WASHINGTON - The Supreme Court unanimously ruled yesterday that Missouri's tax on the use of out-of-state products is unconstitutional, but only to the extent that the use levy exceeds local sales taxes.
The case, Associated Industries of Missouri v. Lohman, Director of Revenue of Missouri, has been closely watched by state and local interests because it raised questions about preserving state and local autonomy in setting tax rates, said Richard Ruda, chief counsel for the State and Local Legal Center in Washington.
The ruling is a victory for state and local governments because it generally upholds combined sales and use tax schemes, which are imposed by 28 states, Ruda said. Rather than strike down the overall Missouri statutory scheme, the court told the state to fix the few instances in which the use tax illegally exceeds the local sales tax, he said.
"Local sales tax are an increasingly important source of revenue for cities and countries," with local governments in 31 states and the District of Columbia collecting more than $22 billion of local sales tax in fiscal 1991, said Ruda in a brief filed on behalf of the National Conference of State Legislatures, National League of Cities, and other groups.
Writing for the court, Justice Clarence Thomas said Missouri's scheme discriminates against interstate commerce in violation of the Constitution's commerce clause, which prohibits states from erecting barriers to the free flow of trade across state lines.
However, "we impose no new restrictions on the state's power to delegate its taxing authority as it sees fit," the court said. "What a state may not do is appeal to decentralized decisionmaking to augment its powers; it may not grant its political subdivisions a power to discriminate against interstate commerce that the state lacked in the first place."
The court said states remain "free to authorize political subdivision to impose sales or use taxes, as long as discriminatory treatment of interstate commerce does not result. Other states apparently have had little difficulty in combining some local autonomy with the commands of the commerce clause."
Missouri imposes two unchallenged statewide taxes, a 4.225% sales tax on goods purchased in the state, and an equivalent 4.225 use tax on out-of-state goods purchased within the state. However, the state also imposes an additional use tax of 1.5% that is not paired with an equivalent sales tax. Missouri instead authorizes - but does not require - local governments to impose an additional local sales tax.
"Over 1,000 localities [in Missouri] have used that authority to enact sales tax ranging from 0.5% to 3.5%, while at least one county has no local sales tax at all," the court said. Discrepancies between the additional sales and use taxes resulted, with the use tax higher than the sales tax in some localities and lower in others.
Associated Industries of Missouri, a trade association representing businesses that sell to Missouri customers, and Alumax Foil Inc., a Missouri manufacturer that pays use taxes, sued the state for violating the commerce clause. But the Supreme Court of Missouri upheld the tax scheme under a "compensatory tax" doctrine that allows states to impose equivalent tax burdens on interstate and local commerce.
The state high court said it considered the "overall effect" of the scheme, rather than compare the sales and use taxes locality by locality. The state court concluded that the local sales tax, in the aggregate, exceeded the use tax and therefore did not discriminate against interstate commerce.
The high court yesterday said this theory, as applied under the compensatory tax doctrine, "assumes that discrimination in some parts of a state tax system may be permissible under the commerce clause."
But "actual discrimination, wherever it is found, is impermissible, and the magnitude and scope of the discrimination have no bearing on the determinative question whether discrimination has occurred," the court said.
The court left to Missouri the question how to provide relief to those harmed by the unconstitutionally imposed tax.
In other action yesterday, the high court let stand a Georgia law that entitles the state to take 75% of a punitive damages award in product liability cases. The case, Moseley v. Georgia, arose from claims by Thomas and Elaine Moseley against General Motors Corp. in connection with an accident involving a General Motors vehicle in which their son was killed.
In February 1993, a jury awarded $101 million in punitive damages against General Motors. Under what is known as a "compulsory apportionment" law, Georgia asserted title to 75% of the award.
The trial court upheld the verdict but declared the apportionment law unconstitutional under the takings clause of the Fifth Amendment of the Constitution, which provides that private property may not be "taken" without just compensation. The Supreme Court of Georgia reversed and said the law was constitutional because the award does not become private property. Nine states have comparative apportionment laws, Moseley attorneys said.