Constitutionality of Requiring Payment of Use Tax

Re: Advisory opinion: Constitutionality of requiring payment of use tax with submission of individual income tax return; Internet Tax Freedom Act; G.S. § 105-164.6 Dear Representative Allred:

Beginning with taxable year 1999, G.S. § 105-269.14 requires that most persons remit unpaid “use” taxes with the filing of their individual income tax returns. Individuals not required to file income tax returns will continue to file the consumer use return. G.S. § 105-164.16(d). In light of the Internet Tax Freedom Act (“P.L. 105-277") (1998), and several federal decisions addressing application of the use tax to interstate commerce, you request our opinion as to the constitutionality of this new provision.

North Carolina’s use tax was first enacted in 1939 to compliment the sales tax. 1939 Sess. L., ch. 158, s. 800. The tax is imposed upon property acquired for use in North Carolina, other than for sale. G.S. § 105-164.6. The tax is designed to prevent evasion of the sales tax by individuals purchasing tangible personal property outside the state. Johnston v. Gill, 224 N.C. 638, 643-44 (1944). It prevents unfair competition on the part of out-of-state merchants. Id. at 644.

The bulk of P.L. 105-277 is directed at regulating access by minors to the Internet, concerns distinct from your inquiry. However, other provisions seem relevant. Sections 1101 (a)(1) and (2) prohibit states for a period of three years from taxing “Internet access” or imposing “multiple or discriminatory taxes” upon electronic commerce.

Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (“Quill”) and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) (“Bellas Hess”), remain seminal cases as to the constitutional restraints upon the powers of states to assess or collect use taxes from multi-jurisdictional companies. In Quill, the Court affirmed Bellas Hess in part and held that the states may not require sellers of goods to collect use taxes levied in the destination states of their buyers unless the sellers actually possess physical presence in such jurisdictions. Id. at 317. Quill holds, however, that to the extent Bellas Hess suggests that “due process” also requires a showing of physical presence, Bellas Hess no longer remains good law. Id. at 308.

Whatever the purported national scope of the Internet Tax Freedom Act, in our opinion it does not prohibit a state from bundling payment of use taxes with payment for income taxes. Liability for the use tax falls directly upon the purchaser of the property.

G.S. § 105-164.6(d). The transaction taxed, a defined use of tangible property, is totally different from that activity now pre-empted by federal law: access to the Internet or levies upon electronic commerce.

Moreover, Quill and related decisions speak only to the range within which states can make interstate sellers collect taxes actually owed by their customers. Nothing within G.S. § 105-269.14 attempts to make vendors of goods account for taxes incurred by their vendees. The statute simply does not affect interstate commerce in any way.

We hope the foregoing is helpful.

Signed by:

Reginald L. Watkins Senior Deputy Attorney General

George W. Boylan Special Deputy Attorney General