Jefferson Lines, Inc., In re, 93-1684

• Decision Date: 21 January 1994
• Docket Number: No. 93-1684,93-1684
• Citation: 15 F.3d 90
• Parties: -826 In re JEFFERSON LINES, INC., Debtor. STATE OF OKLAHOMA ex rel. OKLAHOMA TAX COMMISSION, Appellant, v. JEFFERSON LINES, INC., Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 90

15 F.3d 90

73 A.F.T.R.2d 94-826

In re JEFFERSON LINES, INC., Debtor.

STATE OF OKLAHOMA ex rel. OKLAHOMA TAX COMMISSION, Appellant, v. JEFFERSON LINES, INC., Appellee.

No. 93-1684.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 11, 1993.

Decided Jan. 21, 1994.

Stanley P. Johnston, Deputy General Counsel of the Oklahoma Tax Com'n, Oklahoma City, OK, argued (J.I.M. Caldwell and Craig S. Key, Asst. General Counsel of the Oklahoma Tax Com'n, on the brief), for appellant.

Loren A. Unterseher, Minneapolis, MN, argued (Steven D. DeRuyter, on the brief), for appellee.

Before RICHARD S. ARNOLD, Chief Judge, BEAM, Circuit Judge, and JACKSON, ^* District Judge.

RICHARD S. ARNOLD, Chief Judge.

In 1989, the Oklahoma Tax Commission sought payment from Jefferson Lines, Inc., the debtor in a Chapter 11 bankruptcy proceeding, for unpaid sales tax on the gross price of interstate bus tickets sold in Oklahoma. The State law, Okla.Stat. Title 68, Sec. 1354(1)(C), requires Jefferson to collect and remit sales tax on the gross price of every bus ticket sold in Oklahoma. ¹ The statute applies to the sale of all tickets sold in Oklahoma, regardless of where the trip begins or ends. Jefferson is a bus line providing transportation service for both intrastate and interstate travel. Jefferson objects to paying the sales tax for the miles travelled outside of Oklahoma, arguing that the sales tax violates the Commerce Clause of the United States Constitution, Article I, Sec. 8, cl. 3. The Bankruptcy Court ² agreed with Jefferson. The District Court ³ affirmed. So do we.

A state tax on interstate commercial activity violates the Commerce Clause unless it "is applied to an activity with a substantial nexus to the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services or benefits provided by the State." Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51 L.Ed.2d 326 (1977). If a tax statute fails to meet any of these four standards, the statute will offend the Commerce Clause. See Goldberg v. Sweet, 488 U.S. 252, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989). Both the District Court and the Bankruptcy Court held the statute was not fairly apportioned, thus failing the second standard of Complete Auto. We begin our inquiry by examining the issue of apportionment.

To determine whether a tax is fairly apportioned a court must ask whether the tax is both "internally" and "externally consistent." Goldberg, 488 U.S. at 261, 109 S.Ct. at 589. The purpose of this inquiry "is to ensure that each State taxes only its fair share of an interstate transaction." Goldberg, Id.

For a tax to be internally consistent, it "must be structured so that if every State were to impose an identical tax, no multiple taxation would result." Id. at 261, 109 S.Ct. at 589. The Oklahoma tax meets this test. As noted by the District Court and the Bankruptcy Court, an individual bus ticket can be sold in only one state. Therefore, even if every state taxed bus tickets sold within its borders, for all transportation originating within that state, no customer would be taxed more than once. Thus, the Oklahoma tax is internally consistent.

But is the Oklahoma tax externally consistent? "The external consistency test asks whether the State has taxed only that portion of the revenues from the interstate activity which reasonably reflects the in-state component of the activity being taxed." Goldberg, Id. When we evaluate the arguments, we must look beyond formalism and consider the practical and economic effect of the tax on interstate commerce. Id. at 264, 109 S.Ct. at 590; see also Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 659-60, 68 S.Ct. 1260, 1264-65, 92 L.Ed. 1633 (1948).

The Commission contends that the tax is externally consistent and does not need to be apportioned because the tax is on the sale of the ticket and therefore is imposed only on local activity. To defend the assertion that only the sale of the ticket is taxed and not the use of the ticket, the Commission explains that the Oklahoma sales tax is based solely on the purchase price of the ticket, and that once the sale has occurred, the taxable event is complete. In essence, the Commission argues that the taxable activity is the sale of a ticket, not of transportation. This argument is too technical and flies in the face of how bus-ticket prices are set. A ticket price is set, at least partially, on the number of miles travelled. To say that only the purchase of a ticket is taxed, and not the use of the ticket, ignores the fact that the real value of the ticket is the right to ride a bus. The ticket without the travel would be of scant value to a customer. We will not separate the sale of a piece of paper from the service which it represents. To hold otherwise would elevate form over substance and require this Court to ignore economic realities.

Both courts below relied, correctly we think, on Central Greyhound Lines, Inc. v. Mealey, supra. In this 1948 case, New York levied a gross-receipts tax on a New York-based bus company. All of the company's revenues were subject to the tax, even though they included large sums attributable to transportation services performed in New Jersey. The Supreme Court held the tax invalid because it was not apportioned as between intrastate and interstate transportation revenues. The Court said that "[b]y its very nature an unapportioned gross receipts tax makes interstate transportation bear more than 'a fair share of the cost of local government whose protection it enjoys.' " 334 U.S. at 663, 68 S.Ct. at 1266 (quoting Freeman v. Hewit, 329 U.S. 249, 253, 67 S.Ct. 274, 277, 91 L.Ed. 265 (1946)). The vice of the New York gross-receipts tax was that "it [laid] 'a direct burden upon every transaction in [interstate] commerce by withholding, for the use of the State, a part of every dollar received in such transactions.' " Central Greyhound, 334 U.S. at 663, 68 S.Ct. at 1266 (quoting Crew Levick Co. v. Pennsylvania, 245 U.S. 292, 297, 38 S.Ct. 126, 128, 62...