Opinion ID: 1753306
Heading Depth: 1
Heading Rank: 5

Heading: Was the Chancellor Correct in Finding the Alabama Sales Tax to be an Improper Burden on Interstate Commerce?

Text: Eschewing prior precedent, the United States Supreme Court in Complete Auto Transit Co. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977), held that commerce clause analysis should be based on the practical effects of a challenged state tax. The Court stated that for a tax to withstand commerce clause challenge it must satisfy the following test: (1) the tax must be applied to an activity with a substantial nexus with the taxing state; (2) it must be fairly apportioned; (3) it must not discriminate against interstate commerce, and (4) it must be fairly related to the services provided by the state. Id. at 279, 97 S.Ct. at 1079, 51 L.Ed.2d at 331. This Court recently applied the Complete Auto Transit test in Marx v. Truck Renting and Leasing Association, 520 So.2d 1333 (Miss. 1987). In TRLA this Court upheld a chancellor's determination that the state gross income tax failed to meet the four-prong test as applied to truck leasing companies which only routed trucks through the state. In TRLA this Court held the tax failed the first prong: the companies' businesses did not have a substantial connection to the taxing state. TRLA, at 1342-1343. We think the Alabama tax also fails to meet the substantial nexus prong. The record is clear that the fuel was produced in Mississippi  not Alabama, the sale was initially negotiated outside Alabama, and under Alabama law the sale should have been considered a non-taxable event. Chevron merely stored the fuel in Alabama, apparently for a period not exceeding two weeks. As noted under Part II, Alabama does not consider delivery to a common carrier to be a taxable event. Under these facts even Alabama acknowledges the mere changing of possession in Alabama does not create a substantial nexus. The first prong of the Complete Auto Transit test does not appear to be met. See TRLA, at 1342-1343. Weeks cites Franklin Fibre-Lamitex v. Director of Revenue, 505 A.2d 1296 (Del. Super. Ct. 1985), aff'd, 511 A.2d 385 (1986), as supporting its argument that the Complete Auto Transit test is met. In Franklin the Delaware court dealt with a state tax on gross receipts including sales accomplished by shipment from a location in Delaware through common carriers to out-of-state buyers. The court interpreted the gross receipts tax to apply to goods, the passage of title to which occurred within the state. Id. at 1298-99. The court there interpreted the passage of title to be determined by reference to the local version of the Uniform Commercial Code, in the absence of a more specific statutory directive, which provided that title to goods passed where shipped. Id. The Delaware court found the tax met the Complete Auto Transit test. The Franklin Fibre-Lamitex case is distinguishable since here Alabama did express its intent, through approval of the Department of Revenue regulations, that this transaction was not to be considered closed within Alabama. Also, unlike the Delaware case, here the sale originated outside the taxing state covering goods not originally produced within the taxing state. The Court in Franklin Fibre-Lamitex faced facts establishing a much greater nexus with Delaware compared with Alabama's nexus with Weeks and Chevron. The failure to meet one prong renders the tax invalid, TRLA, at 1343, but Alabama's tax may fail the third prong, as well. For example, if the sale of fuel to Weeks had been negotiated in Mississippi, for fuel produced in Mississippi, and if, as testimony established, Mississippi defines a closed transaction as not including placing property in the hands of common carrier, Mississippi might persuasively argue that delivery in Mississippi closes the transaction here, and, thus, subjects this transaction to Mississippi sales tax. If Alabama held that the same transaction was closed in that state because it was where the common carrier took possession, then conceivably both Mississippi and Alabama could tax the same sale by virtue of their incongruous definitions of a closed transaction. By definition, then, Mississippi and another state arguably would be taxing only local incidents, though both would be taxing the same event, thus discriminating against the out-of-state buyer.