New High Court Term Could Decide Cases Affecting Billions Of Dollars in Taxes

WASHINGTON - The new Supreme Court term could produce decisions affecting billions of dollars in state taxes, veteran high court watchers said yesterday.

One issue before the court is whether the justices are willing to overturn a 1967 precedent barring states from imposing tax collection responsibilities on out-of-state mail-order firms. Whatever the court decides, its action is expected to have a big impact nationally.

"The term is likely to produce some interesting tax decisions, either by decision on the merits or through denial" of review, said Timothy B. Dyk, a partner with Jones, Day, Reavis & Pogue. "One of the most important [issues the court is being asked to decide] involves the Supreme Court decision in National Bellas Hess Inc. v. Department of Revenue," he said.

Mr. Dyk, speaking at a briefing session sponsored by the U.S. Chamber of Commerce's litigation center, noted that the court declined to review this area during its last term in a Connecticut case. That refusal left intact a Connecticut Supreme Court decision barring the state from imposing a tax-collection responsibility. But Mr. Dyk said a similar dispute, Quill v. North Dakota, is now before the justices.

The last time the Supreme Court visited mail-order taxation was in its 1967 Bellas Hess ruling, which held that Illinois's sales and use tax was unconstitutional because mail-order firms lacked a sufficient connection with, and derived insufficient benefit from, the state to warrant tax collection responsibility. The court also said such requirements violate the constitution's commerce clause because they place an undue burden on interstate commerce.

Since that time, the mail-order business has grown to a $150-billion-a-year industry - an attractive target for cash-starved municipalities. But efforts to impose tax-collection responsibilities have drawn divergent results.

The Connecticut Supreme Court, citing the Bellas Hess precedent, rejected that state's attempt to force mail-order purveyors to collect taxes on sales to residents. But the North Dakota Supreme Court ruled in the Quill case that the "economic, social, and commercial landscape upon which Bellas Hess was premised no longer exists, save perhaps in the fertile imagination of attorneys representing mail-order interests."

Mr. Dyk said Pennsylvania also is seeking Supreme Court review of the issue and that the Tennessee high court is scheduled to hear arguments in a similar case in early October.

Though Mr. Dyk said it is unclear whether the court will decide to hear arguments in the mail-order dispute, he said it is likely the justices will agree once more to examine the constitutionality of California's property tax system. The court agreed to review the tax in June, but R.W. Macy & Co., a department store operator that challenged the law, decided to drop the case.

Mr. Dyk said that because the court already had agreed to review the matter, it likely will do so again in another case. And if the court upholds California's system - under which new businesses are assessed taxes at current property values while more established firms are assessed at older and presumably higher rates - other states may be expected to follow.

"Anything that has a positive economic impact and is politically popular will be widely imitated," Mr. Dyk said. "If a state can stick it to out-of-state businesses, there aren't many politicians who can resist that."

Philip A. Lacovara, managing director and general counsel of Morgan Stanley & Co., said such levies are the "local equivalent of Japan bashing - out-of-state business bashing."

Mr. Lacovara said the court also will examine two environmental cases testing the bounds of the federal Clean Water Act. In the disputes, Arkansas v. Oklahoma and Environmental Protection Agency v. Oklahoma, the court is being asked to decide whether federal or state clean water standards apply when the EPA issues permits for sewage treatment facilities.

Under a ruling by the U.S. Court of Appeals for the 10th Circuit, strict standards in one state could block the EPA from granting a permit to an upstream treatment facility located in another state. Mr. Lacovara said $10 billion of infrastructure financing nationally could be put on hold if the 10th Circuit's ruling is allowed to stand.

Both Mr. Dyk and Mr. Lacovara predicted that Judge Clarence Thomas, if confirmed to a seat on the Supreme Court, could have a major influence on the court's work. Mr. Lacovara said Judge Thomas, who currently sits on the U.S. Court of Appeals for the District of Columbia Circuit, appears in his opinions to be inclined toward "the free market school," which would provide businesses an important voice on the court.

Mr. Dyk said the court "is not as central to business issues as it once was," but added. "The fact is that we simply do not know where Judge Thomas stands on a host of issues. Nor, I think, does he."

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