Beam resolves taxpayer claims under Davis but Quill raises new prospectivity issue.

• Author: Koch, Albin C.

Introduction

In James B. Beam Distilling Co. v. Georgia, 111 S. Ct. 2439 (1991), the Supreme Court of the United States held that Georgia's invalidation of a discriminatory state liquor tax statute on Commerce Clause grounds could not be applied prospectively to deny taxpayer claims for refund. The judgment of the court was announced by Justice David Souter, who cited the Court's decision in Bacchus Imports Ltd. v. Dias, 468 U.S. 263 (1984), which had found a similar Hawaii statute unconstitutional retroactively. Thus, Justice Souter's opinion, in which only Justice Stevens joined, rejected selective prospectivity: it held that retroactive application of the ruling in Bacchus required retroactivity of the same principle in all later cases. There were four other opinions in the case which was decided 6-3 in favor of granting retroactive relief to the taxpayer, but none of the opinions represented a majority view, nor did any of them discuss the precise nature of the retroactive relief that Georgia is constitutionally required to grant.

Beam is another in the recent skein of delphic pronouncements on the subject of retroactivity in constitutional state tax controversies. Depending on how these cases are counted, the overwhelming majority favor taxpayers by requiring refunds or equivalent retrospective relief. Nevertheless, the narrowness of the decision in Beam, coupled with the diversity of views among the justices, suggests that the last word on the subject has not yet been heard from the Court.

The first constitutional tax case to consider the retroactivity issue was National Can Corp. v. State Department of Revenue, 109 Wash. 878, 749 P.2d 1286 (1988), appeal dismissed and cert. denied, 486 U.S. 1040 (1988). That case held that the earlier U.S. Supreme Court decision in the same case, Tyler Pipe Industries, Inc. v. State Department of Revenue, 483 U.S. 232 (1987), would not be applied retroactively, even to the taxpayer involved in that case. [1] In refusing to hear the case, the Supreme Court allowed the Washington court's prospective-only decision to stand.

American Trucking Association v. Smith (ATA/Smith), 110 L.E.2d 148 (1990), reached a similar conclusion regarding application of American Trucking Association v. Scheiner (Scheiner), 483 U.S. 266 (1987). In ATA/Smith, a plurality of the Supreme Court substantially affirmed the Arkansas Supreme Court's holding that Scheiner should be applied prospectively only. On the same day, the Court held in McKesson Corp. v. Division of Alcoholic Beverages & Tobacco of Florida, 110 L.E.2d 17 (1990), that a taxpayer was entitled to "meaningful backward-looking relief" whenever a tax ruling in its favor was decided retroactively. Subsequently, in Ashland Oil v. Caryl, 111 L.E.2d 734 (1990), and in National Mills v. Caryl, 111 L.E.2d 740 (1990), the Supreme Court ruled, per curiam, that its decision in Armco, Inc. v. Hardesty, 467 U.S. 638 (1984), should be applied retroactively because it was "clearly foreshadowed" by earlier Supreme Court decisions.

It is also noteworthy that the Supreme Court applied the Beam decision almost immediately, remanding four state tax cases involving retroactivity. [2] Three of the cases concerned whether the Supreme Court's decision in Davis v. Michigan Department of Treasury, 109 S. Ct. 1500 (1989), should be applied retroactively. [3] Because Davis, like Bacchus was decided retroactively in the first instance, the Supreme Court apparently intends that Davis will likewise be applied retroactively. Accordingly, the practical impact of Beam could literally be to require billions of dollars of Davis-type state tax refunds to be paid to individual claimants.

A related development concerns the dispute among many states and the catalog sales industry regarding jurisdiction of market states to require mail order sellers without physical presence in a state to collect use tax from instate purchasers at the time of the purchase. The losing taxpayer in a North Dakota declaratory judgment action has now applied for a writ of certiorari to the Supreme Court. See Quill Corp. v. North Dakota Department of Revenue, 470 N.W.2d 203 (May 7, 1991). The taxpayer in Quill seeks to overturn the holding of the North Dakota Supreme Court that National Bellas Hess v. Illinois Department of Revenue, 368 U.S. 753 (1967), is no longer valid or, alternatively, to establish that its overruling should be prospective only.

These developments make it clear that the retroactivity of constitutional decisions in the state tax field has become a theoretical, constitutional, and practical issue of major proportions. The multitude and diversity of opinions that the issue stimulates on the Court, the varying circumstances in which such cases may arise, and the complexity of resolving all of the considerations presented in a satisfactory manner suggests that the Court should proceed methodically in dealing with this problem.

The Decision In Beam

The taxpayer in Beam challenged a Georgia tax law similar to that overturned by the Supreme Court in Bacchus Imports Ltd. v. Dias, which held that a Hawaii tax statute that discriminated between imported alcoholic beverages and those manufactured from locally grown products violated the Commerce Clause of the Constitution. In Beam, the taxpayer paid the tax and sought a refund under the appropriate state statutory provisions. [4] Although the Georgia courts acknowledged that the Georgia statute was unconstitutional, its Supreme Court refused to apply Bacchus retroactively under the rule in Chevron Oil v. Huson, 404 U.S. 97 (1971). [5] The Georgia court said that the tax "has or could have been" passed on to consumers and, therefore, a retroactive refund might create a "windfall" for the seller; it also concluded that it would be unfair to compel the state of Georgia to refund the more than $30,000,000 in taxes it had collected in good faith under a presumptively valid statute.

The Supreme Court rendered its decision in Bacchus in June 1984, and the taxes at issue in Beam were paid for tax years 1982, 1983, and all of 1984. The Georgia liquor tax was amended in 1985, and the amendment was later upheld as constitutional. [6] It was hoped that Beam might provide the opportunity for resolving a question left unanswered by the 1990 Supreme Court decisions in ATA/Smith and McKesson. [7] ATA/Smith applied Chevron Oil to hold that a taxpayer had no right to a refund if the decision establishing the invalidity of the tax overruled prior precedents and the equities dictated otherwise, whereas McKesson held, in effect, that a refund or equivalent retrospective relief was necessary if the tax was found invalid under settled law. The unanswered question was whether due process required retrospective relief or a refund be granted where the illegal tax was paid under "duress" even though the decision in favor of the taxpayer created new law. Thus, the application of non-retroactivity to deny a refund in Beam could be said to offend the taxpayer's right to due process because it had involuntarily paid an unconstitutional tax and been deprived of property before any meaningful hearing occurred.

Regrettably, instead of considering this issue, the Supreme Court decided Beam on much narrower grounds, and the concurring and dissenting opinions for the most part restated views which had appeared in ATA/Smith.

The Diversity of Views On The Court

Despite the large number of state tax controversies affected by the prospectivity issue, there are only three cases in which the Supreme Court has given its full consideration to it. These are Beam and the 1990 decisions in ATA/Smith and McKesson. ATA/Smith, which has been discussed thoroughly elsewhere, [8] arose in such unusual circumstances that the Court may not have fully considered its many ramifications, particularly how its circumstances should be viewed in light of the holding and language of McKesson. In addition, ATA/Smith may be of doubtful durability as a leading case since it included no real majority opinion.

The supporting majority arose in ATA/Smith only because Justice Scalia was so offended by the dormant Commerce Clause ruling in Scheiner that he accepted non-retroactivity based upon his expressed need to accord stare decisis effect to the decisions overruled by Scheiner. The balance of the justices in ATA/Smith were otherwise evenly divided between those holding for prospectivity and those who believed that automatic retroactivity is the appropriate rule. [9]

The division among the justices in Beam was similar to that in ATA/Smith, though there were some significant differences. Justices O'Connor, Rehnquist, and Kennedy dissented in Beam on the grounds that the Chevron Oil rule applied: they believed Bacchus had announced a new rule and that it would be inequitable to require the state to refund some $30,000,000 in refunds if Bacchus were applied retroactively. They also complained that the retroactivity issue had not been specifically dealt with in the Bacchus opinion.

Justices Blackmun and Scalia wrote separate opinions opposing non-retroactivity generally in which each concurred with the other. [10] Justice Blackmun's opinion stated that the case-or-controversy requirement of Article III of the Constitution required that new rules apply retroactively to the parties bringing a case as well as to all cases pending on direct review. Justice Scalia would hold that the issue was governed by the doctrine of separation of powers, which prohibits either selective or pure prospectivity as beyond the judicial power of the Court.

Justice White opined that Bacchus should be applied...