Sales Tax and the Repeal of Prohibition

Published Date:
Jan 14, 2014

The 21st amendment, which repealed Prohibition back in 1933, would hardly seem to be news. But it actually came into play in what initially appeared to be a very ordinary query before the state tax department. The Office of Counsel usually can resolve sales tax confusion by consulting state laws and regulations, with occasional references to court cases and IRS rules. But in Advisory Opinion TSB-A-13(35)S, the state based its decision—almost entirely—on one of the U.S. Constitution's most famous amendments.

The facts were straightforward: the petitioner is a California-based retailer of bottled wine, which it sells through online catalogs. It holds a license to sell its products to New York state residents aged 21 or older for their personal use, if certain conditions are met. It uses common carriers (that is, not its own delivery vehicles) to ship the wine and maintains no employees, agents or any kind of property or place of business in New York. It would appear there is no nexus and thus no need to collect New York state sales tax.

However, the 21st Amendment did more than allow the sale of alcoholic beverages, as Deputy Counsel Deborah R. Liebman pointed out: The second section of the Amendment states that the "transportation or importation into any State . . . for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited.” Under this section, said Liebman, the state has placed a condition on permission to sell wine produced outside New York directly to state residents. (These are the "laws thereof.") One of these conditions is requiring the seller—that is, the petitioner—to collect sales tax. Indeed, the petitioner also has to observe a variety of other New York provisions under the state's Alcoholic Beverage Control Law.

Never mind nexus: Liebman emphasizes that forcing the California wine company to take responsibility for collecting sales tax was constitutional even though the company had no presence in New York—thanks to that second section. She cited a 1980 U.S. Supreme Court case (California Retail Liquor Dealers Assn. v. Midcal Aluminum, Inc.), in which the court said that the 21st Amendment "grants the States virtually complete control over whether to permit importation or sale of liquor and how to structure the liquor distribution system."

The U.S. Supreme Court revisited this issue in 2005, with a specific reference to New York, pointed out Liebman. In Granholm v. Heald, the court ruled New York could not prohibit direct sales of wine by out-of-state distributors. The state had used the justification that it needed to protect sales tax revenues. In this context, the majority of the court made it clear that New York still had to right to regulate the importation of wine (although not ban it outright). Liebman quoted from the decision: "In particular, New York could protect itself against lost tax revenue by requiring a permit as a condition of direct shipping…Licensees could be required to submit regular sales reports and to remit taxes."

In short, the provisions of New York's registration requirement, properly set up under the authority of the 21st Amendment, trump the famous Quill v. North Dakota case that set the standard for nexus and cross-border sales tax requirements.

The lesson here is very narrow on the surface: advisory opinions are only applicable for the particularly situation, and not many vendors can claim the U.S. Constitution regulates their products. But it is valuable for CPAs to know that occasionally the minutiae of obscure tax provisions will have to give way to major principles of constitutional law. More broadly, we can see that sometimes even the most mundane tax cases can be full of surprises.     

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