitioner contends “the

controlling transactional nexus cases” of Dilworth and General Trading Co. v. State

Tax Commission of Iowa, 322 U.S. 335 (1944) render North Carolina’s transactional

nexus with the Sales at Issue insufficient to impose a sales tax on the Sales at Issue.

(ECF No. 45, at p. 5; ECF No. 42, at pp. 18–22.) In response, the Department denies

that there is a transactional nexus requirement under the Commerce Clause (ECF

No. 43, at p. 22), and further argues in its supplemental brief that Dilworth is no

longer good law (ECF No. 50, at p. 2). To assess these arguments, the Court must analyze and determine the continuing vitality of Dilworth and its companion case,

General Trading.

iii. Dilworth and General Trading

46. In Dilworth, the United States Supreme Court considered whether

Arkansas could assess a sales tax on a Tennessee corporation for certain transactions

between the company and residents of Arkansas. 322 U.S. at 327–28. The

corporation had no physical presence in Arkansas and was not authorized to do

business in Arkansas. Id. at 328. Orders from Arkansas residents were made

“through solicitation in Arkansas by a traveling salesman domiciled in Tennessee, by

mail or telephone.” Id. The orders required acceptance by the corporation’s office in

Memphis, Tennessee. Id. The corporation’s products were shipped by delivery to a

carrier in Tennessee, and title passed to the purchaser “in Memphis” upon delivery

of the products to the carrier. Id. The Supreme Court of Arkansas held that

imposition of sales tax on these transactions by Arkansas was precluded by the

Commerce Clause. Id. at 327. The United States Supreme Court affirmed, stating:

we would have to destroy both business and legal notions to deny that under the circumstances of the sale – the transfer of ownership – was made in Tennessee. For Arkansas to impose a tax on such transaction would be to project its powers beyond its boundaries and to tax an interstate transaction. ... A sales tax is a tax on the freedom of purchase . . . . A use tax is a tax on the enjoyment of that which was purchased. In view of the differences in the basis of these two taxes and the differences in the relation of the taxing state to them, a tax on an interstate sale like the one before us and unlike the tax on the enjoyment of goods sold, involves an assumption of power by a state which the Commerce Clause was meant to end.

Id. at 330.

47. Conversely, in General Trading, Iowa imposed a use tax on goods

purchased from a Minnesota company by Iowa residents. 322 U.S. at 336. The Iowa

statute at issue required “every retailer maintaining a place of business in Iowa to

collect the use tax from the purchaser.” Id. (cleaned up). The company had no

physical presence in Iowa. Id. at 337. “The property on which the use tax was laid

was sent to Iowa as a result of orders solicited by traveling salesmen sent into Iowa

from [the company’s] Minnesota headquarters. The orders were always subject to

acceptance in Minnesota whence the goods were shipped into Iowa by common

carriers or the post.” Id. The Iowa Supreme Court held that the company “was a

‘retailer maintaining a place of business in this state’ within the meaning of the Iowa

statute , . . . [and] that Iowa had not exceeded its powers in the imposition of this use

tax on Iowa purchasers, and that collection could validly be made” from the company.

Id. The United States Supreme Court agreed, and held that Iowa’s use tax did not

violate the Commerce Clause, concluding that

[t]he tax is what it professes to be -- a non-discriminatory excise laid on all personal property consumed in Iowa. The property is enjoyed by an Iowa resident partly because the opportunity is given by Iowa to enjoy property no matter whence acquired. The exaction is made against the ultimate consumer -- the Iowa resident who is paying taxes to sustain his own state government. To make the distributor the tax collector for the State is a familiar and sanctioned device.

Id. at 338. 48. Thus, in Dilworth and in General Trading the states imposed different

taxes (i.e., sales versus use) and the Court reached different results, with the only

significant difference being that in Dilworth, Arkansas did not have a sufficient

transactional nexus with the sales where title to the products transferred outside of

Arkansas, while in General Trading, Iowa clearly had a sufficient nexus to tax the in-

state use of the products by Iowa residents.

49. Relying on these precedents, Petitioner summarizes its argument as

follows:

[t]he facts of this case are substantially indistinguishable from the pertinent facts in Dilworth and are in direct contrast to those in General Trading Co. and Excel [Inc. v. Clayton, 269 N.C. 127 (1967)]. 12 In Dilworth, as in this case, though orders were solicited in the taxing state, all orders for tangible personal property were accepted and approved outside the taxing state, and legal title and possession of the tangible personal property passed to the purchasers outside the taxing state. In Dilworth and in this case, the tax assessed was a sales tax – not a use tax. There is simply no constitutionally significant distinction between Dilworth and the facts of this case. Dilworth has not been overruled by the Court and remains the law of the land.

(ECF No. 42, at p. 22 (cleaned up).) The Court agrees with Petitioner that, under

Dilworth, “a state sales tax survives scrutiny under the Commerce Clause only where

12 In Excel, the Supreme Court of North Carolina addressed whether certain purported interstate transactions were subject to sales tax. 269 N.C. 127 (1967). Notably, the Court found that because the out-of-state purchasers arranged for pickup of the products “f.o.b. Lincolnton,” North Carolina, the products “were delivered to [the purchasers] in North Carolina, the taxing jurisdiction.” Id. at 134. Accordingly, the Court held that North Carolina’s assessment of a sales tax on the transaction did not violate the Commerce Clause. (Id.) the purchase of tangible personal property – i.e., the transfer of ownership from the

seller to buyer – takes place in the taxing state.” (ECF No. 51, at p. 1) (hereinafter

referred to as the “Dilworth formalism.”) If the Dilworth formalism remains good

law, then the sales tax imposed on the Sales at Issue in this case is unconstitutional.

iv. Arguments as to whether Dilworth remains good law

50. First, Petitioner argues that the United States Supreme Court has

“consistently upheld” the Dilworth formalism. (ECF No. 51, at p. 1.) Specifically,

Petitioner cites to Oklahoma Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 186–87

(1995) (citing favorably to Dilworth, stating “we [have] held that a sales tax could not

validly be imposed if the purchaser already had obtained title to the goods as they

were shipped from outside the taxing State into the taxing State by common carrier”);

Itel Cont. Int’l Corp. v. Huddleston, 507 U.S. 60, 69–75 (1993) (explaining that

“Tennessee’s sales tax is imposed upon the ‘transfer of title or possession,’” and that

this tax “on a discrete transaction occurring within the state” does not implicate

Foreign Commerce Clause concerns 13); Wardair Canada, Inc. v. Fla. Dep’t of Revenue,

477 U.S. 1, 9 (1986) (recognizing there is “no threat of multiple international taxation

. . . since the tax is imposed only upon the sale of fuel, a discrete transaction which

occurs within one national jurisdiction only”); American Oil Co. v. Neill, 380 U.S. 451,

457–58 (1965) (citing favorably to Dilworth, stating that “this Court has struck down

taxes directly imposed on or resulting from out-of-state sales which were held to be

13 The Foreign Commerce Clause requires satisfaction of the same Complete Auto factors

assessed in dormant Commerce Clause analysis. See Itel Containers, 507 U.S. at 72. insufficiently related to activities within the taxing state, despite the fact that the

vendor knew that the goods were destined for use in that State”).

51. Second, Petitioner addresses the United States Supreme Court’s most

recent sales and use tax decision, South Dakota v. Wayfair, Inc., 138 S. Ct. 2080

(2018). (ECF No. 51, at p. 3.) Specifically, Petitioner argues that “[t]he core holding

in Dilworth . . . was not presented to – or discussed by – the Wayfair Court.” (Id. at

p. 4.)

52. On the other hand, the Department argues that the United States

Supreme Court “implicitly” overruled Dilworth in its decision in Complete Auto. (ECF

No. 50, at p. 2.) Specifically, the Department argues that:

[i]n place of the semantic distinctions [between a sales tax and use tax expressed in Dilworth] the Court offered a four- part test for evaluating the constitutionality of a tax . . . . Thus, Complete Auto articulated a succinct standard by which to test the constitutionality of a tax while explicitly eschewing the Spector 14 rule and its rationale, which encapsulated the Dilworth understanding of the Commerce Clause. Nothing in the Complete Auto standard turned on semantic distinctions between sales taxes and use taxes. Relying on Dilworth as binding precedent would introduce an anachronism into modern state tax jurisprudence by reintroducing a formal interpretation of the Commerce Clause long abandoned by the Court.

(ECF No. 50, at p. 7.) Further, the Department argues that Wayfair did not expressly

address Dilworth because “it was already effectively abandoned under Complete

Auto.” (Id. at pp. 10–11.)

14 Referring to Spector Motor Service, Inc. v. O’Connor, 340 U.S. 602 (1951), where the Court made state taxation of interstate transactions per se unconstitutional. See also, Freeman v. Hewitt, 329 U.S. 249 (1946) (invalidating a state’s gross receipt tax on interstate sales of securities under the same rationale). a. Complete Auto

53. The Court is not persuaded that Complete Auto “implicitly” overruled

Dilworth formalism. First, Complete Auto is neither a sales tax case, nor a nexus

case. Its importance is that (1) it established an analytical framework for Commerce

Clause cases, on which every case since has relied, see 430 U.S. at 279; and (2) it

rejected the Spector rule that a state tax on the “privilege of doing business” is

necessarily unconstitutional in the context of interstate commerce. Id. at 288–89.

54. Accordingly, the Court acknowledges that, to the extent Dilworth posits

that taxation on interstate commerce is per se unconstitutional, Complete Auto and

other cases have clearly overruled that aspect of its holding. However, the Supreme

Court’s rejection of the Spector rule in Complete Auto did not explicitly overrule

Dilworth’s holding that to meet the transactional nexus requirement under the

Commerce Clause, a state sales tax must only be imposed on sales where the transfer

of title or possession occurs within the taxing state. This position is consistent with

conclusions reached by commentators. See Paul J. Hartman, Federal Limitations on

State and Local Taxation § 11.4 (2d ed.) (Supp. Nov. 2020) (acknowledging that the

Court in Complete Auto “abandoned the position that any tax found by the Court to

be imposed on interstate commerce is a per se violation of the commerce clause” but

“[u]nless the Court changes its ideas about what constitutes a sufficient nexus for

sales tax purposes of the taxed event to the taxing state, apparently the Dilworth

holding will remain”); Richard D. Pomp, Wayfair: It’s Implications and Missed

Opportunities, 58 WASH. U. J. L. & POL’Y 1, 53 (2019) (“[T]here is, however, another aspect of Dilworth. The whole transaction, starting with solicitation in Arkansas and

ending with the consumer having possession of the goods in Arkansas, constituted

interstate commerce, which, under the jurisprudence of the day, could not be taxed.

That part of the opinion was clearly overturned by subsequent cases. But still left

open is the constitutional definition of where a sale takes place.”).

b. Wayfair

55. With respect to Wayfair, the Court is similarly unpersuaded that its

holding has any effect on the Dilworth formalism. In Wayfair, the United States

Supreme Court considered “when an out-of-state seller can be required to collect and

remit [a South Dakota sales] tax” and “reconsidere[d] the scope and validity of the

physical presence rule mandated by” National Bellas Hess v. Dep’t of Rev., 386 U.S.

753 (1967) and Quill, 504 U.S. 298, under the Commerce Clause. 15 138 S. Ct. at 2088.

56. South Dakota enacted a statute which “require[d] out-of-state sellers to

collect and remit sales tax ‘as if the seller had a physical presence in the state”’ if the

seller “on an annual basis, deliver[s] more than $100,000 of goods or services into the

State or engage[s] in 200 or more separate transactions for the delivery of goods or

services into the State.” Id. at 2089 (quoting S.B. 106 at ¶¶ 3, 5, 8(10)). S.B. 106

15 The physical presence rule originated in Bellas Hess, where the Court held that in order for a tax to pass muster under the Due Process Clause or the Commerce Clause, the taxpayer must have a physical presence in the taxing jurisdiction. 386 U.S. at 758–60 (“[T]he Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail.”). Later, in Quill, the Court overruled Bellas Hess to the extent it “indicated that the Due Process Clause requires a physical presence for the imposition of duty to collect a use tax . . . as superseded by developments in the law of due process.” Id. at 308. However, with respect to the Commerce Clause, the Quill Court held that the physical presence “bright- line rule” remained good law. Id. at 312–319. expressly excluded the retroactive application of this new tax requirement for out-of-

state sellers. Id.

57. South Dakota filed a declaratory judgment action against on-line

retailers Wayfair, Inc., Overstock.com, Inc., and Newegg, Inc., none of which had any

employees or real estate in South Dakota, “seeking a declaration that the

requirements of [S.B. 106] are valid and applicable to respondents[.]” Id. The South

Dakota Supreme Court affirmed a lower court’s decision that S.B. 106 was

unconstitutional due to respondents’ lack of physical presence in South Dakota,

reasoning that “Quill has not been overruled [and] remains the controlling precedent

on the issue of Commerce Clause limitations on interstate collection of sales and use

taxes.” Id. (quoting 901 N.W.2d 754, 761 (S.D. 2017)).

58. On review, the United States Supreme Court first acknowledged that

[u]nder this Court’s decisions in Bellas Hess and Quill, South Dakota may not require a business to collect its sales tax if the business lacks a physical presence in the State. Without that physical presence, South Dakota must rely on its residents to pay the use tax owed on their purchases from out of state sellers.

Id. at 2088. However, the Court ultimately vacated and remanded the decision of the

South Dakota Supreme Court, overruling the Bellas Hess and Quill physical presence

rule, and upholding the constitutionality of S.B. 106. Id. at 2098–2100. In the

absence of the bright-line physical presence rule, the Court relied on the first prong

of the Complete Auto test, which “simply asks whether the tax applies to an activity

with a substantial nexus with the taxing state.” Id. Further, the Court stated, “a

substantial nexus is established when the taxpayer [or collector] ‘avails itself of the subsequent privilege of carrying on business’ in that jurisdiction.” Id. at 2099

(citation omitted).

59. As applied to S.B. 106, the Court in Wayfair held that the statute’s

applicability thresholds require a “quantity of business [that] could not have occurred

unless the seller availed itself of the substantial privilege of carrying on business in

South Dakota.” Id. at 2099. Accordingly, in the case of Wayfair, Inc., Overstock.com,

Inc, and Newegg, Inc.—all entities for which S.B. 106 was applicable—the Court held

that the Commerce Clause tax “nexus is clearly sufficient based on both the economic

and virtual contacts respondents have with the State.” Id.

60. Notably, as pointed out by Petitioner, the Wayfair Court did not have

reason to consider any questions regarding whether there existed a transactional

nexus between South Dakota and the sales being taxed because the parties “agree[d]

that South Dakota has the authority to tax these transactions.” Id. at 2092. 16

Accordingly, the Court concludes that Wayfair does not overrule the Dilworth

formalism. Again, this Court’s conclusion is in line with conclusions reached by

commentators. See Adam Themmesch, Darien Shanske, & David Gamage, Wayfair:

Sales Tax Formalism and Income Tax Nexus, STATE TAX NOTES 975, 976 (Sept. 3,

2018) (stating that the Wayfair Court “certainly did not explicitly overrule” the

“Dilworth formalism” and “uncertainty involving this issue leads us to conclude that

the better course for states would be to continue to abide by Dilworth formalism and

to enact economic nexus standards through their use tax systems”); Richard D. Pomp,

The Supreme Court’s Opinion does not indicate whether title to the products sold by 16

Wayfair to the South Dakota residents passed inside or outside of South Dakota. Wayfair: Its implications and Missed Opportunities, 58 WASH. U. J.L. & POL’Y 1, 51–

56 (2019) (opining that “[p]ost-Wayfair legislation should . . . clarif[y] that it is the

use tax that remote vendors are being asked to collect and not the sales tax” as to

avoid “a potential problem” created by the holdings in Dilworth and General Trading);

Hayes R. Holderness, Navigating 21st Century Tax Jurisdiction, 79 MD. L. REV. 1,

13–24 (2019) (surveying the transactional nexus requirement since Dilworth and

explaining that “the decision and the parties [in Wayfair] focused on the personal

nexus issue” and “did little with respect to the transactional nexus doctrine”).

c. State Courts and Dilworth

61. In further support of its arguments, Petitioner cites to a number of state

court cases which have adhered to the Court’s holding in Dilworth. See Lamtec v.

Dep’t of Revenue, 215 P.3d 968, 971 (Wash. Ct. App. 2009) (holding that Dilworth

applies solely to transaction-based taxes (i.e., sales taxes) and not gross

receipts/activity-based taxes such as the Business & Occupation tax imposed on a

New Jersey corporation); TA Operating Corp. v. Fla. Dep’t of Revenue, 767 So. 2d.

1270, 1275 (Fla. Dist. Ct. App. 2000) (relying on Dilworth and holding fuel shipped

“F.O.B. Brunswick, Georgia” was not subject to Florida’s fuel tax); World Book, Inc.

v. Mich. Dep’t of Treasury, 459 Mich. 403, 412, 590 N.W.2d 293 (1999) (relying on

Dilworth and holding that where a Michigan taxpayer was “through selling” (i.e., title

and possession passed to buyers outside the State), the sales were subject to Michigan

use tax, and not sales tax); Bloomingdale Bros. v. Chu, 513 N.E.2d 233, 234 (N.Y.

1987) (“[T]he ultimate destination of the goods is not necessarily the location of a particular sale [citing Dilworth]. Delivery may occur before the merchandise reaches

its final destination. Delivery, in the sense that physical custody is transferred, may

take place several times during the course of a transaction, but it is only that delivery

which transfers control of the merchandise for consideration which marks a taxable

event [(citations omitted)].”); Sears, Roebuck and Co. v. Lindley, 436 N.E.2d 1029,

1032 (Ohio 1982) (holding that Dilworth precluded the imposition of Ohio sales tax

on newspaper inserts printed outside Ohio and mailed into Ohio, with title and

possession passing outside Ohio).

62. In support of its contrary argument, the Department cites to state court

cases which have treated Dilworth as obsolete. See Arizona Dep’t of Revenue v. Care

Computer Sys., Inc., 4 P.3d 469, 471 (Ariz. Ct. App. 2000) (rejecting the argument

that a “transaction privilege tax requires a higher level of nexus with the taxing state

than does a use tax” reasoning that “[t]his argument is based on cases that were

decided when state taxes on interstate commerce were per se unconstitutional,”

referring to Dilworth, Freeman, and Spector); Greenscapes Home & Garden Prods. v.

Testa, 129 N.E.3d 1060, 1071 (Ohio Ct. App. 2019) (explaining that “[Dilworth] was

decided at a time when . . . state taxes on interstate commerce were per se

unconstitutional” and that “[i]n Complete Auto, the U.S. Supreme Court overruled

this line of cases and upheld a privilege on doing business tax on gross receipts from

interstate commerce.”); Baker & Taylor, Inc. v. Kawafuchi, 82 P.3d 804, 815 (Haw.

2004) (holding the same and declining to find Dilworth determinative). 63. Petitioner, on the other hand, argues that Care Computer and

Greenscapes “are of limited relevance” to this case due to the fact that (a) they both

involve gross-receipts-based taxes—not sales taxes (ECF No. 51, at pp. 9–12; citing

to Lamtec, 215 P.3d at 971 and Ford Motor Co. v. City of Seattle, 156 P.3d 185, 190

(Wash. 2007) (holding Dilworth irrelevant where the tax involved is not a sales tax,

but rather a business and occupation tax on the privilege of doing business in the

taxing jurisdiction); and (b) both Care Computer and Greenscapes misinterpret

Complete Auto as a rejection of the holding in Dilworth. (ECF No. 51, at p. 12.)

64. Both parties make compelling arguments regarding the impact of

Dilworth, Complete Auto, and Wayfair on this case. The Court has thoroughly

reviewed the parties’ arguments, the relevant court decisions, and other persuasive

authorities, and concludes that (a) Complete Auto did not overrule the Dilworth

formalism; (b) Wayfair did not overrule the Dilworth formalism; and, therefore (c) the

Dilworth formalism remains the law of the land. Absent contrary authority from the

United States Supreme Court, the Court concludes that the principles set forth in

Dilworth are controlling, and finds that North Carolina does not have a sufficient

transactional nexus with the Sales at Issue under the Commerce Clause to impose

sales tax on the Sales at Issue.

65. Therefore, the OAH’s finding that the Sales at Issue were properly

sourced to North Carolina under N.C.G.S. § 105-164.4B (2010) giving North Carolina

authority to impose sales tax on those transactions is unconstitutional as applied to

Petitioner and should be REVERSED. The Sales at Issue lacked a sufficient transactional nexus to North Carolina under the Commerce Clause of the United

States Constitution since it is undisputed that title to the Sales at Issue passed to the

purchasers and third-party recipients outside of North Carolina. 17

IV. CONCLUSION

THEREFORE, IT IS ORDERED that the Final Decision is REVERSED and

summary judgment is hereby entered in favor of Petitioners.

SO ORDERED, this the 23rd day of June, 2021.

/s/ Gregory P. McGuire Gregory P. McGuire Special Superior Court Judge for Complex Business Cases

17 Again, the Court emphasizes that its conclusion on this “as applied” challenge—that the

Department’s sourcing of the Sales at Issue to North Carolina under N.C.G.S. § 105-164.4B (2010) is unconstitutional—is not intended to apply to any later enacted revised versions of the statute.