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

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 retroactively even if it was wrongly decided on that issue, but disagreed with Justice Souter's disclaimer of the propriety of pure prospectivity (discussed below), presumably because he was not inclined to overrule the Court's prior holdings recognizing that principle. His separate opinion positions him to be a "swing" vote.

Justice Souter's opinion, which was formally concurred in only by Justice Stevens, described the issue before the Court as one of "choice of law." He said there were three ways to resolve the matter. The Court could adopt:

* the "normal" rule, under which the decision would be fully retroactive to the parties before the Court and all others, consistent with procedural barriers to further litigation such as res judicata and that statute of limitations;

* the "purely prospective" method, under which the new rule would be applied neither to the parties before the Court nor to others against or by whom it might be applied for conduct or events occurring before the decision; or

* the "selective prospectivity" rule, which would apply the new rule to the parties before the Court but pursuant to which the prior rule would be applied to all other cases arising on facts predating announcement of the new rule.

Although the parties in Beam had assumed Chevron Oil to be applicable, Justice Souter thought otherwise. He found the retroactivity issue to be controlled by the scope of the holding in Bacchus, which he interpreted as applying retroactively to the litigants in that case. [11] Thus, Justice Souter defined the question in Beam to be whether the Court could refuse to apply a rule of federal law retroactively after the case announcing that rule had already done so. [12] He concluded that principles of equality in treatment and stare decisis required retroactive application of Bacchus, notwithstanding the possibility that Bacchus might have incorrectly applied Chevron Oil.

Two clues to Justice Souter's possible thinking are provided in the body of his opinion. First, he cites and discusses Griffith v. Kentucky, 479 U.S. 314 (1987), which he interpreted as adopting, in the criminal context, a principle of equality requiring similarly situated litigants to be treated the same. He said:

Once retroactive application is chosen for any new rule it is chosen for all others who might seek its prospective application.

Justice Souter characterized his decision as limited "entirely to an issue of choice of law," and he expressly declined to "speculate" on "the bounds of propriety" of pure prospectivity in any particular case, thereby suggesting that pure prospectivity might not receive his approval in some contexts. [13]

With the retirement of Justice Marshall, the present make-up of the Court seemingly provides three "core" votes in favor of applying the Court's pure prospectivity doctrine in state tax cases (Chief Justice Rehnquist and Justices O'Connor and Kennedy), two "core" votes against doing so (Justice Blackmun and Scalia), two leaning strongly against pure prospectivity (Justices Souter and Stevens), and one whose future position is much more difficult to predict (Justice White). [14] Obviously, Justice Marshall's replacement (whether Circuit Judge Clarence Thomas or someone else) will have an important vote on this issue.

Importance of McKesson

A continuing ray of taxpayer hope for the future is provided by the unanimous Supreme Court opinion in McKesson. That case was also concerned with the application of Bacchus to a liquor tax statute that had been redrafted to comply with Bacchus. Although the Florida Supreme Court had held the statute invalid because it made only cosmetic changes from the preceding version clearly objectionable under Bacchus, the state court denied any refund to the taxpayer on the grounds that the state had relied in good faith on a presumptively valid taxing statute. (The Florida court also held that any refund accorded the taxpayer would amount to a "windfall" because the taxpayer had probably been able to pass on the cost of the tax to its customers.)

In reversing, the Supreme Court of the United States held unanimously that when the substantive rule in a case is retroactive, the Due Process Clause of the Fourteenth Amendment obligates the state to provide "meaningful backward-looking relief" to rectify any unconstitutional deprivation to property. Since the Florida tax was invalid "only" because it discriminated against interstate commerce, the Court held that Florida was not limited to providing such "relief" through a refund; it could "reformulate and enforce the liquor tax during a contested perior in any way . . ." that eliminated the discrimination. Accordingly, Florida could (i) order a refund for the discriminatory portion of the tax, (ii) assess increased back taxes to retrospectively eliminate the discrimination, or (iii) provide any combination of these two forms of relief, as long as the discrimination was wholly removed. [15]

In McKesson, the Court rejected the "pass-on" defense. The rejection in McKesson was on both factual and legal grounds; the Court stated that no showing had been made that the tax had been passed on to McKesson customers and, moreover, even if it had been, the taxpayer still would have been injured because the tax provided an advantage to the competitors in whose favor it discriminated. [16]

a. The Definitional Riddle

One of the continuing areas of uncertainty regarding retroactivity of constitutional state tax decisions is the legal label to be placed on the question. The plurality opinion in ATA/Smith viewed the issue as substantive: was the substantive law changed retroactively or only prospectively? The Court in ATA/Smith theorized that stare decisis justified applying the new rule prospectively only, if the existing tax statutes were valid under prior law. This analysis represented a new definitional approach to the issue, because in the earlier tax cases (Bacchus, Tyler Pipe, and Scheiner), the Court had remanded this matter for state determination as a remedial question. Indeed, that is how the dissenters and others defined the issue in ATA/Smith. [17] On the other hand, Justice Souter, coming to the question for the first time in Beam, defined the issue neutrally as one involving a "choice of law" almost as if a conflicts question devoid of constitutional content had been presented.

If retroactivity is a substantive issue governed by stare decisis, then where a tax refund is being claimed, the result is assumed if the Supreme Court has held that the new rule is to be applied prospectively only; no refund need be granted. Conversely, if rectroactivity is a question of remedy, the courts may have more flexibility to fashion appropriate remedies generally where the issues arises. [18]

b. Treatment of State Tax Refund Cases

The real question that the Supreme Court must address in a "new law" context, however, is whether typical state tax litigation still involves considerations requiring the "sure and certain refund" remedy demanded by Justice Holmes almost 80 years ago when he wrote in Atchison T. & S.F.Ry. v. O'Connor, 223 U.S. 280, 285-86 (1912):

It is reasonable that a man who denies the legality of a tax should have a clear and certain remedy . . . [If] he cannot interfere by injunction with the state's collection of its revenues, an action at law to recover back what he has paid is the alternative left. Of course . . . when . . . the state has a . . . summary remedy, such as distress, and the party indicates by protest that he is yielding what he cannot prevent, courts sometimes . . . have been a little too slow to recognize the implied duress . . . . But even if the state is driven to an action, if at the same time the citizen is put at a serious disadvantage . . .justice may require that he shall be at liberty to avoid those disadvantage by paying promptly and bringing suit . . . .

The preconditions identified by Justice Holmes are, alternatively, (i) whether the taxpayer has been prohibited by state law from seeking to enjoin the tax, and (ii) whether the taxpayer would be disadvantaged by penalties or summary collection procedures if it sought to contest the tax by seeking an injunction before paying it. In either case, the refund remedy must be "sure and certain."

Furthermore, Justice Holmes's opinion in Atchison was cited with approval by the unanimous court in McKesson. [19] In addition, McKesson states that "meaningful backward looking relief" must consist of a refund if a state has levied a tax that "was beyond the state's power to impose" other than because of its discriminatory nature. Otherwise "allowing the state to 'collect these unlawful taxes by coercive means and not incurring any obligation to pay them back'. . . would be in contravention of the [Due Process Clause of the] 14th Amendment." [20] In McKesson the Court also noted that post-deprivation relief was not necessary in situations where meaningful pre-payment relief was provided. Thus, if constitutional objections could be asserted in a suit for injunction before the taxpayer was subjected to duress to pay the tax or in a defense to a tax enforcement proceeding, McKesson suggests that the state would have satisfied the due process requirement to permit the taxpayer to be heard before any tax was collected. [21]

McKesson also analyzed the old rule applicable in many states that taxpayers have no common law right to the refund of a tax "voluntarily" paid. [22] The Due Process Clause of the Fourteenth Amendment requires meaningful retrospective relief only when the tax payment is under "duress." According to McKesson, "duress" exists, even when a pre-deprivation procedure for testing the tax is available, as by injunction or declaratory relief, if a tax must still be paid to "avoid financial sanctions or seizure of property." [23] Although availability of a pre-deprivation hearing without penalty could be a procedural safeguard sufficient in itself to satisfy due process requirements, McKesson recognizes that a state need not provide such a "meaningful" procedural protection from the exaction of taxes. Such a pre-deprivation hearing might "threaten a government's financial security, both by creating unpredictable interim revenue shortfalls . . . and by making the ultimate collection of validly unpaid taxes more difficult." Thus states are permitted to "employ various financial sanctions and summary remedies . . . to encourage . . . timely payments prior to resolution of any dispute over the validity of the tax assessment . . . ." [24]

At no point, however, does McKesson explicitly deal with the conflict that would arise if a tax refund claimant were denied a refund on the ground that its newly established constitutional right was to be applied prospectively only. If such a decision involve a state that either denied a pre-deprivation hearing on tax issues or collected its taxes under duress, prospective application of the new rule to a tax refund claimant would arguably violate the due process. [25]

Because almost all states employ both summary procedures and penalties to encourage "timely [tax] payments prior to resolution of disputes over . . . validity of the tax . . .," or prohibit prepayment relief from their principal taxes, this author believes that McKesson requires refund remedies to be granted by all such states.

Furthermore, it is not clear why the remand of the Davis-related cases issued after the decision in Beam did not also cite McKesson because the taxes in the Davis cases violated federal intergovernmental immunity, and were not simply discriminatory. Thus, it seems clear that the language of McKesson demands that Davis-related refunds be granted in each case where a refund remedy has been properly sought. [26]

The Bellas Hess Issue

Quill Corp. is a mail order office supply company with business locations in Illinois, California, and Georgia. The company has filed a petition for a writ of certiorari with the Supreme Court of the United States to challenge the decision of the North Dakota Supreme Court that it must collect use taxes from its North Dakota customers on purchases shipped into the state. [27] In reversing the trial court holding in favor of the taxpayer, the North Dakota high court expressly declined to follow the U.S. Supreme Court's holding in National Bellas Hess, Inc. v. Illinois Department of Revenue, 368 U.S. 753 (1967), on the grounds that its rationale had been undermined by intervening decisions, including Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and a sea change in the controlling facts.

Bellas Hess held that a state could not impose a use tax collection obligation on a mail-order seller that had no physical location or presence in the state. The decision found that both Due Process and Commerce Clause considerations required such a result. Due process was not satisfied because there was an absence of a "definite link" or "minimum connection" between the "state and the person, property or transaction it seeks to tax." The Commerce Clause was implicated because the resulting administrative burden on Bellas Hess would be very heavy if it were required to comply with "[t]he many variations in rates of tax, in allowable exemptions, and in administration and record-keeping requirements" that would be necessary if it were required to collect use tax for all the jurisdiction where its purchasers resided.

In its opinion in Quill, the North Dakota Supreme Court seized on the "more case-specific approach" suggested by Justice Fortas's dissent in Bellas Hess. Justice Fortas had argued that it was appropriate to take into consideration the nature and extent of the solicitation and exploitation of the market made by the particular merchandiser. Because Bellas Hess was regularly and continuously engaged in exploitation of the Illinois consumer market through its banking and credit facilities on a large-scale basis, Justice Fortas would have required it to collect the use tax. He discounted the majority's fear of the resulting administrative burden on the grounds that "the skill of contemporary man and his machines" could handle it.

In analyzing the facts in Quill, the North Dakota court found that the "economic, social, and commercial landscape upon which Bellas Hess was premised no longer exists . . ." According to the court, an enormous change from the mail order catalog business to "direct marketing" has been triggered by technological advances permitting computerized database marketing and overnight delivery. Mail order volume has swelled from $2.4 billion in 1967 to approximately $183.3 billion in 1989.

In addition, the state court found that a substantial change in the legal climate had also occurred in the intervening quarter century since Bellas Hess. In language that reads as if it might have originated in the state's brief, the court cited such cases as Complete Auto Transit, National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1987), and D.H. Holmes Co. v. MacNamara, 486 U.S. 24 (1988), for the proposition that the Supreme Court of the United States has moved away from a "pointless formalism" toward a substantial economic presence test for establishing tax nexus. The four-prong test for taxing interstate activities stated in Complete Auto Transit of (i) substantial nexus, (ii) fair apportionment, (iii) non-discrimination, and (iv) fair relationship to services provided by the state was claimed not to be offended by assignment of the use tax collection responsibility to Quill. The court's analysis holds that the seller's "ubiquitous" economic presence within the state satisfied the first prong of Complete Auto Transit and that the fourt prong was satisfied by the state's maintenance of an infrastructure necessary to support the North Dakota market that Quill was exploiting. [28] Direct benefit to Quill from this infrastructure was also projected by the court in the form of disposal of the 24 tons of trash that the court estimated Quill's mailing into the state produced each year. [29]

The court buttressed its holding further by reference to Quill's licensing of software to its North Dakota customers to provide on-line access to Quill's computerized inventory and price lists, thereby facilitating direct ordering by such customers. The court also thought it significant that Quill retained rights to recover ownership of the software upon termination of the license agreement as well as the fact that it contacted North Dakota financial institutions from time to time to check the credit of state customers.

Should the U.S. Supreme Court agree to hear the Quill case, a significant possibility exists that the case could serve as the vehicle for overturning Bellas Hess. If that occurs, the Court will then have to face whether that ruling would constitute "new law" justifying application of the Chevron Oil prospective-only rule. This would be the first time the court has been confronted with the possibility that the Chevron Oil doctrine could be applied to shield taxpayers from retroactive liability. Because of the diversity of views on the Court regarding non-retroactivity, it is impossible to predict the outcome.

Assuming that the threshold "new law" test of Chevron Oil and ATA/Smith would be satisfied, the equities favoring its application prospectively only appear to be significant. They include the following:

* the high relative cost of complying with different rate and exemption structures of the thousands of state and local governments that collect sales and use taxes in the United States, especially in the case of smaller businesses selling into many states;

* the relative lack of success of the states in several attempts to overturn Bellas Hess; [30]

* the ability of states to attempt more direct and less expensive means for collecting use taxes from its own citizens by requiring voluntary use tax assessments to be made on state income returns (as Maine has recently decided to attempt); [31]

* the lack in virtually all states of any statute of limitations protection for non-filing sellers who have relied on Bellas Hess; [32]

* the practical inability of sellers to recover retroactive use taxes from their purchasers; and

* the fact that any retroactive revenues from such a source would constitute a "windfall" to government since such revenues could not have been reasonably budgeted under existing law.

Furthermore, even states that had enacted and publicized statutes intended to facilitate the assault on Bellas Hess could hardly complain that prospective overruling of the case would violate any imagined legal right of the state. In fact, states may not wish to contest this issue vigorously, since to do so might take it more difficult for the court to overrule Bellas Hess should it be so inclined.

Thus another twist arising out of Quill is that it could provide an opportunity for the Supreme Court to strengthen the argument, not yet embraced by a full-court majority, that non-retroactivity constitutes a legitimate exercise of judicial power in tax cases. Certainly, the O'Connor-Rehnquist-Kennedy grouping on the Court would probably not shy from such a prospect that could succeed in permitting both parties in Quill to emerge victorious in part.

Conclusions

1. Beam appears to be a "way station" on the road to establishment of the Supreme Court's non-retroactivity doctrine. Indeed, its holding that retroactivity of the lead case necessarily rules out selective prospectivity for later cases may not always be the correct result. For example, that rule would prohibit the Court from taking into account the equities relating to specific taxpayers and other litigants that only rarely will be consistent from case to case.

2. The due process doctrine laid down by the Court in the early years of the Twentieth Century and elaborated in McKesson remains intact. Taxpayers required to pay taxes under duress -- and this includes almost everyone -- are entitled to a "sure and certain" remedy to recover those taxes if they were illegally collected. The taxpayer should be entitled to a pre-payment hearing to determine what constitutes present law but is not because of the states' practical need to collect revenues before such determinations are made. Accordingly, the Court's non-retroactivity doctrine must give way to the due process rights of taxpayers not to be deprived summarily of tax monies without having their day in court. ATA/Smith probably failed to consider this fundamental American right only because it was not properly before the Court or because the ATA/Smith plurality failed fully to appreciate the meaning of McKesson and its antecedent due process cases.

3. Quill seems to provide the possibility that the court might apply non-retroactivity to benefit the interests of mail-order sellers. It also tempts the Court to soften the effect of overruling Bellas Hess by deciding the case prospectively.

4. Tax refund claimants faced with a state defense that they did not bear the economic incidence of an illegal tax should continue to press their claims for full backward-looking relief in accordance with the Court's decision in McKesson. Unless the legislature of the state has acted to restrict tax refund claims on the basis of economic incidence, there does not appear to be any clear legal justification for so limiting tax refund claims.

5. In specific cases, taxpayers should consider escrowing or seeking an injunction against paying taxes imposed by statutes of doubtful constitutionality where "new law" is or may be implicated in final disposition of the case.

Notes

[1] The Supreme Court had originally remanded Tyler Pipe to the Washington Supreme Court for consideration of the retroactivity issue.

[2] Bass v. State of South Carolina, 111 S. Ct. 2881 (1991), reported below at 395 S.E.2d 171 (1990); Harper v. Virginia Department of Taxation, 111 S. Ct. 2883 (1991), reported below at 401 S.E.2d 868 (1991); Lewy v. Virginia Department of Taxation, 111 S. Ct. 2883 (1991), reported below at 395 S.E.2d 171 (1990). Norwest Bank Duluth v. James, 111 S. Ct. 2881 (1991), reported below sub nom Cambridge State Bank v. Roemer, at 457 N.W.2d 716 (Minn. 1991).

[3] In Davis, the Court held that states that exempted pensions paid to state employers from income tax could not tax federal employees on their pensions without violating intergovernmental immunity. See Cummings, Young & newman, Status of Davis-Type State Court Litigation, 51 Tax Notes 631 (May 6, 1991), where the status of this issue in 23 states is analyzed. See generally Swanson v. Powers, No. 90-1110 (4th Cir. June 25, 1991); Pledger v. Bosnick, No. 90-39 (Ark. June 10, 1991). The fourt case, Norwest Bank Duluth v. James, concerned whether Memphis Bank & Trust Co. v. Garner, 459 U.S. 392 (1983) (discriminatory tax on income from federal obligations violates federal immunity), should be applied prospectively.

[4] Ga. Code Ann. [section] 48-2-35(b)(1). The Georgia statute provides the state with the right to sue to collect penalties and interest and to attach the taxpayer's property and use garnishment to collect any tax due the state. Ga. Code Ann. [subsection] 48-2854, 48-3-1, 48-2-55, and 48-2-56.

[5] Chevron Oil established three factors that must be considered in determining the retroactivity of a new precedent: (i) whether a new principal of law has been established; (ii) whether the purpose of the rule is fostered by retroactive application; and (iii) whether retroactive application would not produce substantial inequitable results that may otherwise be avoided. ATA/Smith confirmed that the first factor is the threshold test.

[6] Heublein, Inc. v. State, 256 Ga. 578, 351 S.E.2d 1980 (1987).

[7] See Koch, American Trucking's "Catch-22" Should Not Affect Most Taxpayer Claims In Current State Tax Disputes, 51 Tax Notes 1043, 1045 (May 27, 1991).

[8] See Fallon & Miller, New Law, Non-Retroactive and Constitutional Remedies, 104 Harv. L. Rev. 1731 (1991); Koch, supra note 7.

[9] The plurality opinion in ATA/Smith was written by Justice O'Connor, who was joined by Chief Justice Rehnquist and Justices White and Kennedy. The dissenting opinion was written by Justice Stevens and concurred in by Justices Brennan, Marshall, and Blackmun.

[10] Justice Marshall concurred in both of their opinions and did not write a separate opinion.

[11] In fact, retroactivity was viewed as a remedial issue in Bacchus, and the case was remanded to the Hawaii Supreme Court for consideration of that issue. This is the same procedure followed by the Court in Scheiner and Tyler Pipe. Thus, it appears that Justice Souter would have probably joined the dissenters in ATA/Smith. Query, does his opinion for the Court in Beam overrule ATA/Smith, sub silentio? Of those in the majority in Beam, only Justice White specifically rejects that interpretation; therefore, one way to read the case is that there were five "core" votes against selective non-retroactivity, the technique used in ATA/Smith. Of course, one of those five was Justice Marshall's, and he announced his retirement in June 1991.

[12] A similar objection had been raised by the dissenters in ATA/Smith. Although they claimed Scheiner was not decided prospectively only, the "retroactivity" question was remanded to the Pennsylvania courts and expressly left open in Scheiner, as it was in Bacchus and Tyler Pipe. Presumably the dissenters' view emanated from the assumption that the remand in Scheiner was intended to apply only to remedial issues, not to the retroactivity of the Court's substantive decision. In fact, that is what the language of Scheiner, Tyler Pipe, and Bacchus implies. Because the Pennsylvania Supreme Court has decided not to grant any retroactive relief in Scheiner (1 State Tax Notes 31, September 2, 1991), that case could well be back before the Court soon. If that occurs, Justices White andScalia may feel morally bound to support non-retroactivity in accordance with their position in ATA/Smith. Query, if they should do so and majority of the Court agreed, would Scheiner II overrule Beam? Presumably, this paradox could influence the Court not to grant certiorari in Scheiner again.

[13] The dissenters in Beam specifically objected to this observation.

[14] Justice White voted for prospectivity in ATA/Smith on the grounds that Chevron Oil governed the result. In Beam, he concurred that retroactivity should not be withheld in any subsequent case once the leading case on the issue had been decided retroactively, regardless of whether the original case was correctly decided. He specifically rejected Justice Souter's suggestion, however, that pure prospectivity might not be correct in some circumstances.

[15] Notwithstanding the brilliance of the taxpayer's victory in McKesson, to date no refunds have yet been paid to McKesson; Florida is apparently still exploring the possibility of collecting the discriminatory portion of the tax from McKesson's competitors.

[16] In cases other than McKesson, it is possible that the "pass-on" argument (which was mentioned briefly by the Georgia court in Beam) may appear in the guise of an economic theory to determine the extent to which an aggrieved taxpayer may have suffered actual damages as a result of being subjected to an unconstitutional tax. Under this approach, actual damage would be defined as (i) the amount of tax that economic theory shows was absorbed by the taxpayer and not passed on to its customers and (ii) any lost market share attributable to the unconstitutional tax. See Lobel, Refunding Unconstitutional State Taxes, 52 Tax Notes 581 (July 29, 1991). This approach would not seem to pass muster under McKesson which rejected the pass-on defense on legal grounds and, in any event, might require statutory enactment before it could be engrafted on a state tax refund scheme calling for full refunds of illegal taxes. Bacchus, 468 U.S. at 277 n.14; cf. United States v. Jefferson Electric Manufacturing Co., 291 U.S. 386 (1934) (federal statute denied refund of automotive excise tax unless taxpayer proved it absorbed the burden of the tax). But cf. W. Va. Tax Announcement 91-15 (April 3, 1991), which announces West Virginia's intention to apply economic tax incidence analysis in calculating refunds of unconstitutional taxes, presumably the retroactive refunds ordered in Ashland Oil v. Caryl and National Mills v. Caryl. Tax incidence theory has the added disadvantage of being almost totally unintelligble to anyone but economists. See Lobel, supra.

[17] See Fallon & Miller, supra note 8. This article is an ambitious and versatile effort to categorically analyze the Supreme Court's nonretroactivity doctrine; it provides much useful information regarding the different subjects to which the Court has taken a "new law" approach by recognizing the reliance interest arising out of prior law. The article points out that, notwithstanding the abandonment of prospectivity in criminal cases pending on direct review in Griffith v. Kentucky, the Court has continued to refuse to apply new law in habeas corpus actions on the grounds that the writ is intended to cause lower courts to conform to establish law. See Teague v. Lane, 489 U.S. 288 (1989). Secondly, the article shows that the Court has refused to apply "new law" in constitutional tort actions where to do so would subject public officials to liability exposure that could not have been reasonably predicted. See Harlow v. Fitzgerald, 457 U.S. 800 (1982).

[18] See Fallon & Miller, supra note 8, at 1833.

[19] Several other due process cases were also cited. See Ward v. Love County Board of Commissioners, 253 U.S. 17 (1920); Montana National Bank of Billings v. Yellowstone County, 276 U.S. 43 (1928); Carpenter v. Shaw, 280 U.S. 363 (1930); Iowa Des Moines National Bank v. Bennett, 284 U.S. 239 (1931).

[20] McKesson, 110 L.Ed.2d at 37.

[21] McKesson, 110 L.E.2d at 36.

[22] See, e.g., Keyes v. City and County of San Francisco, 177 Cal. 313, 320, (1918).

[23] McKesson, 110 L.Ed.2d at 37 n.21. See also United States v. Mississippi Tax Commission, 412 U.S. 363, 368 (1973). Under the law of most states, major taxes must be considered paid under "duress" under this definition. See, e.g., Calif. Rev. and Tax Code [subsection] 504, 405, 26117, 2618, 2704, 2705, 2922, and 3691. (property taxes); Calif. Rev. and Tax Code [subsection] 25931-33, 25934, 25934.2, 25901, 25901(b), and 25901(c) (banking and corporations tax); Calif. Rev. and Tax Code [subsection] 18681-18681.1, 18682, 18684, 18682.1, and 18674.2 (personal income tax); and Calif. Rev. and Tax Code [subsection] 6408.4, 6480.8, 6591, 6476, 6477, 6478, 7051.2, 6484, and 6485 (sales and use tax).

[24] McKesson, 110 L.Ed.2d at 36.

[25] Brinckerhoff, Faris Trust & Savings Co. v. Hill, 281 U.S. 673 (1930), held that an administrative tax refund remedy could not be substituted retroactively by court decision for an injunctive right that was the only remedy recognized when taxpayers sought relief particularly since the administrative remedy was barred by the statute of limitations. In that case, Justice Brandeis stated that "a state may not deprive a person of all existing remedies for the enforcement of a right, which the state has no power to destroy, unless there is, or was afforded to him some real opportunity to protect it ...." See also Duke Power Co. v. South Carolina Tax Commission, 81 F.2d 513 (4th Cir.), cert. denied, 298 U.S. 669 (1936) (state could not retroactively repeal tax refund statute and restore right to seek injunction without violating due process requirements where the tax had already been paid and the taxpayer's suit for refund was pending when the legislature acted).

[26] One state in which refund remedies were not properly sought in every case arising under Davis is North Carolina. That state has had a 30-day statute of limitations for constitutional refund claims for 50 years. Accordingly, although some $9 million of Davis refunds have been paid by North Carolina, much greater claims were sought under 12 U.S.C. [section] 1983 but denied under qualified immunity in Swanson v. Powers, No. 90-1110 (4th Cir. June 25, 1991). See also Pledger v. Bosnick, No. 90-39 (Ark. June 10, 1991), which held that refunds under Davis must be granted because Chevron Oil did not apply to excuse retroactive application of the decision.

[27] North Dakota v. Quill Corp., No. 900257 (N.D. May 7, 1991), petition for cert filed, 60 U.S.L.W. 3108 (U.S. August 2, 1991)

[28] The second and third prongs of Complete Auto Transit were dismissed as irrelevant notwithstanding the distinct possibility that origin states may well begin to tax interstate sales if Bellas Hess falls. See Likely Effect on Interstate Mail Order Sales after Bellas Hess Repeal, 48 Tax Notes 496 (July 23, 1990).

[29] The court noted but dismissed as "too simplistic" another court's holding discounting this factor because, by the time the trash was disposed of, it was the property of the recipient. Cf. S.F.A. Folio Collections, Inc. v. Bannon, 217 Conn. 220, 585 A.2d 666 (1991). The North Dakota court stated that the seller obtained much more benefit from the catalog mailings than did the recipients, a conclusion that some residents of a rural state like North Dakota might find equally "simplistic."

[30] L.L. Beam, Inc. v. Commonwealth, 101 Pa. Common Ct. 435 (Pa. 1986); Bloomingdale's By Mail, Ltd. v. Pennsylvania Department of Revenue, 513 Pa. 149, 518 A.2d 1203 (1986); Cally Curtis v. Groppo, 214 Conn. 292, 572, A.2d 302 (1990); S.A.F. Folio Collections, Inc. v. Bannon, supra; but cf. S.F.A. Folio Collections v. Huddleston, No. 89-30125-ii (Tenn. Chancery Ct. 20th Jud. Dist. March 11, 1991); Bloomingdale's By Mail, Ltd. v. Huddleston, No. 893017-ii (Tenn. Chancery Ct. 20th Jud. Dist. March 8, 1991).

[31] See 48 Tax Notes 481 (July 23, 1990).

[32] Thus, should Bellas Hess be overturned in such states, theoretically they could attempt to collect use tax for years prior to 1967 when Bellas Hess was decided.

ALBIN C. KOCH is Of Counsel to the Toluca Lake, California, law firm of Horgan, Rosen, Beckham, & Coren. Mr. Koch is a graduate of Yale University and Harvard Law School, and has previously served as Vice President and Assistant General Tax Counsel of Bank of America and as a partner in Morrison & Foerster. He is active in the California Bar Association and the ABA Section of Taxation, and is the author of numerous articles on state and local tax issues.