NTUF’s Taxpayer Defense Center filed an amicus curiae (“friend of the court”) brief with the Supreme Court of the United States in Ellingson v. South Dakota Department of Revenue. Ellingson asks how much use tax a state can impose on imported equipment.
Ellingson is a Minnesota drain tile installation company which performed some work in South Dakota. The equipment Ellingson used in South Dakota was purchased outside of the state and was never subject to a sales tax. Because the equipment was used in South Dakota, South Dakota imposed a use tax on the equipment’s value, some of which was only used for a day. The problem here, as NTUF’s Andrew Wilford explained, is “[d]espite the fact that some of the equipment had only been present in South Dakota for a single day, South Dakota applied its 4.5 percent use tax to the entire value of all the equipment. Adding on interest, the resulting tax assessment came out to over $75,000.”
In our brief, we argued that taxing the current value of an item that was only used in the state for a day is inherently unfair, especially when, as here, the equipment did not permanently rest in South Dakota. Although South Dakota offers a credit for sale or use taxes paid to another state, this credit system does not solve the fair apportionment issue created by this use tax because construction equipment is not always taxed by other states. Rather, it is merely a formulaic approach that holds there is fair apportionment without examining if the tax is really fairly apportioned. South Dakota’s blanket assertion that its tax scheme is constitutional because of the credit system is at odds with multiple Supreme Court opinions which emphasized the practical effect of a statute is the most important consideration.
We warned the Court that South Dakota’s practice of blindly applying a credit without examining whether the tax scheme meets the fair apportionment requirement is a growing, national concern. This is seen in the trio of cases: Comptroller of the Treasury of Maryland v. Wynne, Zilka v. Tax Revenue Board of the City of Philadelphia, and this case.
In Wynne, the Supreme Court concluded Maryland’s tax scheme, which included a partial credit, was unconstitutional as it raised the total tax burden. In Zilka, Pennsylvania’s Supreme Court upheld Pennsylvania’s and Philadelphia’s taxation schemes because tax credits were provided, despite the fact that Zilka was taxed on the same income twice. In Ellingson, the South Dakota Supreme Court justified taxing the full value of out-of-state equipment that was only used in-state for one day on the premise that it offered a credit for taxes paid.
Given that lower courts often supply a credit for taxes paid as mere lip service to the Supreme Court’s precedent on fair apportionment, we urge the Supreme Court to clarify that courts must meaningfully engage with whether a tax is fairly apportioned. While tax credits often work to resolve issues, they do not work in every instance. Failure to meaningfully engage in review of the practical effects of a tax will allow states to continue to impose unfairly apportioned taxes and preclude taxpayers from challenging these taxes under the commerce clause of the U.S. Constitution.
On Monday, October 7, 2024, the U.S. Supreme Court denied Ellingson Drainage, Inc. v South Dakota Department of Revenue, U.S. No. 23-1202’s petition for writ of certiorari.