Missouri's local use taxes do not violate the Commerce Clause

St. Louis Daily Record & St. Louis Countian, Jun 23, 2005 by Donna Walter

Missouri's local use tax laws do not violate the Commerce Clause of the U.S. Constitution, the Missouri Supreme Court said Tuesday.

The court came to this conclusion by examining the purpose of the law and how the law changed since 1994 when the U.S. Supreme Court said in Associated Industries of Missouri vs. Lohman that the law impermissibly burdened interstate commerce.

The 1992 version of the law imposed a 1.5 percent use tax on all items bought outside of Missouri and delivered inside the state. So in cities that had no sales tax, or that had a minimal sales tax, a resident who bought an item from an out-of-state vendor paid more in use tax than another resident who bought the same item in the city paid in sales tax. As such, the law violated the Constitution, said the nation's high court in Associated Industries, because [w]here the use tax exceeds the sales tax, the discrepancy imposes a discriminatory burden on interstate commerce.

In 1996, the Missouri Supreme Court decided on remand that the unconstitutional provisions could not be severed from the law and declared the entire law unconstitutional. Later that year, the Missouri General Assembly repealed the old law and replaced it with the version at issue in the case at hand, Kirkwood Glass Co. vs. Director of Revenue.

The current use tax laws, found in Sections 144.757 through 144.761, provide that a taxing jurisdiction's use tax may not be larger than its sales tax. Section 144.757 states in part: Any county or municipality . . . may, by a majority vote of its governing body, impose a local use tax if a local sales tax is imposed as defined in section 32.085, RSMo, at a rate equal to the rate of the local sales tax in effect in such county or municipality.

This means that no purchaser is required to pay a higher tax on items shipped to that jurisdiction than they would if they purchased the item in-state within the same locality, wrote Judge Laura Denvir Stith for the unanimous court. Out-of-state sellers are also assured that purchasers will not pay a higher tax than if the item were purchased in-state within the same locality. In fact, since several jurisdictions within Missouri impose no local use taxes at all, many out-of-state purchases are taxed at a lower rate than were the item purchased in-state in the same jurisdiction to which the out-of- state item would be delivered.

Kirkwood Glass argued the use tax laws still impose an impermissible burden on interstate commerce due to the different amounts of sales tax imposed in Missouri's counties.

The inequality exists between the taxing jurisdictions, argued lawyers James C. Owen and Katherine S. Walsh in their brief for the company. While it may be true that within each individual taxing jurisdiction local use tax does not exceed local sales tax, the local use tax still does not provide for the equality guaranteed by the Commerce Clause. Any other interpretation would mean that the Commerce Clause of the United States Constitution has fallen into control of local municipalities.

But the state Supreme Court rejected this argument. Instead, it reasoned, to determine whether a use tax is compensatory - which is the only reason such a tax may be imposed - a party only needs to look at whether a taxing jurisdiction's use tax is higher than, lower than or equal to the sales tax in the same jurisdiction. If the use tax is equal to or lower than the sales tax, it is compensatory and therefore constitutional.

Kirkwood Glass sought a refund of $6,371.63, which it argued was the overpayment of local use taxes collected between September 1999 and June 2002.

The issue drew the interest of the Missouri Municipal League, the Missouri Association of Counties, the St. Louis County Municipal League, the city of Kansas City and the city of St. Louis. These groups filed a joint brief in support of the state's position.

The Missouri Municipal League financial report for the fiscal year that ended June 30, 2003, shows that Missouri cities collected more than $55 million in local use tax. A financial report from the Missouri Association of Counties for the same fiscal year shows $11.9 million in local use tax collected by Missouri counties.

In addition, the city of St. Louis expects to collect roughly $25 million in local use tax during the current fiscal year, and at the same time, Kansas City expects to collect more than $30 million.

If the narrow and strained interpretation of the federal commerce clause . . . urged by Kirkwood Glass Co. is accepted, Missouri's cities and counties whose citizens adopted the local use tax will be confronted with the loss of revenue exceeding tens of millions of dollars annually, argued the amici curiae in their brief.

The amici curiae were represented by Galen P. Beaufort, city attorney for Kansas City, and William D. Geary, assistant city attorney for Kansas City, on behalf of the Missouri Municipal League, the St. Louis County Municipal League and the city of Kansas City; Ivan L. Schraeder of St. Louis on behalf of the Missouri Association of Counties; and Patricia A. Hageman, city counselor for St. Louis, and Edward J. Hanlon, deputy city counselor for St. Louis, on behalf of the city of St. Louis.