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

IN THE SUPREME COURT OF NORTH CAROLINA

2022-NCSC-133

No. 407A21

Filed 16 December 2022

QUAD GRAPHICS, INC.

v.
N.C. DEPARTMENT OF REVENUE

Appeal pursuant to N.C.G.S. § 7A-27(a)(2) from the order and opinion entered

on 23 June 2021 by Judge Gregory P. McGuire, Special Superior Court Judge for

Complex Business Cases, in Superior Court, Wake County, granting summary

judgment in favor of petitioner after the case was designated a mandatory complex

business case by the Chief Justice pursuant to N.C.G.S. § 7A-45.4(b). Heard in the

Supreme Court on 30 August 2022.

Akerman, LLP, by Michael J. Bowen, pro hac vice; and Douglas W. Hanna for
petitioner-appellee.

Joshua H. Stein, Attorney General, by Ryan Y. Park, Solicitor General, and
Ashley Hodges Morgan, Special Deputy Attorney General, for respondent-
appellant.

Poyner Spruill LLP, by Caroline P. Mackie; and Caroline S. Van Zile, Principal
Deputy Solicitor General for the District of Columbia, for Steve Marshall,
Attorney General for the State of Alabama, Treg R. Taylor, Attorney General for
the State of Alaska, Philip J. Weiser, Attorney General for the State of Colorado,
Karl A. Racine, Attorney General for the District of Columbia, William Tong,
Attorney General for the State of Connecticut, Lawrence G. Wasden, Attorney
General for the State of Idaho, Kwame Raoul, Attorney General for the State of
Illinois, Theodore E. Rokita, Attorney General for the State of Indiana, Thomas
J. Miller, Attorney General for the State of Iowa, Brian E. Frosh, Attorney
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General for the State of Maryland, Maura Healey, Attorney General for the
Commonwealth of Massachusetts, Keith Ellison, Attorney General for the State
of Minnesota, Aaron D. Ford, Attorney General for the State of Nevada, Andrew
J. Bruck, Acting Attorney General for the State of New Jersey, Hector Balderas,
Attorney General for the State of New Mexico, Letitia James, Attorney General
for the State of New York, Wayne Stenehjem, Attorney General for the State of
North Dakota, Josh Shapiro, Attorney General for the Commonwealth of
Pennsylvania, Peter F. Neronha, Attorney General for the State of Rhode Island,
Thomas J. Donovan Jr., Attorney General for the State of Vermont, and Robert
W. Ferguson, Attorney General for the State of Washington, amici curiae.

Q Byrd Law, by Quintin D. Byrd; and Richard Cram, pro hac vice, for
Multistate Tax Commission, amicus curiae.

William W. Nelson for North Carolina Chamber Legal Institute, amicus curiae.

MORGAN, Justice.

¶1 Respondent appeals from the Business Court’s decision, in which the tribunal

had concluded that the sales of printed materials produced by Wisconsin-based

petitioner out of state and shipped to its customers and their designees located within

North Carolina lacked a sufficient nexus to North Carolina for the imposition of state

sales tax under the Commerce Clause of the Constitution of the United States in light

of the Supreme Court of the United States’ decision in McLeod v. J.E. Dilworth Co.,

322 U.S. 327 (1944). The question we are tasked with answering on appeal is whether

Dilworth remains controlling precedent in this case or if subsequent Supreme Court

decisions supersede Dilworth’s holding and provide an alternative method for

determining the constitutionality of North Carolina’s sales tax regime. Because

Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), provides the relevant
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modern test for the imposition of a state tax on interstate commerce and because

South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), applies this test to a tax regime

materially identical to that of North Carolina without regard for Dilworth’s holding,

we hold in favor of respondent and reverse the Business Court’s decision below.

I. Factual and Procedural Background

¶2 The facts of this case are neither particularly complicated nor in dispute.

Petitioner is an S-Corporation headquartered in Sussex, Wisconsin. Petitioner is

engaged in the production and sale of printed materials, including books, magazines,

catalogs, and other items, for distribution across the United States. Between 2009

and 2011, petitioner processed approximately $20 million worth of orders for delivery

to customers or third-party recipients located in North Carolina. Petitioner’s

materials are printed at commercial printing facilities throughout the United States,

but no such facility was located in North Carolina during the time period at issue.

After producing the purchased materials at a facility located out of state, petitioner

would deliver customers’ orders to the United States Postal Service or another

common carrier located outside of North Carolina for delivery to in-state customers

or their third-party representatives. According to its sales contracts, possession, legal

title, and risk of loss for any ordered materials passed from petitioner to its customers

when those materials were delivered to carriers outside of North Carolina. Petitioner

employs sales representatives throughout the United States. Beginning in September
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2009, petitioner employed a sales representative in North Carolina who solicited

sales to customers both inside and outside of the state.

¶3 Respondent North Carolina Department of Revenue is an agency of the State

of North Carolina which administers the state’s tax collection system. In 2011,

respondent conducted an audit related to petitioner’s collection of sales and use tax

within North Carolina for the period between 1 January 2007 and 31 December 2011.

On 12 November 2015, respondent issued a Notice of Proposed Sales and Use Tax

Assessment finding petitioner liable for uncollected and unremitted sales tax for sales

to North Carolina customers between 1 January 2007 and 31 December 2011.

Petitioner appealed respondent’s Notice of Assessment through respondent’s

departmental review process. Upon review, respondent found that petitioner was a

retailer engaged in business in North Carolina as it maintained a resident employee

to solicit sales and service customer accounts within the state. Respondent also found

that petitioner had failed to establish that its customers took possession of purchased

materials outside of North Carolina and, as such, concluded that the sales were

properly sourced to the state under North Carolina’s sourcing statute N.C.G.S. § 105-

164.4B, since the materials were received by petitioner’s customers or their designees

within the state.1 However, respondent found that the Department had been unable

1 Section 105-164.4B of the North Carolina General Statutes provides sourcing
principles for the imposition of sales tax on sellers of goods delivered to in-state purchasers
or their designees. In relevant part, the statute provides that “[w]hen a purchaser receives a
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to establish that petitioner had sufficient business activity in North Carolina to create

the nexus for the imposition of sales and use tax prior to September 2009 based on

petitioner’s lack of physical presence in the state until that time. On 30 November

2018, after removing sales predating September 2009 as well as other exempt

transactions and adjusting the assessment accordingly, respondent issued a Notice

of Final Determination upholding the imposition of uncollected and unremitted sales

tax in the amount of $3,238,022.52 from sales made between 1 September 2009 and

31 December 2011.

¶4 On 28 January 2019, petitioner appealed respondent’s Notice of Final

Determination and filed a petition with the Office of Administrative Hearings (OAH)

advancing the following arguments: (I) that the disputed transactions were not

subject to North Carolina retail sales or use tax because all relevant aspects of the

transactions took place outside of the state, (II) that the assessment of North Carolina

sales and use tax on these transactions violated the Due Process Clause and

Commerce Clause of the Constitution of the United States, and (III) that the specific

transactions included in respondent’s assessment should have been excluded or were

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) (2009), and that “[d]irect
mail . . . is sourced to the location where the property is delivered” when “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) (2009). This is known as “destination-based”
sourcing, which defines the site of a sale of tangible property based on the item’s destination
and has been adopted by a majority of the states.
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otherwise exempt from North Carolina sales and use tax. Petitioner removed Claim

III from its petition but pursued Claims I and II before the OAH. On 24 June 2020,

after petitioner and respondent filed cross-motions for summary judgment,

Administrative Law Judge Melissa Owens Lassiter entered a Final Decision granting

respondent’s motion for summary judgment and dismissing petitioner’s case with

prejudice.

¶5 The OAH’s Final Decision held that petitioner was a “retailer” as defined by

N.C.G.S. § 105-164.3(35)(a) and was therefore obligated to collect and remit sales tax

pursuant to N.C.G.S. §§ 105-164.8 and 105-164.4B. Furthermore, although the OAH

acknowledged that it “has not been given jurisdiction to determine the

constitutionality of legislative enactments[,]” quoting In re Redmond, 369 N.C. 490,

493 (2017), it opined that petitioner had sufficient nexus with North Carolina for

respondent to impose sales tax on the sales in question. Finally, the Final Decision

announced that the sales at issue were properly sourced to North Carolina as set

forth in the state’s sourcing statute. See N.C.G.S. § 105-164.4B(a)(2), (d)(2) (2009).

¶6 On 24 July 2020, petitioner petitioned for judicial review of the OAH’s Final

Decision to the Business Court pursuant to N.C.G.S. § 105-241.16, designating the

case as a mandatory complex business case pursuant to N.C.G.S. § 7A-45.4. The

matter was assigned to the Honorable Louis A. Bledsoe III, Chief Business Court

Judge on the same day. On 20 August 2020, petitioner filed an Amended Petition for
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Judicial Review. On 24 September 2020, the parties stipulated to the official record

of the proceedings at the OAH. On 2 October 2020, the Business Court issued an

Order and Opinion on various motions filed by the parties, including a denial of

respondent’s motion to dismiss petitioner’s amended petition for judicial review.

Between 26 October 2020 and 10 December 2020, the parties filed their briefs,

responses, and replies with the Business Court. On 6 January 2021, the case was

reassigned to the Honorable Gregory P. McGuire, Special Superior Court Judge for

Complex Business Cases. The parties appeared for a hearing on 2 February 2021. On

27 May 2021, the Business Court issued a Notice to Provide Supplemental Briefing;

in response, the parties filed supplemental briefs on 11 June 2021.

¶7 On appeal before the Business Court, petitioner argued that (1) the OAH erred

in holding that petitioner was a “retailer” under the provisions of N.C.G.S. § 105-

164.3(35)(a) that was required to pay sales tax to North Carolina on the sales at issue

under the provisions of the Act, and (2) respondent’s assessment of sales tax on the

sales at issue was unconstitutional under the Due Process Clause and Commerce

Clause of the Constitution of the United States. On 23 June 2021, the Business Court

held in favor of petitioner, reversing the OAH’s Final Decision and granting summary

judgment in favor of petitioner. The Business Court first considered petitioner’s

argument that it was misclassified as a “retailer” under N.C.G.S. § 105-164.3(35)

because the transfer of title and possession to the printed materials took place outside
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of North Carolina and a person must make sales “in this State” to be classified as a

retailer under the statute. See N.C.G.S. § 105-164.3(35) (2009). The Business Court

rejected this argument, concluding that the OAH had correctly held that petitioner

was a “retailer” within the meaning of N.C.G.S. § 105-164.3(35). This issue has not

been briefed to this Court and is not the subject of our review.

¶8 The Business Court next considered petitioner’s contention that North

Carolina’s imposition of sales tax on the sales at issue—where title and possession of

the printed materials arguably transferred to purchasers and third-party recipients

located in North Carolina before the materials entered the state—was

unconstitutional under the Commerce Clause of the Constitution of the United States

in light of the Supreme Court’s decision in Dilworth. The Business Court discredited

respondent’s assertion that the decisions of the Supreme Court of the United States

in Complete Auto and Wayfair overruled Dilworth formalism, and therefore concluded

that Dilworth remains controlling precedent in this case. The Business Court

accordingly granted summary judgment to petitioner on the basis that North

Carolina did not have a sufficient nexus with the sales at issue under the Commerce

Clause to impose sales tax on them, reversing the OAH’s Final Decision. On 1 July

2021, the matter was reassigned to the Honorable Mark A. Davis, Special Superior

Court Judge for Complex Business Cases. On 22 July 2021, respondent filed a notice

of appeal directly to this Court pursuant to N.C.G.S. § 7A-27(a)(2). On the same day,
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respondent filed a motion to stay execution of the Business Court’s 23 June 2021

Order and Opinion with the Superior Court pending the outcome of this appeal. The

trial court granted this motion on 5 October 2021.

II. Analysis

¶9 Appeals arising from orders granting summary judgment are decided under a

de novo standard of review. Dallaire v. Bank of Am., N.A., 367 N.C. 363, 367 (2014).

Under this standard, the Court considers the matter anew and freely substitutes its

judgment for that of the lower court or administrative agency. Midrex Techs. v. N.C.

Dep’t of Revenue, 369 N.C. 250, 257 (2016); N.C. Dep’t of Env’t & Nat. Res. v. Carroll,

358 N.C. 649, 660 (2004). Since the Business Court granted summary judgment to

petitioner, we shall consider the questions of law underlying the decision anew and

freely substitute our own judgment for the conclusion of the Business Court. The sole

question before this Court is whether the holding of the Supreme Court of the United

States in Dilworth controls the outcome of the case at bar. Based on the high court’s

subsequent decisions in Complete Auto and Wayfair, we hold that Dilworth does not

govern the present case. We further conclude that North Carolina’s imposition of

sales tax on the purchases at issue in this case does not violate either the Commerce

Clause or the Due Process Clause of the Constitution of the United States under the

relevant modern test provided by Complete Auto.

A. Dilworth’s status in modern Commerce Clause jurisprudence
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¶ 10 On 15 May 1944, the Supreme Court of the United States issued its opinions

in both Dilworth and Dilworth’s companion case General Trading Co. v. State Tax

Comm’n, 322 U.S. 335 (1944). In Dilworth, the Supreme Court determined that the

state of Arkansas had no authority under the Commerce Clause of the Constitution

of the United States to impose a tax on the sale of machinery or mill supplies

purchased from Tennessee corporations which did not have any offices, branches, or

other places of business located within Arkansas, where title passed upon delivery to

a common carrier within Tennessee before the goods were ultimately brought into

Arkansas for delivery to Arkansas customers. McLeod v. J.E. Dilworth Co., 322 U.S.

327, 330 (1944). Since these sales were, in the high court’s view, “consummated in

Tennessee for the delivery of goods in Arkansas[,]” Arkansas could not tax them

without “project[ing] its powers beyond its boundaries and . . . tax[ing] an interstate

transaction.” Id. at 328, 330. As such, the Supreme Court determined that Arkansas

was prohibited from doing so under the then-prevailing interpretation of the

Commerce Clause as categorically barring states from taxing interstate commerce,

which was seen as residing within the exclusive province of Congress. Id. at 330.

¶ 11 Meanwhile, in General Trading, the Supreme Court of the United States

upheld the imposition of an Iowa use tax levied against property brought into Iowa

from the state of Minnesota for customers located within Iowa’s boundaries even

though the Minnesota company whose goods were subject to the tax and which was
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required to collect and then to remit the tax back to Iowa maintained no offices or

other places of business within the state. General Trading, 322 U.S. at 336. According

to the Supreme Court in its opinion in General Trading, Iowa’s imposition of a use

tax did not tax the “privilege of doing interstate business,” but rather the privilege of

enjoying one’s property within the state, regardless of its origin. Id. at 338. Requiring

the Minnesota seller to collect the tax was, in the Supreme Court’s view, simply a

“familiar and sanctioned device” to implement a use tax against the ultimate

consumer, an Iowa resident. Id. The high court thus justified Iowa’s imposition of the

tax on the grounds that:

Of course, no State can tax the privilege of doing interstate
business. That is within the protection of the Commerce
Clause and subject to the power of Congress. On the other
hand, the mere fact that property is used for interstate
commerce or has come into an owner’s possession as a
result of interstate commerce does not diminish the
protection which he may draw from a State to the upkeep
of which he may be asked to bear his fair share.

Id. (citation omitted). As Justice Douglas noted in his dissent in Dilworth, however,

the Supreme Court’s categorical rejection of the imposition of state sales tax and its

simultaneous countenance of a complementary use tax on the same transactions had

no practical effect on the ability of states to tax the receipt of goods from out of state.

Dilworth, 322 U.S. at 333–34 (Douglas, J., dissenting) (“But a use tax and a sales tax

applied at the very end of an interstate transaction have precisely the same economic

incidence. Their effect on interstate commerce is identical . . . there should be no
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difference in result under the Commerce Clause where, as here, the practical impact

on the interstate transaction is the same.”).

¶ 12 The Dilworth majority addressed this apparent contradiction by

acknowledging that, although a “sale[s] tax and a use tax in many instances may

bring about the same result[,]” the two forms of tax “are different in conception, are

assessments upon different transactions, and . . . may have to justify themselves on

different constitutional grounds.” Id. at 330. In particular, the high court’s majority

emphasized that a “sales tax is a tax on the freedom to purchase” whereas a “use tax

is a tax on the enjoyment of that which was purchased.” Id. A use tax, according to

the Supreme Court, was imposed only after the sale “had spent its interstate

character” and therefore did not amount to a taxation of interstate commerce itself.

Id. at 331. The Supreme Court thus reasoned that only the imposition of interstate

sales tax by the states was prohibited by the Commerce Clause:

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 the goods sold, involves
an assumption of power by a State which the Commerce
Clause was meant to end. The very purpose of the
Commerce Clause was to create an area of free trade
among the several States.

Id. at 330. This “free trade” philosophy laid the groundwork for the subsequent

decisions of the Supreme Court of the United States in cases such as Freeman v.

Hewit, 329 U.S. 249, 252 (1946) (holding that the Commerce Clause does not “merely
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forbid a State to single out interstate commerce for hostile action” but precludes it

from “taking any action which may fairly be deemed to have the effect of impeding

the free flow of trade between States”), and Spector Motor Serv. v. O’Connor, 340 U.S.

602, 603–10 (1951) (striking down a nondiscriminatory “privilege of doing business”

franchise tax as imposed by Connecticut against a foreign corporation only engaged

in interstate commerce on the basis that Congress has the exclusive power to tax the

privilege of engaging in interstate commerce).

¶ 13 Nearly thirty years later, the Supreme Court began to disassociate its

approach in this legal arena from the strict formalism that had characterized

Dilworth and the Dilworth progeny. In 1977, the high court chose to expressly

overrule Freeman and Spector, utilizing its opinion in Complete Auto Transit, Inc. v.

Brady, 430 U.S. 274 (1977) to disavow the “free trade” theory which was articulated

in Dilworth. Complete Auto Transit, Inc. was a Michigan corporation contracted for

the purpose of transporting motor vehicles manufactured by General Motors

Corporation outside of the state of Mississippi from a railhead in Jackson, Mississippi

to dealers throughout the state. Id. at 276. Complete Auto argued that Mississippi

did not have authority to impose a sales tax upon its transportation services since the

company was “but one part of an interstate movement” and therefore immune to state

taxation under the precedent set by cases such as Freeman and Spector. Id. at 277–

78. In Complete Auto, the Supreme Court acknowledged that Freeman and Spector
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had “reflect[ed] an underlying philosophy that interstate commerce should enjoy a

sort of ‘free trade’ immunity from state taxation[,]” but the high court opted to follow

the path paved by more recent decisions considering “not the formal language of the

tax statute, but rather its practical effect.” Id. at 278–79. The Supreme Court

criticized the Spector rule’s “holding that a tax on the ‘privilege’ of engaging in an

activity in the State may not be applied to an activity that is part of interstate

commerce” as having “no relationship to economic realities[,]” and rejected its blanket

prohibition against the imposition of a direct tax on interstate sales regardless of

whether it was fairly apportioned or nondiscriminatory. Id.

¶ 14 The Supreme Court in Complete Auto “abandoned the abstract notion that

interstate commerce ‘itself’ cannot be taxed by the States[,]” recognizing, in its place,

that “interstate commerce may be required to pay its fair share of state taxes.” D.H.

Holmes Co. v. McNamara, 486 U.S. 24, 30–31 (1988). Alternatively, the high court

elected to follow the line of cases sustaining taxes against Commerce Clause

challenges where they “applied to an activity with a substantial nexus with the taxing

State, [were] fairly apportioned, [did] not discriminate against interstate commerce,

and [were] fairly related to the services provided by the State.” Complete Auto, 430

U.S. at 279. This has become known as Complete Auto’s “four-part formulation” and

provides the modern test for determining the constitutionality of a state tax imposed

on interstate commerce regardless of its formal designation.
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¶ 15 The Complete Auto test has since been applied to determine the

constitutionality of various taxes levied against interstate commerce. D.H. Holmes,

486 U.S.at 30; see, e.g., Okla. Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995),

superseded by statute on other grounds. These cases have made clear that Complete

Auto’s declaration required the rejection of outdated precedent that “proscribed all

taxation formally levied upon interstate commerce” or encouraged legal

gamesmanship by drawing artificial boundaries around taxes that differed in form

but not substance. Id. at 183 (“[W]e categorically abandoned . . . [such] formalism

when [Complete Auto . . .] overruled Spector and Freeman.”); see also Dep’t of Revenue.

v. Ass’n of Wash. Stevedoring Cos., 435 U.S. 734, 745 (1978) (“Because the tax in the

present case is indistinguishable from the taxes at issue in Puget Sound and in Carter

& Weekes [prohibiting state taxation of the gross receipts of businesses involved in

the unloading of interstate cargo vessels on the grounds that such taxes were

prohibited by the Commerce Clause], the Stevedoring Cases control today’s decision

on the Commerce Clause issue unless more recent precedent and a new analysis

require rejection of their reasoning. We conclude that Complete Auto . . . requires such

rejection.”) (emphasis added). Cf. Quill Corp. v. North Dakota, 504 U.S. 298, 310–11

(1992) (“Complete Auto rejected Freeman and Spector’s formal distinction between

‘direct’ and ‘indirect’ taxes on interstate commerce because that formalism allowed

the validity of statutes to hinge on ‘legal terminology,’ ‘draftsmanship and
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phraseology.’ ” (citation omitted)), overruled on other grounds by South Dakota v.

Wayfair, Inc., 138 S. Ct. 2080 (2018).

¶ 16 The Dilworth/General Trading dichotomy was exactly such a formalistic

distinction that turned upon legal draftsmanship as opposed to differences in the

practical effect of a use tax as compared to a sales tax. It would further appear that

the Supreme Court of the United States has wholly abandoned the free trade theory

which had provided for the distinction’s unsteady foundation. See Complete Auto, 430

U.S. at 278–79. In the instant case, however, petitioner and its amicus curiae caution

that this Court is not authorized to engage in an “anticipatory overruling” of Supreme

Court precedent interpreting federal law, regardless of how “moth-eaten” its

underlying logic has become. See Rodriguez de Quijas v. Shearson/Am. Express, Inc.,

490 U.S. 477, 484 (1989) (“If a precedent of [the U.S. Supreme] Court has direct

application in a case, yet appears to rest on reasons rejected in some other line of

decisions, [other courts] should follow the case which directly controls, leaving to this

Court the prerogative of overruling its own decisions.”). Nonetheless, there is no

“magic words” requirement that must be used for the nation’s premier legal forum to

overrule its own precedent; indeed, it may implicitly overrule precedent by issuing a

decision in direct contradiction with its prior holdings. See Miller Bros. Co. v.

Maryland, 347 U.S. 340, 344 (1954) (“Our decisions are not always clear as to the

grounds on which a tax is supported, especially where more than one exists; nor are
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all of our pronouncements . . . consistent or reconcilable. A few have been specifically

overruled, while others no longer fully represent the present state of the law.”). Where

two precedents are flatly irreconcilable, the latter in time controls.

B. Wayfair’s application of Complete Auto to North Dakota’s sales tax regime

¶ 17 We are in the fortuitous position of not having to discern whether Dilworth

was automatically retained within the Supreme Court’s decision in Complete Auto or

whether we were compelled to engage in an anticipatory overruling of a federal

precedent whose underlying logic has been abandoned but whose direct holding has

never been specifically readdressed. Instead, we can confidently look to the

application by the Supreme Court of the United States of the Complete Auto test to a

materially identical tax regime in South Dakota v. Wayfair, Inc., 138 S. Ct. 2080

(2018) to guide our analysis. Since Wayfair is directly applicable to the case before

us, its holding supersedes Dilworth to the extent that the two precedents are in

conflict with one another and guide our own path forward.

¶ 18 Wayfair overruled a line of precedent which prohibited states from requiring

sellers to collect and to remit state sales or use tax unless they maintained a physical

presence within the state. See Nat’l Bellas Hess, Inc. v. Dep’t of Revenue, 386 U. S.

753 (1967); Quill Corp. v. North Dakota, 504 U. S. 298 (1992). In 2016, the state of

South Dakota enacted “An Act to provide for the collection of sales taxes from certain

remote sellers, to establish certain Legislative findings, and to declare an emergency”
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and invited the Supreme Court to reconsider this precedent in light of the fact that

the modern proliferation of remote e-commerce vendors like Wayfair was “seriously

eroding the sales tax base” and “causing revenue losses and imminent harm . . .

through the loss of critical funding for state and local services.” Wayfair, 138 S. Ct. at

2088 (alteration in original) (quoting S.B. 106, 2016 Leg. Assembly, 91st Sess. § 8(1)

(S.D. 2016) (S.B. 106)). The Act required sellers who delivered more than $100,000

worth of goods to South Dakota customers or made more than 200 individual

transactions for the delivery of goods into the state to collect and remit sales tax “as

if [they] had a physical presence in the State.” Id. at 2089 (quoting S.B. 106, § 1).

¶ 19 Wayfair challenged the South Dakota law under the Supreme Court’s

precedent in Quill, which affirmed the rule articulated in Bellas Hess that a state

may not require a seller without any physical presence within the state to collect and

remit sales or use tax for the sale of goods for delivery into the state. Quill, 504 U.S.

298. Bellas Hess, which was decided prior to the Supreme Court’s decision in

Complete Auto, held that requiring sellers “whose only connection with customers in

the State [was] by common carrier or . . . mail” to collect and remit state use tax both

“violate[d] the Due Process Clause of the Fourteenth Amendment and create[d] an

unconstitutional burden upon interstate commerce[,]” in violation of the Commerce

Clause. Bellas Hess, 386 U.S. at 756, 758. In Quill, the high court overturned the due

process holding in Bellas Hess on the grounds that its “due process jurisprudence
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ha[d] evolved substantially in the 25 years since Bellas Hess,” abandoning

“formalistic tests” concerning a defendant’s presence within the forum state for a

“more flexible inquiry into whether a defendant’s contacts with the forum made it

reasonable . . . to require it to defend the suit in that State.” Quill, 504 U.S. at 307.

The high court went on to say that:

Comparable reasoning justifies the imposition of the
collection duty on a mail-order house that is engaged in
continuous and widespread solicitation of business within
a State. Such a corporation clearly has “fair warning that
[its] activity may subject [it] to the jurisdiction of a foreign
sovereign.” In “modern commercial life” it matters little
that such solicitation is accomplished by a deluge of
catalogs rather than a phalanx of drummers: The
requirements of due process are met irrespective of a
corporation's lack of physical presence in the taxing State.
Thus, to the extent that our decisions have indicated that
the Due Process Clause requires physical presence in a
State for the imposition of duty to collect a use tax, we
overrule those holdings as superseded by developments in
the law of due process.

In this case, there is no question that Quill has
purposefully directed its activities at North Dakota
residents, that the magnitude of those contacts is more
than sufficient for due process purposes, and that the use
tax is related to the benefits Quill receives from access to
the State. We therefore agree with the North Dakota
Supreme Court’s conclusion that the Due Process Clause
does not bar enforcement of that State’s use tax against
Quill.

Id. at 308 (alterations in original) (citation omitted). The Supreme Court did not,

however, overrule the holding in Bellas Hess that such an imposition was in violation
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of the Commerce Clause. The high court distinguished the physical presence

requirement in Bellas Hess from those distinctions articulated in other cases that had

been overturned by its decision in Complete Auto by explaining that:

Complete Auto, it is true, renounced Freeman and its
progeny as “formalistic.” But not all formalism is alike.
Spector’s formal distinction between taxes on the “privilege
of doing business” and all other taxes served no purpose
within our Commerce Clause jurisprudence, but stood
“only as a trap for the unwary draftsman.” In contrast, the
bright-line rule of Bellas Hess furthers the ends of the
dormant Commerce Clause. Undue burdens on interstate
commerce may be avoided not only by a case-by-case
evaluation of the actual burdens imposed by particular
regulations or taxes, but also, in some situations, by the
demarcation of a discrete realm of commercial activity that
is free from interstate taxation. Bellas Hess followed the
latter approach and created a safe harbor for vendors
“whose only connection with customers in the [taxing]
State is by common carrier or the United States mail.”
Under Bellas Hess, such vendors are free from state-
imposed duties to collect sales and use taxes.

Id. at 314–15 (alteration in original) (citations omitted). Instead, the Court in Quill

held that Complete Auto had incorporated Bellas Hess’s physical presence rule into

the first prong of its four-part test. Id. at 311 (“Bellas Hess . . . stands for the

proposition that a vendor whose only contacts with the taxing State are by mail or

common carrier lacks the ‘substantial nexus’ required by the Commerce Clause.”).

¶ 20 Citing these cases as binding precedent, Wayfair moved for, and was granted,

summary judgment in its favor at the state trial court level on the grounds that it did

not have substantial nexus with South Dakota due to the lack of physical presence
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within the state. The South Dakota Supreme Court affirmed the lower court’s

decision pursuant to Quill and South Dakota petitioned the Supreme Court of the

United States for a writ of certiorari.

¶ 21 After South Dakota had petitioned for a writ of certiorari, but before the

Supreme Court agreed to hear the case, contemporary tax commentators faulted the

state for drafting its Act to “attack the physical presence rule only in the context of

sales taxes[,]” thereby raising the specter not only of Bellas Hess and Quill, but of

Dilworth and its progeny. Hayes R. Holderness & Matthew C. Boch, Did South

Dakota Neglect Transactional Nexus in Its Bill to Kill Quill?, Bloomberg BNA (Dec.

6, 2017) [hereinafter Holderness & Boch, Did South Dakota Neglect Transactional

Nexus]. Specifically, despite a dearth of cases explicitly acknowledging such a

distinction, academics had begun to identify that Complete Auto’s “substantial nexus”

requirement could be broken down into two, separate inquiries: first, so-called

“personal” or “entity nexus” which requires each taxed entity to have a substantial

connection to the taxing state (and, under the precedent set by Bellas Hess and Quill,

to maintain a physical presence within the state), and second, so-called “transactional

nexus,” which requires each taxed transaction to have a substantial connection to the

taxing state. See Jeffrey A. Friedman & Kendall L. Houghton, The Other Nexus:

Transactional Nexus and the Commerce Clause, 4 St. & Local Tax Law., 19, 22–33

(1999). According to some legal scholars, Dilworth had been incorporated in part into
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Complete Auto through the concept of transactional nexus, and therefore states

remained prohibited from imposing sales tax on transactions for goods delivered into

the state by common carrier where title and possession transferred outside of the

taxing state for lack of sufficient nexus even where a complementary use tax would

be upheld. See id.; Breen M. Schiller & Daniel L. Stanley, Nexus News: The

Reemergence of Transactional Nexus, J. St. Taxation 9, 11–12 (Winter 2021).

¶ 22 These commentators theorized that South Dakota’s “oversight” in drafting its

Act to require remote sellers shipping their goods into the state to collect sales tax

but not use tax might impact the Wayfair case in one of four ways: (1) the Court might

deny certiorari on the grounds that the Act addressed only sales tax; (2) the Court

might grant certiorari and revisit not only Quill, but also Dilworth; (3) the Court

might grant certiorari and note that South Dakota would have to extend its statute

to cover use tax before it could require such tax to be collected pursuant to Dilworth;

or (4) the Court might grant certiorari and overrule Quill without addressing

Dilworth or its progeny, thereby “implicitly suggesting that the transactional nexus

distinction between sales and use taxes is of little or no importance.” Holderness &

Boch, Did South Dakota Neglect Transactional Nexus. Indeed, the Court, without

ever addressing Dilworth, overruled Quill and held that there was sufficient nexus

between Wayfair and South Dakota for the imposition of sales tax.
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¶ 23 The Supreme Court accepted South Dakota’s invitation to reconsider the

physical presence requirement established in Bellas Hess and held to have been

incorporated into the Complete Auto test in Quill. The high court decided to overrule

both Bellas Hess and Quill on the grounds that the “physical presence rule . . . [was]

unsound and incorrect.” Wayfair, 138 S. Ct. at 2099. The Supreme Court held that

the physical presence rule was “not a necessary interpretation of Complete Auto’s

nexus requirement” but, rather, was closely related to the minimum contacts

required under the Due Process Clause of the Fourteenth Amendment. Id. at 2085.

However, as Quill itself had ceded, “a business need not have a physical presence in

a State to satisfy the demands of due process.” Id. at 2093.

¶ 24 Further, the Wayfair Court explicitly repudiated the formalistic Commerce

Clause jurisprudence of eras past as incompatible with modern legal precedents and

economic realities. Id. at 2094. The high court pointed out the recognition that

Complete Auto and its progeny had “eschewed formalism for a sensitive, case-by-case

analysis of purposes and effects.” Id. (quoting West Lynn Creamery, Inc. v. Healy, 512

U.S. 186, 201 (1994)). The Supreme Court instead held that:

So long as a state law avoids “any effect forbidden by the
Commerce Clause,” courts should not rely on anachronistic
formalisms to invalidate it. The basic principles of the
Court’s Commerce Clause jurisprudence are grounded in
functional, marketplace dynamics; and States can and
should consider those realities in enacting and enforcing
their tax laws.
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Id. at 2094–95 (citation omitted). Even though the Wayfair Court clearly understood

that South Dakota’s statute at issue involved the imposition of sales tax and not use

tax, nonetheless the highest tribunal did not draw any legal distinction between the

two. See Wayfair, 138 S. Ct. at 2089 (“[T]he Act requires out-of-state sellers to collect

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

added) (quoting S.B. 106, § 1)). The Court did not discuss Dilworth or “transactional

nexus” as a concept separate and apart from “substantial nexus” at all. Conversely,

the Supreme Court held that, “[i]n the absence of Quill and Bellas Hess, the first

prong of the Complete Auto test simply asks whether the tax applies to an activity

with a substantial nexus with the taxing State.” Id. at 2099. There, the high court

held that the nexus between Wayfair and South Dakota was “clearly sufficient based

on both the economic and virtual contacts respondents have with the State.” Id. The

Supreme Court went on to conclude that “the substantial nexus requirement of

Complete Auto [was] satisfied in [that] case[,]” id. at 2099, and remanded for further

proceedings not inconsistent with its decision, id. at 2100.

¶ 25 The significance of the Wayfair decision was not lost on either the states or on

interstate businesses in their capacity as the states’ impending taxpayers. In its

wake, South Dakota and Wayfair entered into a settlement agreement by which

Wayfair would collect state sales tax beginning on 1 January 2019, and many states

began using South Dakota’s law as a model as they adopted statutes requiring the
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collection of sales tax by remote sellers. See Richard D. Pomp, Wayfair: Its

Implications and Missed Opportunities, 58 J. L. & Pol’y 1, 9–10 n.55 (2019); Jennifer

Karpchuk, States Could Use Wayfair Laws To Fix Depleted Budgets, Law360 (July

15, 2020) [hereinafter Karpchuk, States Could Use Wayfair Laws]. This revenue had

become particularly vital as online retail transactions proliferated while states

continued to contend with a public health crisis. See Karpchuk, States Could Use

Wayfair Laws; see also Wayfair, 138 S. Ct. at 2097 (“Though Quill was wrong on its

own terms when it was decided in 1992, since then the Internet revolution has made

its earlier error all the more egregious and harmful.”). In order to remain under the

auspices of the Wayfair decision, many such states intentionally adopted those

aspects of South Dakota’s law that were mentioned most favorably by the Court. See,

e.g., Jay Hancock, The Wayfair Sales Tax Case: Companies Without a Physical

Presence Required to Collect Sales Tax, LBMC (Mar. 1, 2022) (detailing which states

adopted “economic nexus” thresholds of $100,000 or more for the imposition of sales

tax on remote sellers after Wayfair).

¶ 26 On 7 August 2018, the North Carolina Department of Revenue issued a

directive requiring remote sellers making gross sales in excess of $100,000 or

conducting 200 or more separate transactions to North Carolina customers to begin

collecting state sales tax in accordance with Wayfair. N.C. Dep’t Rev., SD-18-6 (Aug.

7, 2018). This rule was limited to prospective application, which brought about
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respondent’s exclusion of those sales which were made by petitioner before the

corporation first established a physical presence in North Carolina by hiring an in-

state sales representative in September 2009. Prior to Wayfair, however, North

Carolina’s sales tax regime already paralleled South Dakota’s in several key respects,

given each state’s membership in the Streamlined Sales and Use Tax Agreement

(SSUTA). See An Act to Enable North Carolina to Enter the Streamlined Sales and

Use Tax Agreement, S.L. 2001-347, §§ 1.1–3.3, 2001 N.C. Sess. Laws 1041, 1041–60;

S.D. Codified Laws § 10-45C-3 (2010). As member-states, North Carolina’s and South

Dakota’s tax regimes are largely governed by the same definitions and sourcing

principles. As such, many aspects of their respective tax laws are nearly identical,

including, inter alia:

South Dakota North Carolina
Sales tax is assessed against goods or Sales are sourced to the state in which
services to be delivered into South the product or service was received for
Dakota for receipt by in-state customers. the purposes of assessing sales tax.
S.B. 106, § 1 (2016). N.C.G.S. § 105-164.4B(a)(2) (2009).
South Dakota defines to “receive” as “Receipt” is defined as “taking
“(a) the taking possession of tangible possession of tangible personal
personal property; (b) making first use property, making first use of services,
of services; or (c) taking possession of or or taking possession or making first use
making first use of any product of digital goods, whichever comes first”
transferred electronically, whichever but does not include possession by a
comes first” excluding possession by a shipping company on behalf of the
shipping company on behalf of the purchaser. Sales and Use Tax Bulletin
purchaser. S.D. Admin. R. 64:06:01:62 4-1A.
(2015).

Sales or use tax is due based on the Direct mail is sourced to the location
locations to which the advertising and where it is delivered if the purchaser
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promotional direct mail is delivered. provides the seller with information to
Other direct mail is sourced to the show the jurisdictions to which the
address for the purchaser contained direct mail is to be delivered. N.C.G.S. §
within the seller’s records. S.D. Admin. 105-164.4B(d)(2) (2009).
R. 64:06:01:68 (2010).
A use tax is imposed for the in-state use, A complementary use tax applies when
storage, or consumption of tangible goods that are purchased out of state
goods at the same rate as would have are brought into the state for their use,
been applied had the goods been storage, or consumption. N.C.G.S. §
purchased in South Dakota. S.D. 105-164.6(a)(1) (2009).
Codified Laws § 10-46-2 (2010).
The imposition of state use tax is North Carolina allows sellers to credit
reduced by the amount of sales or use the amount of sales or use tax paid on
tax previously paid in another state for an item in another state against the tax
the same property. S.D. Codified Laws § imposed under North Carolina law.
10-46-6.1 (2010). N.C.G.S. § 105-164.6(c)(2) (2009).
Remote sellers are required to collect Remote sellers are only obligated to
and remit sales tax as if they had a collect state sales tax if they conduct
physical presence within the state if significant in-state activity such as
they make sales exceeding $100,000 or making at least 200 separate sales or
200 or more separate transactions to $100,000 worth of sales to in-state
South Dakota customers over the course customers over the course of a year.
of a year. S.D. Codified Laws § 10-64-2 This applies only prospectively
(2016). This applies only prospectively beginning 1 November 2018. N.C. Dep’t
following the passage of the Act. S.B. Rev., SD-18-6 (Aug. 7, 2018).
106, §§ 5, 3, 8(10) (2016).
South Dakota can extract sellers’ North Carolina can extract a seller’s
registration information from the information from the central
central registration system. The state registration system, allows sellers to
further allows sellers to register without register without a signature, and
a signature and permits agents to permits agents to register on behalf of
register on behalf of sellers. S.D. sellers. N.C.G.S. §§ 105-164.29, 105-
Codified Laws §§ 10-45C-3, 10-45C-5, 164.42E(4), 105-164.42I (2009).
10-45-24 (2010).
South Dakota provides state-level North Carolina provides state-level
administration of state and local sales administration of state and local sales
and use taxes. Sellers are required to and use taxes. Sellers are required to
register, file returns, and remit funds at register with, file returns with, and
the state level. South Dakota requires remit funds to a state-level authority.
sellers to file only one return each tax The state requires sellers to file only
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period for the state and all of its local one tax return each period for the state
jurisdictions. S.D. Codified Laws § 10- and all local jurisdictions. N.C.G.S. §§
45C-5 (2010). 105-164.16, 105-469, 105-471, 105-
483, 105-498, 105-507.2, 105-509.1,
105-510.1, 105-511.3 (2009).
South Dakota uses the definitions North Carolina uses the SSUTA
provided by the SSUTA to define the definitions to define the following
following terms, inter alia: “bundled terms, inter alia: “bundled transaction,”
transaction,” “delivery charges,” “direct “delivery charges,” “direct mail,” “lease
mail,” “lease or rental,” “purchase price,” or rental,” “purchase price,” “retail sale
“retail sale or sale at retail,” “sales or sale at retail,” “sales price,” and
price,” and “tangible personal property.” “tangible personal property.” N.C.G.S.
S.D. Codified Laws §§ 10-45-1, 10-45- §§ 105-164.3, 164.4D (2009).
1.5, 10-45-1.9, 10-45-1.12, 10-45-1.13,
10-45-1.14, 10-45-1(4), 10-45-1(10), 10-
45-94.1 (2010).
South Dakota reviews sales tax software North Carolina reviews sales tax
submitted for certification as Certified software submitted for certification as
Automated Software (CAS) and provides CAS and provides liability relief for
liability relief to sellers for their reliance reliance on such software. N.C.G.S. §§
on such software. S.D. Codified Laws § 105-164.42H, 105-164.42I (2009).
10-45C-7 (2010).

C. Applying Complete Auto’s four-part formulation to North Carolina’s tax

¶ 27 Because North Carolina’s imposition of sales tax under the circumstances

presented in this case does not differ from South Dakota’s in any respect that is

legally significant to this matter, and because both states have incorporated the

SSUTA’s uniform rules and definitions into their sales tax and use tax regimes, we

follow the Supreme Court’s precedent in Wayfair and apply the four-part test in

Complete Auto to determine its constitutionality. Under the “now-accepted

framework for state taxation” provided by Complete Auto, courts will sustain a tax

imposed on interstate commerce as long as it: “(1) applies to an activity with a
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substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not

discriminate against interstate commerce, and (4) is fairly related to the services the

State provides.” Wayfair, 138 S. Ct. at 2091. We uphold North Carolina’s tax against

petitioner’s Commerce Clause challenge because petitioner’s activities have a

substantial nexus with North Carolina and the imposition of sales tax on petitioner’s

sales to North Carolina customers is fairly apportioned, nondiscriminatory, and fairly

related to the services provided by the state. We further hold that North Carolina’s

assessment of sales tax on the sales at issue does not offend petitioner’s right to due

process under the Due Process Clause of the Constitution of the United States.

1. Substantial Nexus

¶ 28 Despite petitioner’s contention otherwise, the Wayfair Court addressed the

first requirement of Complete Auto’s four-part test—substantial nexus—in its

entirety by holding that, “[i]n the absence of Quill and Bellas Hess, the first prong of

the Complete Auto test simply asks whether the tax applies to an activity with a

substantial nexus with the taxing State.” Id. at 2099. Specifically, the Supreme Court

held that Wayfair’s “economic and virtual contacts” provided a “clearly sufficient”

nexus for the imposition of sales tax in light of the fact that South Dakota’s act only

applied to sellers delivering more than $100,000 worth of goods or services into the

state or making 200 or more separate transactions for the delivery of goods or services

into the state on an annual basis. Id. According to the high court, this “quantity of
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business could not have occurred unless the seller availed itself of the substantial

privilege of carrying on business in South Dakota.” Id. Since a nexus is established

whenever a taxpayer “avails itself of the substantial privilege of carrying on business

in that jurisdiction,” Polar Tankers, Inc. v. City of Valdez, 557 U. S. 1, 11 (2009)

(quotation marks omitted), the Wayfair Court held that the substantial nexus

requirement of Complete Auto had been clearly satisfied. Wayfair, 138 S. Ct. at 2099.

¶ 29 Although the Supreme Court of the United States in Wayfair did not

specifically disaggregate substantial nexus into its component parts of transactional

and personal nexus, it did begin its discussion by dispensing with the subject properly

considered as constituting the transactional nexus issue before proceeding to the

physical presence requirement as an aspect of personal nexus. The high court stated:

All agree that South Dakota has the authority to tax
these transactions. S.B. 106 applies to sales of “tangible
personal property, products transferred electronically, or
services for delivery into South Dakota.” § 1 (emphasis
added). “It has long been settled” that the sale of goods or
services “has a sufficient nexus to the State in which the
sale is consummated to be treated as a local transaction
taxable by that State.” [Jefferson Lines, 514 U.S. at 184];
see also 2 C. Trost & P. Hartman, Federal Limitations on
State and Local Taxation 2d § 11:1, p. 471 (2003)
(“Generally speaking, a sale is attributable to its
destination”).

Id. at 2092–93. By citing its decision in Jefferson Lines, South Dakota’s sourcing

statute, and a treatise on federal regulation of state and local taxation, the Supreme
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Court did not so much neglect transactional nexus as it summarily dismissed any

notion that South Dakota might not have authority to tax the sales at issue on the

grounds of both general taxing principles and the state’s specific destination-based

sourcing statute.

¶ 30 The facts presented in the case at bar provide equal, if not greater, support for

a finding of substantial nexus. Petitioner has clearly availed itself of the substantial

privilege of carrying on its own business in North Carolina through both its economic

and physical contacts with the state. Petitioner processed approximately $20 million

worth of orders for delivery into the state between 2009 and 2011. This is well above

the annual threshold of $100,000 cited favorably in Wayfair. Further, unlike the

remote sellers implicated in Wayfair, petitioner has maintained a physical presence

within North Carolina for the relevant time period by employing a sales

representative to solicit sales both within and from outside of the state. Finally, as a

member of the SSUTA, North Carolina employs the same destination-based sourcing

principles as South Dakota, which attribute a sale to the state in which the goods or

services were received for the purpose of assessing state sales tax. Compare S.B. 106

§ 1, with N.C.G.S. § 105-164.4B(a)(2). We therefore hold that there is also substantial

nexus here.2

2 Although the Court only reached and ruled on the issue of nexus in Wayfair, we note
that it also looked favorably to several features of South Dakota’s statute in anticipating how
the Act may be further evaluated on remand:
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2. Fair Apportionment

¶ 31 The second requirement of the Complete Auto test serves “to ensure that each

State taxes only its fair share of an interstate transaction” and to prevent “multiple

taxation” of the same transaction by more than one state. Jefferson Lines, 514 U.S.

at 184–85. The Supreme Court addressed the issue of malapportionment in Jefferson

Lines in the context of the state of Oklahoma’s imposition of a state sales tax on the

sale of bus tickets sold within the state for travel into other states. Id. at 177–78. In

Jefferson Lines, the Court began by stating that:

For over a decade now, we have assessed any threat
of malapportionment by asking whether the tax is

The question remains whether some other principle in
the Court’s Commerce Clause doctrine might invalidate the Act.
Because the Quill physical presence rule was an obvious barrier
to the Act’s validity, these issues have not yet been litigated or
briefed, and so the Court need not resolve them here. That said,
South Dakota’s tax system includes several features that appear
designed to prevent discrimination against or undue burdens
upon interstate commerce. First, the Act applies a safe harbor to
those who transact only limited business in South Dakota.
Second, the Act ensures that no obligation to remit the sales tax
may be applied retroactively. S.B. 106, §5. Third, South Dakota
is one of more than 20 States that have adopted the Streamlined
Sales and Use Tax Agreement. This system standardizes taxes
to reduce administrative and compliance costs: It requires a
single, state level tax administration, uniform definitions of
products and services, simplified tax rate structures, and other
uniform rules. It also provides sellers access to sales tax
administration software paid for by the State. Sellers who
choose to use such software are immune from audit liability.

Wayfair, 138 S. Ct. at 2099–2100. Each of these features is reflected in North Carolina’s own
laws, as detailed in the table above.
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“internally consistent” and, if so, whether it is “externally
consistent” as well. Internal consistency is preserved when
the imposition of a tax identical to the one in question by
every other State would add no burden to interstate
commerce that intrastate commerce would not also bear.
This test asks nothing about the degree of economic reality
reflected by the tax, but simply looks to the structure of the
tax at issue to see whether its identical application by every
State in the Union would place interstate commerce at a
disadvantage as compared with commerce intrastate. A
failure of internal consistency shows as a matter of law that
a State is attempting to take more than its fair share of
taxes from the interstate transaction, since allowing such
a tax in one State would place interstate commerce at the
mercy of those remaining States that might impose an
identical tax . . . .

External consistency, on the other hand, looks not to
the logical consequences of cloning, but to the economic
justification for the State’s claim upon the value taxed, to
discover whether a State’s tax reaches beyond that portion
of value that is fairly attributable to economic activity
within the taxing State. Here, the threat of real multiple
taxation (though not by literally identical statutes) may
indicate a State’s impermissible overreaching.

Id. at 185 (citations omitted).

¶ 32 The Supreme Court of the United States held in Jefferson Lines that

Oklahoma’s tax was both internally and externally consistent. Id. at 185–96. First,

the high court determined that the tax was internally consistent because if every

state were to impose an identical tax (i.e. a tax on ticket sales within the state for

travel originating in that state), no sale would be subject to more than one such tax

because each would be attributable to only one lone state. Id. at 185. And second, the
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Supreme Court concluded that the tax was externally consistent because “[a] sale of

goods is most readily viewed as a discrete event facilitated by the laws and amenities

of the place of sale,” and thus the high court had “consistently approved taxation of

sales without any division of the tax base among different States” by permitting the

state in which the sale is deemed to have taken place to tax the entire purchase price.

Id. at 186. In Jefferson Lines, the Supreme Court declared that the sale of a bus ticket

within Oklahoma for transit out of the state was properly deemed a local event

because the taxable event was comprised of the “agreement, payment, and delivery

of some of the services in the taxing State” and “no other State [could] claim to be the

site of the same combination.” Id. at 190. Further, “the combined events of payment

for a ticket and its delivery for present commencement of a trip [were] commonly

understood to suffice for a sale.” Id. at 191. The high court therefore decided that

Oklahoma could levy a sales tax upon the entire purchase price of the ticket even

though the service it entailed included travel across other states. Id. at 186–96.

¶ 33 North Carolina’s imposition of sales tax on the sales at issue in this case is

likewise both internally and externally consistent. First, the tax is internally

consistent because, as in Jefferson Lines, every state could impose an identical

destination-based sales tax without any duplicative effect since each sale would only

be attributable to a single state. Indeed, most states—including but not limited to,

SSUTA member-states—have destination-based sourcing statutes that attribute
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sales to the state in which the goods or services are to be received and impose state

sales taxes accordingly. And second, the tax is externally consistent because, as the

Court recognized in Wayfair, a sale of goods is generally attributable to its

destination. Wayfair, 138 S. Ct. at 2092–93. Unlike Arkansas in Dilworth, North

Carolina has state law addressing where a sale is deemed to have taken place for the

purpose of assessing state sales tax. North Carolina’s sourcing statute traces the sale

of goods to their location of receipt and printed materials to the mailing address

provided by purchasers, notwithstanding delivery to a common carrier f.o.b.3 in

another state. N.C.G.S. § 105-164.4B(a)(2), (d)(2)(b); N.C.G.S § 105-164.4E (2009). As

in Jefferson Lines, “no other State [could] claim to be the site of the same” since each

purchase of goods or materials is delivered to only one mailing address located within

one destination state. North Carolina has joined a number of states which have

adopted destination-based sourcing principles; beyond the twenty-three states which

are members of the SSUTA, thirty-five of the fifty states in the nation, along with the

District of Columbia, currently define the sale of goods according to their ultimate

destination. Jennifer Faubion, Tax Burden Analysis and Review of Recent Significant

Changes: Presentation to the Legislative Finance Committee (July 20, 2022),

https://www.nmlegis.gov/handouts/ALFC%20072022%20Item%205%20Tax%20Burd

en%20Analysis%20and%20Review%20of%20Recent%20Significant%20Changes.pdf.

3 “F.o.b.” is an abbreviation for “free on board.”
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This list of states includes Wisconsin—the state in which petitioner maintains its

headquarters and from which petitioner ships many of its orders—whose sourcing

rules are materially identical to North Carolina’s sourcing rules as a fellow SSUTA

member. Wis. Stat. § 77.522(1)(b), (1)(c) (2010). Consequently, none of these states

will assess duplicate sales tax, since they all define a sale as occurring at the point of

destination: one address located within one state. Finally, North Carolina and other

states provide an additional safeguard against multiple taxation by providing a credit

to sellers in the amount of any sales tax or use tax already paid on a particular

purchase. N.C.G.S. § 105-164.6(c)(2) (2009).

¶ 34 For these reasons, we hold that North Carolina’s assessment of sales tax on

the sales at issue is as externally consistent as it is internally consistent.

3. Nondiscrimination

¶ 35 The requirement that a tax imposed on interstate commerce be

nondiscriminatory serves to avoid the “multiplication of preferential trade areas

destructive of the very purpose of the Commerce Clause,” Dean Milk Co. v. City of

Madison, 340 U.S. 349, 356 (1951), by preventing states from “providing a direct

commercial advantage to local business,” Nw. States Portland Cement Co. v.

Minnesota, 358 U.S. 450, 458 (1959); see also Maryland v. Louisiana, 451 U.S. 725,

754 (1981). A law is therefore discriminatory if it “tax[es] a transaction or incident

more heavily when it crosses state lines than when it occurs entirely within the
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State.” Armco Inc. v. Hardesty, 467 U.S. 638, 642 (1984). On the other hand, a tax

structure that applies the same rate to in-state and out-of-state transactions and

provides a credit for those taxes paid in another state is nondiscriminatory as a

matter of law. See D.H. Holmes, 486 U.S. at 32 (“The Louisiana tax structure likewise

does not discriminate against interstate commerce. The use tax is designed to

compensate the State for revenue lost when residents purchase out of state goods for

use within the State. It is equal to the sales tax applicable to the same tangible

personal property purchased in-state . . . .”).

¶ 36 Here, North Carolina imposes the same sales tax on all purchases made for

delivery to North Carolina customers regardless of the origin of the goods or the

location of the seller. Further, the state maintains a complementary tax structure

that imposes sales tax and use tax at an equal rate and provides a credit against the

assessment of use tax for sales tax paid to another state. N.C.G.S. § 105-164.6(a),

(c)(2). As such, North Carolina does not impose any greater burden on the purchase

of goods from out of state than it does on transactions which are entirely intrastate.

Therefore, the tax is nondiscriminatory as a matter of law.

4. Fair Relation

¶ 37 The fourth and final prong of the Complete Auto test requires that the

assessment of tax be fairly related to services provided by the state to its taxpayers.

However, the state does not need to provide a “detailed accounting” of the services
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Opinion of the Court

provided to each taxpayer based on the taxpayer’s in-state activities; instead, the

state may simply demonstrate the provision of ordinary public services which are

advantageous to the execution of the taxpayer’s business within the state. In D.H.

Holmes, for instance, the Supreme Court found that:

Complete Auto requires that the tax be fairly related
to benefits provided by the State, but that condition is also
met here. Louisiana provides a number of services that
facilitate Holmes’ sale of merchandise within the State: It
provides fire and police protection for Holmes’ stores, runs
mass transit and maintains public roads which benefit
Holmes’ customers, and supplies a number of other civic
services from which Holmes profits. To be sure, many
others in the State benefit from the same services; but that
does not alter the fact that the use tax paid by Holmes, on
catalogs designed to increase sales, is related to the
advantages provided by the State which aid Holmes’
business.

D.H. Holmes, 486 U.S. at 32. Similarly, in Jefferson Lines, the high court found that:

The fair relation prong of Complete Auto requires no
detailed accounting of the services provided to the taxpayer
on account of the activity being taxed, nor, indeed, is a
State limited to offsetting the public costs created by the
taxed activity. If the event is taxable, the proceeds from the
tax may ordinarily be used for purposes unrelated to the
taxable event. Interstate commerce may thus be made to
pay its fair share of state expenses and “ ‘contribute to the
cost of providing all governmental services, including those
services from which it arguably receives no direct
‘benefit.’ ” The bus terminal may not catch fire during the
sale, and no robbery there may be foiled while the buyer is
getting his ticket, but police and fire protection, along with
the usual and usually forgotten advantages conferred by
the State’s maintenance of a civilized society, are
justifications enough for the imposition of a tax.
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Jefferson Lines, 514 U.S. at 199–200 (quoting Goldberg v. Sweet, 488 U.S. 252, 267

(1989)). As with Louisiana in D.H. Holmes and Oklahoma in Jefferson Lines, North

Carolina requires interstate taxpayers like petitioner to pay their “fair share” of those

ordinary public services that aid their in-state business activities, including police

and fire protection, mass transit and public roads, and those other “forgotten

advantages conferred by the State’s maintenance of a civilized society.” See Jefferson

Lines, 514 U.S. at 200. For this reason, we hold that the assessment of sales tax upon

the sales at issue in this case is fairly related to North Carolina’s provision of public

services to its taxpayers, including petitioner.

5. Due Process

¶ 38 Finally, we hold that petitioner has been afforded due process of law. The Due

Process Clause “limits States to imposing only taxes that ‘bea[r] fiscal relation to

protection, opportunities and benefits given by the state.’ ” N.C. Dep’t of Revenue v.

Kimberly Rice Kaestner 1992 Fam. Tr., 139 S. Ct. 2213, 2219 (2019) (alteration in

original) (quoting Wisconsin v. J.C. Penney Co., 311 U.S. 435, 444 (1940)). “The [U.S.

Supreme] Court applies a two-step analysis to decide if a state tax abides by the Due

Process Clause.” Id. at 2220. First, there must be “some definite link, some minimum

connection, between a state and the person, property or transaction it seeks to tax.”

Quill, 504 U.S. at 306 (quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344–45

(1954)). Second, “income attributed to the State for tax purposes must be rationally
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related to ‘values connected with the taxing State.’ ” Id. at 306 (quoting Moorman

Mfg. Co. v. Bair, 437 U.S. 267, 273 (1978)).

¶ 39 Petitioner and its sales have a definite connection to North Carolina. As in

Quill and Wayfair, petitioner in the present case is engaged in “continuous and

widespread solicitation of business” within North Carolina, amounting to millions of

dollars’ worth of sales for delivery into the state. See Quill, 504 U.S. at 308. This level

of activity suffices to give petitioner “fair warning” that its activities may be subject

to the state’s jurisdiction. See id. Further, this activity is rationally related to values

connected with North Carolina since, as discussed above, the sales at issue can be

properly traced to the state through the application of North Carolina’s sourcing

statute.

¶ 40 Additionally, the Supreme Court has held that the “Complete Auto test, while

responsive to Commerce Clause dictates, encompasses as well . . . due process

requirement[s].” Trinova Corp. v. Mich. Dep’t of Treasury, 498 U.S. 358, 373 (1991).

As such, the high court acknowledged the possibility that “every tax that passes

contemporary Commerce Clause analysis [may also be] valid under the Due Process

Clause,” even though the converse is not necessarily true. Quill, 504 U.S. at 313 n.7.

Although we do not presume to conclusively decide that this will hold true in all

circumstances, nonetheless the above analysis demonstrating the satisfaction of

Complete Auto’s four factors provides significant additional support for our conclusion
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in the case at bar that North Carolina’s assessment of the sales tax at issue comports

with the Due Process Clause. We therefore hold that North Carolina’s imposition of

sales tax on the sales involved in this case does not offend the Due Process Clause of

the Constitution of the United States.

III. Conclusion

¶ 41 Based upon the reasons discussed above, we hold that the formalism doctrine

established in Dilworth has not survived the subsequent decisions of the Supreme

Court of the United States in Complete Auto and Wayfair so as to render the sales tax

regime of North Carolina violative of the Commerce Clause and the Due Process

Clause of the Constitution of the United States. Further, North Carolina’s imposition

of sales tax on the transactions at issue in this case is constitutional under the

relevant test provided by Complete Auto. Accordingly, we reverse the Business

Court’s order and opinion and hold in favor of respondent.

REVERSED.
 Justice BERGER dissenting.

¶ 42 As the trial court correctly noted, resolution of this case is determined by

response to one question: “is the holding in Dilworth the controlling law.” In

answering in the affirmative, the trial court invalidated assessment of the sales tax

against Quad Graphics by the North Carolina Department of Revenue because the

Supreme Court of the United States has not overruled McLeod v. J.E. Dilworth Co.,

322 U.S. 327, 64 S. Ct. 1023, 88 L. Ed. 1304 (1944). The trial court’s decision should be

affirmed because this Court is not permitted to disregard the Supreme Court’s

interpretation of the Commerce Clause and the federal Constitution. See Rodriguez

de Quijas v. Shearson/Am. Express, Inc., 490 U.S. 477, 484, 109 S. Ct. 1917, 1921–

22, 104 L. Ed. 2d 526 (1989) (holding that when United States Supreme Court

precedent “has direct application in a case, yet appears to rest on reasons rejected in

some other line of decisions, [a lower court] should follow the case which directly

controls, leaving to this Court the prerogative of overruling its own decisions”).

Therefore, I respectfully dissent.

¶ 43 The transaction at issue in the present case is strikingly similar to the one

addressed in Dilworth. There, Arkansas sought to impose a sales tax upon Tennessee

companies for the sale of machinery and mill supplies out of offices located in

Memphis, Tennessee, which utilized a Tennessee salesman to solicit sales in

Arkansas. Dilworth, 322 U.S. at 328, 64 S. Ct. at 1024. Orders for goods were
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required to be approved by the Memphis office and would come to Tennessee by mail

or phone. Id. at 328, 64 S. Ct. at 1024. Further, title of the goods passed upon delivery

to the carrier in Tennessee, and payment of the sales price was not made in Arkansas.

Id. at 328, 64 S. Ct. at 1024–25. Simply, Dilworth involved “sales made by Tennessee

vendors that are consummated in Tennessee for the delivery of goods in Arkansas.”

Id. at 328, 64 S. Ct. at 1025. The U.S. Supreme Court observed that it “would have

to destroy both business and legal notions to deny that under these circumstances

the sale—the transfer of ownership—was made in Tennessee.” Id. at 330, 64 S. Ct.

at 1025. Thus, the Supreme Court held that an Arkansas sales tax on transactions

completed by Tennessee companies and consummated in Tennessee violated the

Commerce Clause of the U.S. Constitution. Id. at 329–30, 64 S. Ct. at 1025.

¶ 44 Here, Quad Graphics, received orders and produced printed materials outside

of the State of North Carolina. Once the printed materials were produced, they were

delivered to the United States Postal Service or another common carrier—all outside

of North Carolina. Then, the common carrier would deliver the materials to

customers or direct mail recipients within North Carolina. In accordance with the

contracts between the parties, title to the printed material and risk of loss passed

when the materials were provided to the common carrier for shipping. As in in

Dilworth, the sale—“transfer of ownership”—was completed outside of North

Carolina such that petitioner was “through selling” before the materials reached the
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state. See Dilworth, 322 U.S. at 330, 64 S. Ct. at 1025. Quad Graphics later hired a

North Carolina-based sales representative to solicit orders in North Carolina;

however, all orders had to be approved and accepted through the company’s

Wisconsin headquarters.

¶ 45 In 2011, the North Carolina Department of Revenue attempted to assess a

sales tax against Quad Graphics for transactions which occurred from 2007 through

2011, even though transfer of title and possession of the printed material to its

customers occurred outside of North Carolina. Quad Graphics contends that under

these circumstances, and pursuant to Dilworth, imposition of the sales tax is suspect

under the Commerce Clause of the federal Constitution because the sale did not occur

in North Carolina.

¶ 46 Citing to Dilworth, the Supreme Court of the United States has stated that

where a corporation chooses to stay at home in all respects
except to send abroad advertising or drummers to solicit
orders which are sent directly to the home office for
acceptance, filling, and delivery back to the buyer, it is
obvious that the State of the buyer has no local grip on the
seller. Unless some local incident occurs sufficient to bring
the transaction within its taxing power, the vendor is not
taxable.

Norton Co. v. Dep’t of Revenue of State of Ill., 340 U.S. 534, 537, 71 S. Ct. 377, 380, 95

L. Ed. 517 (1951).

¶ 47 To determine whether the tax at issue comports with the Commerce Clause,

we must examine whether the tax is “applied to an activity with a substantial nexus
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with the taxing State, is fairly apportioned, does not discriminate against interstate

commerce, and is fairly related to services provided by the State.” Complete Auto

Transit, Inc. v. Brady, 430 U.S 274, 279, 97 S. Ct. 1076, 1079, 51 L. Ed. 2d 326 (1977)

(emphasis added). Thus, one focus of the first prong in Complete Auto test is the link

between the transaction and the state, which some legal observers have termed a

transactional nexus. See Hayes R. Holderness, Navigating 21st Century Tax

Jurisdiction, 79 Md. L. Rev. 1, 9 (2019).

¶ 48 Another focus of the first prong is what has come to be known as personal

nexus as discussed in Wayfair. Personal nexus is the link between the taxpayer and

the state. Id. The majority devotes much of its analysis to this issue. Notably, the

Supreme Court in Wayfair only addressed personal nexus. The Court did not address

the transactional nexus—leaving that aspect of Dilworth undisturbed. See South

Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 201 L. Ed. 2d 403 (2018) (discussing only the

business’s connection with the taxing state—personal nexus—rather than the

transaction’s connection to the taxing state—transactional nexus). The Court left

open the possibility that the tax at issue in Wayfair could have been subject to other

Commerce Clause challenges which were not reached in the opinion. Id. at 2099–

2100. Therefore, Wayfair speaks only to the personal nexus aspect of the substantial

nexus test and does not apply to the issue in this case—an issue of transactional

nexus.
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¶ 49 It should be noted that just because the Department could not levy a sales tax

on the transaction at issue, it does not follow that the State was without options. The

Department could have applied a use tax without running afoul of the Commerce

Clause. The Court in Dilworth addressed whether Arkansas could have levied a use

tax rather than a sales tax and determined that such a tax was not chosen by

Arkansas and was therefore not before the Court. Dilworth, 322 U.S. at 330, 64 S.

Ct. at 1025. But the Court went on to note that there was a real difference in the

transactions permitting levy of sales or use taxes:

A sales tax and a use tax in many instances may bring
about the same result. But they are different in conception,
are assessments upon different transactions, and in the
interlacings of the two legislative authorities within our
federation may have to justify themselves on different
constitutional grounds. 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
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 the goods sold, involves an assumption of
power by a State which the Commerce Clause was meant
to end.

Id. at 330, 64 S. Ct. at 1025–26.

¶ 50 The Court further concluded that “[t]hough sales and use taxes may secure the

same revenues and serve complementary purposes, they are . . . taxes on different

transactions and for different opportunities afforded by a State.” Id. at 331, 64 S. Ct.

at 1026. A use tax would likely pose no constitutional issue if it had been chosen by
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the Department of Revenue. See Gen. Trading Co. v. State Tax Comm’n of Iowa, 322

U.S. 335, 337–38, 64 S. Ct. 1028, 1029, 88 L. Ed. 1309 (1944).

¶ 51 While the Department and the majority express concern that Quad Graphics

may not be paying its fair share in state taxes, any loss of revenue here is a direct

result of the Department’s decision to levy a sales tax. While a taxpayer certainly

has an obligation to pay taxes owed, it is not a charity, and the government is required

to assess the appropriate tax. While some may deem this a “formalistic” requirement,

such a requirement touches on fundamental fairness for taxpayers.

¶ 52 In this case, the Department of Revenue chose to levy a sales tax on a

transaction which concluded outside of the state. Under Dilworth and the facts of

this case, that violates the Commerce Clause. Had the Department chosen a use tax,

the result here might be different. Contrary to the facts in Wayfair, it is the

Department’s choice of a tax, and not Quad Graphics’s effort to avoid taxes, that

brings this constitutional quandary before this Court.

¶ 53 Because Dilworth applies in this case and defines the location of a sale based

upon “practical notions of what constitutes a sale,” Dilworth, 322 U.S. at 329, 64 S.

Ct. at 1025, and the transaction here occurred outside of North Carolina, I would

conclude that the tax violates the Commerce Clause as applied to Quad Graphics and

affirm the Business Court’s order.