Appellant, vs. Appellee.

Transcription

1 COMMONWEALTH OF MASSACHUSETTS SUPREME JUDICIAL COURT Docket No. SJC REGENCY TRANSPORTATION, INC., Appellant, vs. COMMISSIONER OF REVENUE, Appellee. BRIEF OF THE MASSACHUSETTS MOTOR TRANSPORTATION ASSOCIATION AND OTHER STATE TRANSPORTATION ASSOCIATIONS AS AMICI CURIAE IN SUPPORT OF APPELLANT ANDREW J. FAY BBO # PATRICK E. MCDONOUGH BBO # ELIZABETH J. ATKINSON LeClairRyan, A Professional Corporation One International Place, 11th Floor Boston, Massachusetts

2 TABLE OF CONTENTS TABLE OF AUTHORITIES...i INTEREST OF AMICI CURIAE...1 BACKGROUND OF THE MASSACHUSETTS USE TAX...4 SUMMARY OF ARGUMENT...7 ARGUMENT I. The Massachusetts Use Tax Burdens Interstate Commerce In Violation Of The Commerce Clause A. State Taxation Schemes On Goods And Services Flowing In Interstate Commerce Must Meet The Strict Requirements Of The Commerce Clause B. The Massachusetts Use Tax Burdens Interstate Commerce In Violation Of The Commerce Clause Because The Tax Is Not Fairly Apportioned...18 i. The Massachusetts Use Tax is not fairly apportioned because it is internally inconsistent ii. The Massachusetts Use Tax is not fairly apportioned because it is externally inconsistent C. The Massachusetts Use Tax Violates The Commerce Clause Because It Unfairly Discriminates Against Interstate Commerce...:...30 II. Upholding The Appellate Tax Board's System Would Have Grave Consequences For The Interstate Trucking Industry In Massachusetts III. Massachusetts Can Cure The Commerce Clause Violation in Several Ways, Either By Apportionment Or By Allowing A Credit For All Use Taxes Paid CONCLUSION...41

3 TP,BLE OF AUTHORITIES Cases Am. Trucking Ass ns, Inc, v. Mich. Pub. Serv. Comm'n, 545 U.S. 429 (2005) Am. Trucking Assn's, Inc. v. Schemer, 483 U.S. 266 (1987)...passim Amerada Hess Corp. v. Director, Div. of Taxation, New Jersey Dept. of Treasury, 490 U.S. 66 (1989).. 34 Armco, Inc. v. Hardesty, 467 U.S. 638 (1984) Boston Stock Exchange v. State Tax Comm'n, 429~U.S. 318 (1977) Camps Newfound/Owatonna, Inc. v. Town of Harrison, Me., 520 U.S. 564 (1997) Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977)...17, 20 Comptroller of the Treasury of Maryland v. Wynne, --- U.S. ---, 135 S.Ct (2015)...passim Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983)...passim First Marblehead Corp. v. Commissioner of Revenue, 470 Mass. 497 (2015) First Marblehead Corp. v. Mass. Commissioner of Revenue, --- S.Ct. ----, 2015 WL (Oct. 13, 2015) Fulton Corp. v. Faulkner, 516 U.S. 325 (1996) Goldberg v. Sweet, 488 U.S. 252 (1989)... passim In re State Freight Tax, 82 U.S. 232 (1872) Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979) Maine v. Grand Trunk Railway Co., 142 U.S. 217 (1891)... 22

4 Maine v. Taylor, 477 U.S. 131 (1986)...18, 34 Maryland v. Louisiana, 451 U.S. 725 (1981)..11, 35, 36 McLeod v. J.E. Dilworth Co., 322 U.S. 327 (1944)...32 MeadWestvaco Corp. v. Ill. Dep t of Revenue, 553 U.S. 16 (2008)...16, 20 Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978)...23 Okla. Tax Comm'n v. Chickasaw Nation, 515 U.S. 450 (1995)...16, 19 Okla. Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175 (1995)...passim Trinova Corp. v. Michigan Dept. of Treasury, 498 U.S. 358 (1991)...30 West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994)...27 Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 256 (1938)...8, 9, 20 Wyoming v. Oklahoma, 502 U.S. 437 (1992)... 18, 39 Statutes G.L. c. 64I ~ 7 {c)... 5 G.L. c. 64I, ~ U.S. Const. art. I, 8, cl Regulations 830 CMR ~ 64H. 25.1(7)(h)(1) CMR 64H.25.1(3)(c)(1)... 4 Other Authorities U.S. BUREAU OF TRANSPORTATION STATISTICS 2OZ3 TRANSPORTATION STATISTICS ANNUAL REPORT Z2 U. S. CENSUS BUREAU ~ 2 O Z 4 ANNUAL BENCHMARK DATA

5 INTEREST OF AMICI CURIAE1 The Massachusetts Motor Transportation Association (~~MMTA") is the only Massachusetts statewide association serving the transportation industry and advocating for the industry's diverse interests and needs. The MMTA represents more than 150 member businesses within the Commonwealth, with its members ranging from sma11, family owned businesses with only three to five trucks to large international shipping and consumer-goods companies who operate hundreds of trucks within the Commonwealth. Collectively these members reflect the full spectrum of transportation companies operating within the Commonwealth and within the country. The following state transportation associations join the MMTA in submitting this brief in support of Regency Transportation, Inc. ( "Regency"): the Alaska Trucking Association; Arizona Trucking Association; the California Trucking Association; the Colorado Motor Carriers Association; the Motor Transport Association of Connecticut; the Indiana Motor Truck Association; the Kansas Motor Carriers Association; 1 This Brief is filed by the multiple state associations listed in the brief. Counsel of record for all parties have consented to this filing.

6 the Maryland Motor Truck Association; the Missouri Trucking Association; the New Jersey Motor Truck Association; the New York State Motor Truck Association; the Pennsylvania Motor Truck Association; the Rhode Island Trucking Association; the South Carolina Trucking Association; the Virginia Trucking Association; and the West Virginia Trucking Associations (collectively with the MMTA "Amici"). Amici advocate on behalf of their members and represent the industry on the local, state and federal level concerning laws and regulations that impede the prompt and efficient delivery of goods. ~lmici are committed to advocating for federal and state tax policies that provide tax fairness, consistency, and certainty for the transportation industry in Massachusetts and across the country. Amici's members engage in commerce in and among each of the fifty States and are therefore subject to a variety of state taxes and other regulations. As a result, state taxation and regulatory schemes significantly impact the Amici's members and, particularly, their interstate activities. Amici are therefore uniquely suited to offer a business perspective on the impact of a State's use tax as

7 applied to the interstate trucking industry. Amid are interested in ensuring fair and uniform state taxation schemes and other regulations that are consistent with the Commerce Clause of the United States Constitution. a Amid submit this brief because the present case raises an issue of vital importance to the members of the Associations and any transportation company engaged in interstate commerce that sells and delivers goods within the Commonwealth. Amid believe the Appellate Tax Board (the "Board") reached the wrong result when it determined that the Commissioner of the Massachusetts Department of Revenue's (the "Commissioner") application of the Massachusetts' Use Tax schemez did not violate the Commerce Clause and therefore denied Regency's argument that it met the constitutional exemption set forth in 830 CMR ~ 64H.25.1(7)(h)(1). Amid do not believe levying an unapportioned use tax that does not take into account the percentage of miles driven in Massachusetts passes constitutional muster under the United States Supreme Court's precedent applicable to this case. Under the 2 Amid collectively refers to G.L. c. 64I, ~~ 2, 7 and 803 CMR 64H.25.1 as the "Use Tax scheme" throughout its brief. 3

8 Commissioner's application, Massachusetts subjects all interstate transportation companies to multiple, overlapping taxation. If all States adopted tax schemes like Massachusetts, interstate transportation companies would face a heavy, disproportionate and unfair tax burden that intrastate companies do not face. This burden disincentivizes companies from engaging in interstate commerce - a result impossible to reconcile with the Commerce Clause. BACKGROUND OF THE MASSACHUSETTS USE TAX Massachusetts imposes a use tax on the privilege of storing and using tractors and trailers within Massachusetts that are purchased outside the State. General Laws chapter 64I, 2 ("Section 2") imposes an unapportioned use tax on the storage, use or other consumption in Massachusetts of "tangible personal property or services" purchased outside the state for "storage, use or other consumption within the Commonwealth at the rate of 6.25 percent of the sales price of the property or services." G.L. c. 64I, ~ 2. The Commissioner has promulgated a regulation applying the use tax to the "storage, use or other consumption in Massachusetts of a motor vehicle, trailer or other vehicle purchased or transferred for storage, use of 0

9 other consumption in Massachusetts... unless specifically exempt." 830 CMR 64H.25.1(3)(c)(1) (emphasis added). General Laws chapter 64I, ~ 7 ("Section 7") provides no use tax shall be due for: Sales upon which the purchaser has paid a tax or made reimbursement therefore to a vendor or retailer under the laws of any state or territory of the United States, provided that such tax was legally due without any right to a refund or credit thereof and that such other state or territory allows a corresponding exemption with respect to the sale or use of tangible personal property or services upon which such a sales or use tax was paid to this state.. G.L, c. 64I ~ 7(c). The Commissioner further exempts from the use tax motor vehicles, trailers, or other vehicles purchased in interstate commerce that are subsequently brought into or used in Massachusetts if; (1) the company paid a sales or use tax on the vehicle to the state where the sale or transfer occurred; (2) the sales or use tax was actually paid by the company; (3) the company did not receive or had no right to receive a refund or credit of the use tax in the state where the sale or transfer occurred; and (4) the state or territory to which the sales or use tax was paid allows a corresponding exemption with respect to use 5

10 taxes paid to Massachusetts. 830 CMR ~~ 64H (7) (g) (1), 64H (7) (h) (1). If the taxpayer cannot meet this use tax exemption, the Commissioner also exempts purchases of vehicles or trailers in interstate commerce if the use of the vehicle or trailer in Massachusetts "as part of interstate commerce is exempt from use tax under the Constitution or laws of the United States." 830 CMR ~ 64H.25.1(7)(h)(1). This subsection of the regulation includes the Complete Auto test as grounds for exemption, stating: For the purposes of this subsection, the use of such a vehicle in Massachusetts as part of interstate commerce is exempt from the Massachusetts use tax under the Constitution or laws of the United States only if application of the use tax violates the test applied by the United States Supreme Court in Complete Auto Transit, Inc. v. Brady or any other test subsequently developed by the courts or enacted under the laws of the United States. Id. (internal citations omitted). Under this regulatory carve-out, any application of a use tax that would otherwise violate the Complete Auto test is barred, and a taxpayer would therefore be entitled to a statutory and regulatory exemption from the use tax. Use taxes are effectively a proxy for sales taxes, and allow states to "catch up" by imposing a ^,

11 tax that compensates the State for in-state usage of property purchased elsewhere that was otherwise not subject to a sales tax. Unlike sales taxes, which are imposed on a discrete transaction and where 100 percent of a product's use is presumed to occur, use taxes can be and often are imposed upon a single piece of property multiple times. This reflects the fact that property, such as a trailer, is mobile and its use can occur in multiple states. However use taxes must be apportioned and are by their definition apportionable. STJMMARY OF ARGUMENT The national economy and to a great degree, the Massachusetts economy depends on the free movement of goods and services throughout the United States. The Commerce Clause embodies this idea, the execution of which exists in the prohibition against multiple taxation by different States on sales and use of personal property shipped through interstate commerce. In order to prevent the "barriers to interstate trade" that multiple taxation schemes create, States must fairly apportion taxes levied on goods and services brought into the States by trucking companies engaged in interstate commerce. Western Live Stock v. Bureau ~l

12 of Revenue, 303 U.S. 250, 256 (1938). The Commissioner's interpretation of the Use Tax scheme fails to fairly apportion such taxes as commanded by the Commerce Clause. Application of the Use Tax scheme in this fashion therefore violates the United States Constitution. Specifically, Massachusetts allocates a full amount of its use tax on the purchase price of carriers' equipment purchased outside Massachusetts without any consideration for the significant out-of-state mileage driven by the taxpayer. This tax scheme as applied by the Commissioner directly conflicts with the principles of unimpeded interstate commerce protected by the Commerce Clause. The United States Supreme Court has long recognized that Congress's power to regulate interstate commerce limits the States' ability to burden interstate commerce by imposing duplicative taxes on property and transactions. See Argument, Section I(A). As a result, the Constitution requires States avoid multiple taxation by fairly apportioning the taxes levied on a company engaged in interstate commerce. While States enjoy the sovereign power to tax goods purchased within a state and goods purchased

13 outside the state alike, when a corporation does business in multiple States, that power is necessarily limited. The Commerce Clause requires States implement a tax scheme that meets the "double demand that interstate business shall pay its way, and that at the same time it shall not be burdened with cumulative exactions which are not similarly laid on local business." Western Live Stock, 303 U.S. at 258. Massachusetts' failure to apportion use taxes imposed on interstate trucking carriers based upon either the historical or prospective number of miles the carriers' fleet spends in the state, and to deny full credit for all use taxes paid to other states, is inconsistent with the principle of fair apportionment under the Commerce Clause. See Argument, Section I(B). The Use Tax scheme inevitably results in both: (1) taxation that greatly exceeds the maximum threshold allowed for states to tax only the portion of revenues that reasonably reflect intrastate activity; and (2} multiple taxation of the trucking company's use of trucks and trailers in interstate commerce because the scheme refuses to grant full. credits for all use taxes already paid to other States. This result therefore levies a substantially ~'7

14 higher tax burden on trucking companies that engage in interstate commerce as compared to intrastate companies. The use tax effectively forces interstate carriers, whose fleets often drive a small percentage of their total miles within Massachusetts, to shoulder a significantly higher dollar-per-mile burden for their- use of Massachusetts' roads than intrastate carriers. This lack of apportionment shows the tax bears no reasonable relation to the extent of interstate carriers' contacts with Massachusetts. In addition, because the Use Tax scheme expressly limits interstate trucking companies' ability to receive credit for out-of-state use taxes paid to only taxes paid to the truck or trailer's purchasing state, it ensures a greater tax burden for owners of interstate trucking companies and therefore "facially discriminates against interstate commerce." Okla. Tax Comm'n v. Jefferson Lines, Inc., 514 U.S. 175, 200 (1995) (Scalia, J., concurring in judgment). This discrimination alone provides a sufficient basis to conclude that the Massachusetts Use Tax violates the Commerce Clause without regard to principles of fair apportionment. See id. at ; see also Maryland v. Louisiana, 451 U.S. 725, (1981). 10

15 If all states followed Massachusetts' lead, the freedom of commerce across state borders would be substantially encumbered. See Argument, Section II. Should this Court allow the Commissioner's application of the Use Tax scheme to stand, three scenarios will likely occur: (1) interstate trucking companies will be financially discouraged from either sending their trucks and trailers to Massachusetts, where the companies risk being assessed a full use tax on these trucks and trailers; (2) the decision of interstate trucking companies to not locate their tractors and trailers in Massachusetts would create a cascading effect of increasing prices on consumers across the economic spectrum; and (3) Massachusetts trucking companies engaged in interstate commerce will be disincentivized to send their trucks and trailers to states that impose use taxes, as they will receive no credit. The Use Tax scheme as applied by the Commissioner clearly discourages interstate trucking companies from expanding both into Massachusetts and additional out-of-state markets. Consistent with the Supreme Court's practical, functional approach to analysis of state taxation schemes on interstate commerce, the Commissioner can 11

16 rectify the application of the discriminatory use by instituting a simple change. The appropriate remedy is for Massachusetts to apportion the use tax by requiring interstate carriers to pay a percentage of the use tax for each relevant tractor or trailer that reflects the amount of miles the carrier spent in Massachusetts on either a retrospective or prospective basis.3 This solution prevents the unconstitutional outcome that burdens interstate commerce more than intrastate commerce. ARGUMENT In the present day, millions of American businesses and citizens produce, use, and enjoy goods that originated in a different state. As a result, the American economy of 2015 and each individual's and business's economic interests are more integrated and interdependent than ever before. In 2012 for example, the United States' freight transportation system moved more than 53.9 million tons of goods worth $47.5 billion each day.4 The interstate trucking industry 3 Alternatively, Massachusetts could provide a full credit for all use taxes paid or allocable by interstate carriers in any state in which the carrier operates a particular tractor or trailer. 4 S22 U.S. BUREAU OF TRANSPORTATION STATISTICS, ZO13 TRANSPORTATION STATISTICS ANNUAL REPORTS available dt dot. gov/bts/ sites/rita.dot.gov.bts/files/publications/tr ansportation statistics annual report /2013/chapter4.htm1. 12.

17 carried the highest percentage of both weight and value of goods in the United States in In 2014, $5.97 trillion of goods manufactured in the United States were shipped using this freight transportation system.6 All relevant data and prognostications indicate the importance of interstate commerce to the national economy will only continue to grow in the future. While the trucking industry plays a significant role in the broader national transportation industry, the Massachusetts' economy is more reliant than other states on the trucking industry for the transportation of goods within its borders. In 2010, trucks transported ninety one percent (910) of total manufactured tonnage in the state, or 537,317 tons per day. Over eighty seven percent (870) of Massachusetts' communities depend exclusively on trucks to move their goods. In 2013, the trucking industry in Massachusetts provided 120,340 jobs, or one out of every twenty-four jobs in the state. These jobs paid out over $6.0 billion in total industry wages in the Commonwealth in As of April 2014, 5 Id. 6 S22 U. S. CENSUS BUREAU, ZO14 ANNUAL BENCHMARK DATA, available at www. census. gov/manufacturing/m3 /bench/annualdata.xls. 13

18 there were over 10,200 trucking companies located in Massachusetts; most of these companies were small, locally owned businesses that were served by a wide range of businesses both large and small. The trucking industry also pays its fair share of roadway taxes to Massachusetts. In 2009, the state trucking industry paid approximately $417 million in federal and state roadway taxes and fees. The $417 million represented twenty eight percent (280) of all taxes and fees paid by Massachusetts motorists, despite trucks accounting fo r only four percent (40) of all vehicle miles traveled in the state. As of January 2014, a standard five-axle tractor-semitrailer combination paid $5,760 in state highway user fees and taxes in addition to $8,906 in federal user fees and taxes. These figures do not account for the additional taxes paid by trucking industry businesses in Massachusetts. Massachusetts' reliance on the trucking industry is indicative of how ever-growing integration of the domestic and global economy benefits all parties, and how state-erected barriers to the free flow of goods In 2010, Massachusetts had 36,428 miles of public roads over which all motorists traveled 54 billion miles. The trucking industry's use of public roads was only 2.1 billion of the 54 billion miles traveled. ~~!

19 in interstate commerce will damage the overall health of Massachusetts' economy. The Use Tax scheme poses precisely this type of economic threat. As applied, the Use Tax scheme imposes an impermissible burden on corporations that do business across State lines. This Court should therefore determine the Commissioner's application of the tax violated the Complete Auto test and direct the Commissioner to apportion any use taxes consistent with established constitutional jurisprudence. I. THE MASSACHUSETTS USE TAX BURDENS INTERSTATE COMt~~RCE IN VIOLATION OF THE COM[~RCE CLAUSE. Amici do not dispute that companies who avail themselves of Massachusetts' benefits, whether by residing or conducting business here, may justifiably be subject to taxation. Okla.- Tax Comm'n v. Chickasaw Nation, 515 U.S. 450, (1995). Companies may be fairly expected to contribute to the services and privileges provided to them as a result of residing within the Commonwealth's borders. Id. at 450. However, the Supreme Court has firmly established that when States tax an interstate business enterprise, including through use or other ad valorem taxes, "[t]he Commerce Clause forbids States to levy taxes 15

20 that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation." MeadWestvaco Corp. v. Ill. Dep t of Revenue, 553 U.S. 16, 24 (2008). See Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, (1983). A state tax does not violate the dormant Commerce Clause if the tax meets all four of these criteria: (1) the tax applies to an activity with a substantial nexus with the taxing state; (2j the tax is fairly apportioned; (3) the tax is not discriminatory towards interstate or foreign commerce; and (4) the tax is fairly related to the services provided by the State (the "Complete Auto test"). Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977); Jefferson Lines, Inc., 514 U.S. at The Massachusetts use tax scheme fails prongs two and three of the Complete Auto test. Complete Auto, 430 U.S. at 279. A. Sate Taxa~iofl Schemes On Goods And Serviees Flowing In Interstate Commerce Must Meet The Strict Rec~uirements Of The Commerce Clause. While the States have sovereign power to tax the sales of goods, Congress's exclusive authority over interstate commerce under the Commerce Clause, U.S. Const. art. I, ~ 8, cl. 3, inherently limits the 16

21 States' authority to do so. Wyoming v. Oklahoma, 502 U.S. 437, 454 (1992). The Supreme Court of the United States has long held that the Commerce Clause, U.S. Const. art. I, ~ 8, cl. 3, imposes implicit limitations on "the ability of States and localities to regulate or otherwise burden the flow of interstate commerce." Maine v. Taylor, 477 U.S. 131, 151 (1986). See also Am. Trucking Ass ns, Inc, v. Mich. Pub. Serv. Comm'n, 545 U.S. 429 (2005). This negative command, referred to as the "dormant" Commerce Clause, prevents States from "plac[ing] burdens on the flow of commerce across its borders that commerce wholly within those borders would not bear." Jefferson Lines, 514 U.S. at 180. See also Comptroller of the Treasury of Maryland v. Wynne, --- U.S. ---, 135 S.Ct. 1787, 1794 (2015) (citing Chickasaw Nation, 514 U.S. at 179) (prohibiting states from imposing "certain state taxation even when Congress has failed to legislate on the subject"). The dormant Commerce Clause "precludes states from discriminating between transactions on the basis of some interstate element." Wynne, 135 S.Ct. at 1794 (quoting Boston Stock Exchange v. State Tax Comm'n, 429 U.S. 318, 332 n. 12 (1977)). States "may not tax Eyl

22 a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the state." Am. Trucking Assn's, Inc. v. Sche mer, 483 U.S. 266, (1987). While interstate commerce must "pay its way," the dormant Commerce Clause protects interstate commerce from "bear[ing] cumulative burdens not imposed on local commerce," Western Live Stock, 303 U.S. at 256 and prohibits taxes that discriminate against interstate commerce or that burden it by subjecting activities to multiple or unfairly apportioned taxation. MeadWestvaco Corp., 553 U.S. at 24. These two principles work in tandem to "prohibit taxes that pass an unfair share of the tax burden onto interstate commerce." Quill Corp. v. North Dakota, 504 U.S. 298, 313 (1992). B. The Massachusetts Use Tax Burdens Interstate Coanmerce In Violation Of The Commerce Clause Because The Tax Is Not Fairly Apportioned. The second prong of Complete Auto test requires a state to fairly apportion any taxes on interstate commerce. Complete Auto, 430 U.S. at 279. The Supreme Court has repeatedly held that when a State taxes the corporate activities of a "unitary business" operating in interstate commerce, the Commerce Clause requires the State to apply a formula that apportions

23 the income or use of property by that business occurring within and without the State. Container Corp., 463 U.S. at 169 The Supreme Court stated the relevant underpinnings of the apportionment doctrine in Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434 (1979) "It is a commonplace of constitutional jurisprudence that multiple taxation may well be offensive to the Commerce Clause. In order to prevent multiple taxation of interstate commerce, [the Supreme] Court has required that taxes must be apportioned among taxing jurisdictions, so that no instrumentality of commerce is subjected to more than one tax on its full value.. The corollary of the apportionment principle is that no jurisdiction may tax the instrumentality in full." 441 U.S. at The rationale behind fair apportionment is "to ensure that each State taxes only its fair share of an interstate transaction." Jefferson Lines, 514 U.S. at 184 (emphasis added). See also Goldberg v. Sweet, 488 U.S. 252, (1989).8 The Court requires apportionment of taxes for businesses fully engaged in interstate commerce because it is "eminently reasonable and likely to e Dormant Commerce Clause precedent requiring apportionment dates back as far as 1872, where the Supreme Court held that fair apportionment of tax is a constitutional necessity. See In re State Freight Tax, 82 U.S. 232 (1872). See also Maine v. Grand Trunk Railway Co., 142 U.S. 217 (1891) (upholding formula to compute value of tax assessed against interstate railroad by multiplying railway's total receipts by fraction to estimate amount of revenue attributable to the state). 19

24 produce the most satisfactory results, both to the state and the corporation taxed." Maine v. Grand Trunk Railway Co., 142 U.S. 217, 228 (1891). For a state tax to be fairly apportioned and not punish interstate commerce, it must be both internally and externally consistent. Goldberg, 488 U.S. at 261; Wynne, 135 S.Ct. at i. The Massachusetts Use Tax is not fairly apportioned because it is internally inconsistent. A taxation scheme is internally consistent if its application by every state "would result in no more than all of the unitary business' income being taxed." Container Corp., 463 U.S. at Internal consistency therefore requires states levy taxes on interstate commerce such that if every state imposed an identical tax, "no multiple taxation would result." Goldberg, 488 U.S. at 261. See also Armco, Inc. v. Hardesty, 467 U.S. 638, 644 (1984) (a state tax must be of the kind that "if applied by every jurisdiction, there would be no impermissible interference with free trade.") The internal consistency test9 asks "whether 9 The test allows the court to "isolate the effect of a [State`s] tax scheme" and distinguish between "tax schemes that inherently discriminate against interstate commerce without regard to the tax policies of other states, and tax schemes that create disparate incentives to engage in interstate commerce (and 20

25 the adoption of a rule by all States would place interstate commerce at a disadvantage as compared with commerce intrastate." Wynne, 135 S.Ct. at 1802 n. 7 (quoting Jefferson Lines, 514 U.S. at 185).10 A tax is internally inconsistent if such hypothetical adoption of the tax would impose a greater burden on interstate transactions than on intrastate transactions. Jefferson Lines, 514 U.S. at 185. A simple hypothetical illustrates how the Massachusetts use tax cannot satisfy the internal consistency test. Assume California, Oregon, Washington and Idaho a11: (1) impose a 5 percent use tax upon any personal property, including a vehicle or trailer, stored, used or consumed in the State; (2) do not offer credit for use taxes paid to other States; and (3) offer a sales tax exemption on any purchases of rolling stock (ie: trailers). This hypothetical use tax scheme closely mirrors the Use Tax scheme in Massachusetts. sometimes result in double taxation) only as a result of the interaction of two different but nondiscriminatory and internally consistent schemes." Wynne, 135 S.Ct, at 1802 (citing Armco, 467 U.S. at ; Moorman Mfg. Co. v. Bair, 437 U.S. 267, 277, n. 12 (1978)). The first category of taxes above are deemed unconstitutional; the second are not. Id. to The Court stated in Jefferson Lines that "internal consistency is preserved when the imposition of a tax identical to the one in question by every other state would add no burden to interstate commerce that intrastate commerce would not also bear." Jefferson Lines, 514 U.S, at

26 Assume then that Countrywide Trucking, an interstate carrier domiciled in California, purchases rolling stock in Idaho and pays no sales tax as a result of the exemption. Also assume that In-State Trucking, an intrastate carrier also domiciled in California, purchases a trailer in Idaho, pays no sales tax as a result of the exemption, and brings the tractor directly to its offices in California solely.for the purposes of using the tractor within California. As a result, In-State Trucking pays only a five percent (50) use tax to California. At the same time, Countrywide Trucking brings the trailer it purchased in Idaho to California with the intent to use it in interstate commerce, but first brings the tractor through both Washington and Oregon, where it pays a full use tax in each state. After Countrywide Trucking brings the trailer to California, the State assesses a full use tax against it. Countrywide Trucking has therefore paid fifteen percent(15o) of the total purchase price of the tractor in use taxes to California, Oregon, and Washington, and receives no credit for taxes paid to Oregon and Washington because it did not purchase the trailer there. 22

27 Countrywide Trucking intends to use its new tractor 33 percent in California, 33 percent in Oregon, and 33 percent in Washington. In-State Trucking, whose tractor will be exclusively housed in California, has only paid 5 percent total in taxes. Countrywide Trucking's tax liability would be two hundred percent (2000) higher under this hypothetical tax scheme because it participates in interstate commerce than does In-State Trucking. The aggregate liability is of course greater than the tax liability Countrywide Trucking would face if it provided its services only in California. This example lays out in clear and simple terms how an interstate trucking company will be subject to multiple use taxes if it uses its interstate trucking assets in Massachusetts and other states. The example further illustrates the effect the Use Tax scheme would have if other States besides Massachusetts adopted an identical tax scheme. Interstate carriers would be subject to a full use tax in each State in which the interstate carrier's fleet operates, without any credit for previous use taxes paid. This scheme goes we11 beyond allowing each State to tax "only its fair share of an interstate transaction." Jefferson 23

28 Lines, 514 U.S. at 184. If states nationwide adopted this identical scheme, it would result in multiple taxation that significantly exceeds. the actual use of the tractor or trailer in each state. Container Corp., 463 U.S. at 169. The scheme therefore increases an interstate carrier's tax liability disproportionately to the amount of time the carrier stores and uses the tractor or trailer in Massachusetts. While the scheme does levy a full use tax on intrastate carriers, these carriers do not risk having to pay anything more than a single use tax at one time to one State. The failure to apportion the Use Tax or credit all taxes paid or accrued makes Use Tax scheme functionally equivalent to a tariff merely for the tractor or trailer's entry into the Commonwealth, a notion antithetical to the Commerce Clause. See Wynne, 135 S.Ct. at 1894 (citing West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 193 (1994)). The Supreme Court recently upheld the application of the internal consistency test as part of the Complete Auto analysis, and seemingly rejected locality-based taxation, in Comptroller of the Treasury of Maryland v. Wynne. 135 S.Ct. at Wynne presented the

29 basic question of whether an unapportioned state income tax violated the dormant Commerce Clause when state residents only received credit against a state tax but not a county tax for income taxes paid to other jurisdictions. In Wynne, the Supreme Court appears to have adopted location-neutral taxation schemes as the only method by which taxes may be applied against interstate commerce. Id. By rejecting Maryland's attempts to preserve a taxation scheme that encouraged intrastate investment and economic activity at the expense of interstate commerce, the Court has embraced that actual apportionment is required for all taxation schemes that impose tax liabilities on businesses engaged in interstate commerce.11 Id. As applied by the Commissioner, the Use Tax scheme creates a differentiated financial burden that must be shouldered by interstate transportation companies. Multiple taxation that likely ensues from the Commissioner's interpretation is the inevitable 11 Furthermore, in First Marblehead Corp. v. Mass. Commissioner of Revenue, --- S.Ct. ----, 2015 WL , at *1 (Oct. 13, 2015), the Supreme Court granted the Petitioner's writ of certiorari, vacated the judgment of this Court, and remanded the case back to this Court for further consideration in light of Wynne. See also First Marblehead Corp. v. Commissioner of Revenue, 470 Mass. 497 (2015). In light of the Supreme Court's decision in First Marblehead, it is clear the Court continues to mandate apportionment be done. 25

30 and foreseeable product of the Commissioner's clear choice to tax interstate commerce at higher amounts than intrastate commerce. The tax therefore is internally inconsistent. ii. The Massachusetts Use Tax is not fairly apportioned because it is externally inconsistent. External consistency requires the State tax only that portion of the interstate activity that "reasonably reflects the in-state component of the activity being taxed." Goldberg, 488 U.S. at 262. To determine whether a tax is externally consistent, a court must "examine the in-state business activity which triggers the taxable event and the practical or economic effect of the tax on that interstate activity." Id. Taxation apportionment formulas that are "out of all appropriate proportions to the business transacted in that State" do not meet the external consistency test. Container Corp., 463 U.S. at 170. Further, the Supreme Court has made clear that "the threat of real multiple taxation may indicate a State's impermissible overreaching." Jefferson Lines, 514 U.S. at 185. The test is "essentially a practical inquiry." Goldberg, 488 U.S. at 264. The external consistency

31 test focuses on the "economic justification for the State's claim upon the value taxed, to discover whether a State's tax reaches beyond that portion of the value that is fairly attributable to economic activity within the taxing State." Jefferson Lines, 514 U.S. at 185. The test relates to the proportion of the taxpayer's taxable activity that is conducted within the taxing jurisdiction. Container Corp., 463 U.S. at 169; Trinova Corp. v. Michigan Dept. of Treasury, 498 U.S. 358, 380 (1991). In prior apportionment cases, the Supreme Court has "endorsed apportionment formulas based upon the miles a bus, train or truck traveled within the taxing State" in order to satisfy the external consistency requirements of Complete Auto. Goldberg, 488 U.S. at 262. The Massachusetts use tax plainly fails the external consistency test. Interstate trucking carriers often use their equipment throughout the United States. Imposing a full use tax on the total value of a carrier's equipment that loads and unloads within multiple states clearly would tax more than the intrastate component of the activity. Jefferson Lines, 514 U.S. at 185; Schemer, 483 U.S. at 290. Imposing a use tax on the entire cost of the 27

32 equipment, as Massachusetts did in this case and which it will continue to do unabated unless this Court reverses the Board's decision, effectively taxes interstate business unrelated to any activity carried out within Massachusetts. When only a percentage of that equipment's use occurs within Massachusetts, it is unconstitutional for Massachusetts to tax the full value of that equipment. Sche mer, 483 U.S. at 290. Unlike sales taxes, which arise from a single, isolated event of transferring ownership of tangible personal property for consideration,1z use taxes are by their very definition apportionable. "A use tax is a tax on the enjoyment of that which was purchased." McLeod v. J.E. Dilworth Co., 322 U.S. 327, 330 (1944j. Even though Massachusetts measures the use tax as a percentage of the purchase price of the property, the tax is imposed on the privilege of using, keeping, or consuming the purchased goods within Massachusetts. In contrast to sales taxes, the use of interstate lz The Supreme Court stated in Jefferson Lines: "A sale of goods is most readily viewed as a discrete event facilitated by the laws and amenities of the place of sale, and the transaction itself does not readily reveal the extent to which completed or anticipated interstate activity affects the value on which a buyer is taxed." Jefferson Lines, 514 U.S. at 186. Elsewhere in the opinion, the Court concluded "because the taxable event of the consummated sale of goods has been found to be properly treated as unique, an internally consistent, conventional sales tax has long held to be externally consistent as well." Id. at 188. ~:3

33 carrier's property such as tractors and trailers occurs throughout multiple states and on a continual basis. The Supreme Court's contrast of Oklahoma's sales tax on bus tickets, at issue in Jefferson Lines, with a flat tax on trucks for the privilege of using Pennsylvania's roads, at issue in Schemer, highlights the difference in taxable events between sales and use taxes and the reasons why use taxes must be apportioned: "[Sales taxes are] imposed not upon the use of the State's roads, but upon the freedom of purchase. However complementary the.goals of sales and use taxes may be, the taxable event for the sales tax is the sale of the service, not the buyer's enjoyment or the privilege of using Oklahoma's roads." Jefferson Lines, 514 U.S. at 198. The differential nature of the use tax requires apportionment so as not to violate the Commerce Clause. The risk of multiple taxation is indisputable. Restricting the carrier to only a credit for taxes paid to the purchasing state and no other taxes, without offering apportionment for actual use of the truck or trailer in Massachusetts, plainly imposes significantly higher tax burdens on interstate trucking carriers in favor of intrastate carriers. 29

34 The Massachusetts Use Tax as read now allows Massachusetts to tax a significantly higher percentage of interstate trucking and therefore obtain revenues from interstate commerce that extend far beyond that which "reasonably reflects] the [Massachusetts] component" of interstate trucking. Goldberg, 488 U.S. at 262. C. The Massachusetts Use Tax Violates The F'n3!r~*ni~'~ 'C~ ~.~~L~@ ~' ~~a~~ a~ i ~ l.j31~~i ri ~ Discria~a.nate~ Ac,~a~.nst ~aaterstate Coa~ane~ce. The Use Tax scheme is not only deficient under the second prong of Complete Auto, but also under the third prong because it discriminates against interstate commerce. Complete -Auto, 430 U.S. at 279. State tax statutes cannot unfairly discriminate against interstate commerce "either on its face or in practical effect." Taylor, 477 U.S. at 138. "Even if a tax is fairly apportioned, it may discriminate against interstate commerce [and] violate the Commerce Clause if it has the effect of unduly burdening interstate commerce." Amerada Hess Corp. v. Director Div. of Taxation, New Jersey Dept. of Treasury, 490 U.S. 66, 75 (1989). See also Scheiner, 483 U.S. at 281 (stating that where state statutes allocate tax burdens between "insiders and outsiders" in a manner 30

35 that is not facially discriminatory, these tax burdens must still pass constitutional muster under the Commerce Clause). Courts must analyze whether a state tax scheme is facially discriminatory "in light of its actual effect" and whether the tax scheme "will in its practical operation work discrimination against interstate commerce.' Maryland v. Louisiana, 451 U.S. at 756 (internal quotations omitted). The Use Tax scheme is facially discriminatory because it fails to make even a cursory apportionment that reflects the number of actual miles the tractor or trailer actually "uses" the roads of Massachusetts. State taxation schemes that charge for the use of a state's transportation infrastructure without regard for the amount of miles a vehicle or trailer drives within a State imposes an unfair tax burden on interstate carriers that is "unquestionably discriminatory and thus offends the Commerce Clause." Sche mer, 483 U.S. at 296. Alternatively, the use tax fails to offer any credit or exemption for additional use taxes paid by the interstate carrier to States besides the State in which the carrier purchased the 31

36 tractor or trailer.13 The Commonwealth's resistance to apportioning the Use Tax scheme by the annual mileage interstate operators drive within the Commonwealth raises revenue for the Commonwealth by placing an additional burden only on interstate activity, a result not permitted by the Constitution. One such case, American Trucking Associations, Inc. v. Scheiner, 483 U.S. 266 (1987), is particularly instructive to this Court's analysis. In Schemer, the Supreme Court addressed the validity of two flat annual taxes, which Amici believe are analogous to the Use Tax scheme. Pennsylvania imposed the flat annual taxes on all trailer trucks operating in Pennsylvania 13 The fact that Massachusetts offers a credit for use taxes paid in the State in which the interstate carrier purchased the asset originally is also immaterial under Supreme Court precedent. In Maryland v. Louisiana, 451 U.S. 725 (1981), for example, the Court struck down a Louisiana tax scheme that imposed a tax on certain natural gas brought into the state but provided residents with a credit for certain other taxes paid, observing that the credit for intrastate taxes encouraged the recipients of the credit to engage in intrastate commerce rather than interstate commerce. Id. at 756 (stating that the tax "unquestionably discriminates against interstate commerce in favor of local interests as the necessary result of various tax credits or exclusions"). Massachusetts' decision to decline credit to interstate carriers for taxes paid to other states is the mirror image of Louisiana's discriminatory grant of a credit to residents for intrastate taxes. Massachusetts' denial of use tax credits disincentivizes Massachusetts' based carriers to actually participate in interstate commerce, because such carriers cannot obtain credits against any use tax owed to Massachusetts when they use those same assets elsewhere in interstate commerce. The unapportioned and partial credit effectively encourages carriers to only operate trucking assets in Massachusetts and in no other states in which they might be subjected to a use tax. Maryland v. Louisiana, 451 U.S. at

37 with no apportionment based upon the number of miles traveled within Pennsylvania. Id. at The Supreme Court overturned both statutes on the basis that the statutes "discriminate[d] against out-ofstate vehicles by subjecting them to a much higher charge per mile traveling in the state, and [the taxes] [did] not even purport to approximate fairly the cost or value of the use of Pennsylvania's roads." Id. at 290. The Supreme Court further held that even though the flat taxes were not facially discriminatory, in practical effect they discriminated against interstate commerce because the taxes were not apportioned based upon the miles each truck traveled in Pennsylvania. Id. (finding taxes failed internal consistency test under Complete Auto). According to the Court in Schemer, interstate carriers bore a cost per mile that was nearly five times higher than that of intrastate carriers based upon the total mileage driven within Pennsylvania, and this fact alone impeded interstate commerce to the benefit of intrastate commerce. Id. at The Massachusetts use tax's unapportioned, partial-credit scheme mirrors the scheme in Sche mer in effect, if not in wording. Much like the 33

38 Pennsylvania scheme, Massachusetts effectively discourages interstate carriers from using tractors or trailers, which are meant to be mobile and used to ship goods from state to state in interstate commerce. Schemer, 483 U.S. at 290. This policy forces interstate carriers to choose to send tractors and trailers purchased in interstate commerce either only to Massachusetts for use in intrastate commerce there, or only to other states besides Massachusetts in order to avoid paying the Massachusetts use tax in addition to use taxes paid in other states. The use tax creates an artificial divide that protects intrastate carriers at the expense of interstate carriers because intrastate carriers face no additional risks of having use taxes from other states levied upon them. Massachusetts' tax scheme therefore operates as an inducement for transportation carriers to only operate within Massachusetts. Id. If Massachusetts utilized a truly neutral and apportioned tax regime, there would be no constitutional need for a credit of any sort for taxes paid to other States. Jefferson Lines, 514 U.S. at 180. Massachusetts has not demonstrated any valid factor justifying the Use Tax as written or applied 34

39 that is not related to protecting intrastate commerce. Wyoming v. Oklahoma, 502 U.S. at 454 ( "When a state statute clearly discriminates against interstate commerce, it will be struck down, unless the discrimination is demonstrably justified by a valid factor unrelated to economic protectionism.") As a result, the unapportioned, partial-credit scheme fails to comport with the dormant Commerce Clause on its face and in its application. I. UPHOLDING THE APPELLATE TAX BOARD S SYSTEM WOULD HAVE GRAVE CONSEQUENCES FOR TAE INTERSTATE TRUCKING INDUSTRY IN MASSACHUSETTS. Should this Court uphold the Board's determination and fail to apportion use taxes assessed on operators in interstate commerce, this decision would have immediate and grave effects on the Massachusetts transportation industry and, as a result, the Massachusetts economy as a whole. First, allowing the disparate tax burden to fall on interstate carriers, rather than shouldered proportionally by both interstate and intrastate carriers, will obviously discourage interstate carriers from using their tractors and trailers to deliver goods within Massachusetts for fear they will be assessed the effective tariff the Use Tax scheme 35

40 imposes. If Massachusetts is free to levy the Use Tax scheme without apportionment, all States may do the same, with the result being a rampant compound taxation scheme on interstate carriers that will dramatically disincentivize interstate carriers from engaging in cross-border commercial activities. See Fulton Corp. v. Faulkner, 516 U.S. 325, 333 (1996) (creating multiple taxation scheme discourages businesses from "plying their trades in interstate commerce"). Encouraging this type of economic protectionism or isolationism manifestly rejects the Framers' intent for the Commerce Clause. See Camps Newfound/Owatonna, Inc. v. Town of Harrison, Me., 520 U.S. 564, 577 (1997) ("Avoiding this sort of economic Balkanization and the retaliatory acts of other States that -may follow is one of the central tenets of [the Court's] negative Commerce Clause jurisprudence." (internal citations omitted)). Moreover, the economic protectionism fostered by the Use Tax scheme incentivizes interstate trucking companies dozliciled within Massachusetts to abandon Massachusetts and move their operations elsewhere because -these companies will have to pay several full iterations of the use 36