High Court Should Lift Tax Ban on Export Purchases: Professors

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By Ryan Prete

A coalition of tax law professors is calling on the U.S. Supreme Court to undo a half-century-old precedent that prohibits states from imposing sales tax on exported international items.

Nineteen law professors filed a friend-of-the-court brief urging the high court to take up Loudoun County, Va. v. Dulles Duty Free LLC, which concerns a local government’s ability to tax international sales in duty-free shops at Virginia’s Dulles International Airport. The controlling law in this area was laid down by the Supreme Court’s 1946 decision in Richfield Oil Corp. v. State Bd. of Equalization.

Richard D. Pomp, a professor at the University of Connecticut School of Law and a member of the group behind the Jan. 25 filing, told Bloomberg Tax he is optimistic the high court will take up the case and revisit the issue.

“Our brief makes a compelling case,” Pomp said. “With the proliferation of duty-free stores, there is a lot of money on the table for states.”

The precedent laid down by Richfield, including the “continuous route or journey” test—which prohibits a state from levying a sales tax on goods that have begun such a journey to a foreign destination—is very hard to administer and has created an “aura of uncertainty,” Pomp said.

Richfield also “needlessly infringes upon the fiscal autonomy of States,” according to the brief.

In August 2017, the Supreme Court of Virginia reversed a lower court ruling that Dulles Duty Free LLC must collect Loudoun County’s Business, Professional, and Occupational License tax on the gross receipts of its sales to international travelers. The Circuit Court of Loudoun County had found no violation of the U.S. Constitution’s Import-Export Clause.

Duty Free, which operates several stores in Dulles Airport, didn’t challenge the imposition of the tax on its domestic sales, according to the court opinion. However, it challenged the constitutionality of the imposition of the tax on transactions with international travelers.

‘Cleaning Up Archaic Decisions’

Pomp said he believed the U.S. Supreme Court has the bandwidth to accept another state tax case. It already has agreed to revisit its 1992 decision in Quill Corp. v. North Dakota, which limits states’ taxing authority over remote retailers.

The Supreme Court agreed in early January to review the state of South Dakota’s contention that Quill is obsolete in the e-commerce era and should be overturned. The case arises from the South Dakota Supreme Court’s decision invalidating the state’s digital sales tax statute S.B. 106 (S.D. Codified Laws Chapter 10-64) as unconstitutional under Quill.

“We are in an era where the court is cleaning up old, archaic decisions,” said Pomp, a member of Bloomberg BNA’s State Tax Advisory Board.

“The decision to grant cert in the South Dakota v. Wayfair case may have signaled a new period for the Court in terms of state tax cases,” Pomp said. “And if the court were to overturn Quill, it would be a strong example of cleaning up an outmoded doctrine.”

Exports on Lumber

Bruce Ely, a Birmingham, Ala.-based tax attorney with Bradley Arant Boult Cummings LLP, told Bloomberg Tax in an email that the professors are correct to urge a revisit of Richfield.

“There indeed is a split of authority over whether Atlantic Richfield remains good law, and the Dulles Duty Free case would seem to be a good vehicle for the Court to resolve the split,” said Ely, a member of Bloomberg BNA’s State Tax Advisory Board. “And frankly, applying a sales tax to goods purchased at a duty-free store in a U.S. airport, where the transaction closed when the goods were purchased at the store, doesn’t bother me from a policy perspective.”

Ely referenced a recent case in Alabama, where a taxpayer argued Richfield was still good law—and that decisions in Michelin Tire Corporation v. Wages and Department of Revenue v. Stevedoring Assn., allowing taxation on imports and interstate commerce, respectively, weren’t applicable when it came to a state municipality imposing its business license tax on gross receipts from lumber sales in international commerce.

The Alabama Court of Civil Appeals ruled that the export tax was indeed constitutional.

“The court focused entirely on the Import-Export Clause, as urged by the taxpayer,” Ely said. “But what neither the lower court nor the appellate court addressed was the applicability of either the Commerce Clause or the Foreign Commerce Clause, especially the discrimination and fair apportionment prongs. Unfortunately, the taxpayer didn’t appeal to the Alabama Supreme Court so those arguments were never raised.”

To contact the reporter on this story: Ryan Prete in Washington at rprete@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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