WASHINGTON -- The Supreme Court agreed yesterday to review an Oklahoma sales tax levied on bus and other transportation tickets sold within the state for intra- and interstate trips.
The case, Oklahoma Tax Commission v. Jefferson Lines In., involves a January 1994 decision by the U.S. Court of Appeals for the Eight Circuit, which struck down the 1988 sales tax because it said it violates the Constitution's commerce clause. The clause prohibits states from erecting barriers to interstate commerce.
Oklahoma imposes the levy on sales of transportation by common carriers such as bus companies. Ticket buyers pay the levy, which is collected by bus lines and other transportation vendors for remittance to the state.
Jefferson Bus Lines provides intra-and interstate bus service and sells tickets in Oklahoma at various locations in two categories. The first category applies to tickets for intrastate trips, while the second applies to tickets for interstate travel.
Jefferson collects that state sales tax only on the intrastate class of tickets. While it reports total sales made in Oklahoma, the company deducts sales for interstate transportation on its sales reports and does not collect the tax for such sales.
The Oklahoma Tax Commission disallowed the deduction and called for payment of the sales tax due on the deducted sales for two audit periods, September and October 1989, and January and February 1990.
At the end of October 1989, Jefferson filed for bankruptcy, and the state made its sales tax claims in subsequent bankruptcy proceedings. The U.S. bankruptcy court disallowed the state's claims on grounds that it violated the commerce clause in a decision ultimately affirmed by the appeals court.
The state commission sought Supreme Court review because the appeals court relied on an income tax case, rather than precedents involving sales taxes, to reach its decision.
Unlike a gross income tax, Oklahoma's sales tax "is levied on the consumer, and is imposed solely with respect to that consumer's activity within the state," Oklahoma told the high court. The sale itself, and not the bus route, creates a taxable transaction, it said.
To determine if a state tax violates the commerce clause, the high court uses a four-prong test that includes the criterion of fair apportionment, Oklahoma noted. In turn, to determine whether a state tax is fairly apportioned, the high court looks at both the "internal and external consistency" of the levy.
To be internally consistent, a state tax must be structured so that if it were imposed by every state, no multiple taxation would occur. To be externally consistent, the tax must apply only to the part of revenues that reasonably reflects the in-state component of the taxed activity, the state said.
The lower courts found that tax on bus tickets to be internally consistent, but they said it failed the external consistency test because it sought to tax gross receipts of sales of interstate transportation. This would allow the state to receive tax revenues stemming from out-of-state activity when a ticket covers interstate transportation, the courts found.
Oklahoma disagreed, saying the levy applies to a completed sale before any transportation occurs. "A bus ticket need not be used for its sale to be taxable," the state said.
But Jefferson said that the Oklahoma law, upheld, poses a risk of multiple taxation on interstate bus tickets. There would be nothing to prevent other states from taxing the entire gross receipt of the same ticket or part of the ticket if miles traveled under it are within their borders, it said.
"In these economic times, it is very likely that states other than Oklahoma in which Jefferson travelled would be in search of revenue producing taxes," the company told the court.
In other action yesterday, the high court let stand lower court rulings with implications for state and local finance.
The court declined to review a January 1994 ruling by the U.S. Court of Appeals for the Seventh Circuit holding that Nancy S. Marchiando, the bankrupt owner of a grocery store, was not a trustee of the Illinois Department of the Lottery with fiduciary duties. The appeals court held that Marchiando was merely an agent of the department with power to buy and resell state lottery products.
When Marchiando filed for bankruptcy, she failed to remit proceeds from lottery sales to the state. In Illinois Department of the Lottery v. Marchiando, the state argued unsuccessfully that Marchiando became chargeable as a state trustee for the proceeds and that her debt could not be discharged as a result of bankruptcy. Marchiando had failed to segregate lottery ticket proceeds from other funds, and when her business failed, she spent the proceeds before filing for bankruptcy, the state said.
The appeals court said the state lottery law created a commercial relationship with Marchiando, rather than a fiduciary one, and her debt can be discharged.
In another case, the Supreme Court let stand a December 1993 ruling by the U.S. Court of Appeals for the Tenth Circuit, which extended sovereign immunity from an Oklahoma statute of limitations to the municipality of Cyril. In Mobil Oil Corp. v. Cyril, Okla., the appeals court said Cyril was immune from a two-year state statute of limitations in seeking to recover money damages for contamination of area groundwater by Mobil's oil and gas operations.
Mobil said that under the Tenth Circuit ruling, "not only are untold ancient municipal claims raised from the dead, but henceforth such claims are given eternal life, affecting not only citizens of Oklahoma, but those of other states and nations conducting business in Oklahoma."