"…the case focuses on the discrimination against interstate commerce which may occur if a Missouri purchaser makes an out-of-state purchase taxed at a higher rate than a purchase from in-state…" "the courts will be asked to decide if Missouri's new local use tax…violates the U.S. Constitution…"
(Tax Talk Article in The Asset, April, 30, 1992, "Missouri's new local use tax faces constitutional challenge")
These words are from an article I wrote for the MSCPA Asset published almost thirteen years ago. A lot has changed in those thirteen years for tax practitioners - Sarbanes Oxley, more powerful return preparation software, and the use of the Internet as a tax research/resource tool, but one thing is constant - we're still challenging the use tax!
The original challenge described in my April 1992 article was to Missouri's uniform rate local use tax. That tax, implemented in 1992, levied a uniform 1.5% local use tax in addition to the 4.225% state use tax. The uniform rate local use tax was levied on all transactions subject to the state use tax, and was distributed to all Missouri cities and counties based upon their proportionate share of local sales tax collections.
While that tax originally passed muster at the Missouri Supreme Court, in Associated Industries of Missouri v. Lohman 114 S. Ct. 1815,1824 (1994), the U.S. Supreme Court determined the Missouri local use tax violated the Commerce Clause of the U.S. Constitution in those localities where the local use tax exceeded the local sales tax. The court found the uniform local use tax discriminated against interstate commerce in cities or counties with a low local sales tax rate, as interstate purchases were taxed more heavily than intrastate purchases. On remand to the Missouri Supreme Court, the state court threw out the entire local use tax, and the Missouri Department of Revenue ended up refunding millions to Missouri taxpayers.
After the uniform rate local use tax statute was declared unconstitutional, the Missouri legislature enacted a new local use tax law in June 2000 (Section 144.757 RSMo). This new use tax statute allows cities and counties to impose a local use tax rate equal to or less than the local sales tax rate. This is the local use tax being challenged in the current legal action.
The following example illustrates the potential discrimination challenged in the current case:
Purchaser ABC in St. Louis City orders a widget from a retailer in Chicago. The widget is shipped to ABC in St. Louis. ABC's purchase is subject to a 6.950% total use tax - 4.225% state use tax and 2.725% city of St. Louis use tax. Alternatively, Purchaser ABC in St. Louis orders the same widget from a retailer in Blue Summit, Missouri. The widget is shipped by the Blue Summit retailer to ABC in St. Louis. The sale is subject to a 4.725% sales tax - 4.225% state sales tax and .5% Jackson County sales tax.
In this example, the interstate transaction is subject to a higher tax than the intrastate transaction. The difference occurs because the two taxes - the sales tax and the use tax - are sitused differently. The in-state sales tax transaction is sitused at the retailer's location, while the interstate use tax transaction is sitused at the purchaser's location.
The lead case, Kirkwood Glass Co. Inc. vs. Director of Revenue, (AHC No. 03-1359 RS) has recently been appealed to the Missouri Supreme Court. It may take a year or more before the court rules on the case, and that decision could be appealed to the U.S. Supreme Court, similar to the Associated Industries case. So we should not expect a resolution anytime soon. What should taxpayers be doing now? First, determine if your purchasing locations are in Missouri taxing jurisdictions that have imposed a local use tax, and if so, the amount of local use tax being paid on interstate purchases. Remember that out-of-Missouri vendors making taxable sales to Missouri purchasers are required to collect Missouri state and local use taxes. Several of the clients I have worked with on this issue remit far more use tax to out-of-state suppliers than they self accrue and remit on their Missouri use tax returns. Second, if you have significant taxable purchases that are subject to a local use tax, you may want to consider the procedural alternatives available to protect your rights to a refund or credit should the courts declare the local use tax unconstitutional. No one knows if the courts will uphold Missouri's second shot at a local use tax, or rule it unconstitutional like the first attempt. But the statute of limitations for filing protective refund claims closes monthly. Affected taxpayers need to make sure they are taking steps to protect their rights in the event the courts again rule Missouri's local use tax unconstitutional.
- Transaction Tax