Three major sources of state and local revenue are before the US Supreme Court and the decisions may have far-reaching consequences for all government entities and taxpayers. How is real property to be assessed and taxed? When must sales and use tax be collected? What corporate activities result in taxes on income? The pending cases dealing with these issues are expected to be settled by June 1992.
The U.S. Supreme Court has agreed to hear three cases on fundamental concepts of state and local taxation:
* Real property taxes--the Nordlinger case; * Sales and use taxes--the Quill case; and * Corporate income taxes--the Wrigley case.
REAL PROPERTY TAXES
The Nordlinger case involves the system of real estate taxation enacted by the voters of California in the Proposition 13 referendum in 1978. Under Proposition 13, which is a part of the State of California constitution, real estate taxes are limited to 1% of the lesser of fair market value or the assessed value of the property on March 1, 1975.
An annual inflation adjustment of no more than 2% is allowed. If there is a change of ownership, the property is reappraised at its fair market value, and the 1% tax rate is imposed on that value.
STRANGERS ARE WELCOME
This system of taxation is sometimes referred to as the "welcome stranger" doctrine. In Allegheny Pittsburgh Coal Co. v. County Commisioner of Webster County, 488 U.S. 336 (1989), the Supreme Court ruled that a system of assessments based on the most recent purchase prices violated the equal protection clause of the U.S. Constitution. The result of the county assessor's system was assessments of recently sold properties from eight to 35 times higher than those of comparable neighboring properties. The county assessor's practice was to assess property at 50% of purchase price. The court held that such a general adjustment was not constitutionally improper when used as a transitional substitute for the reappraisal of individual properties. To satisfy the equal protection clause, in the court's words, there should be: "Seasonable attainment of a rough equality in tax treatment of similarly situated property owners."
Allegheny-Pittsburgh involved the practices of a county assessor. In a footnote referring to Proposition 13, the court stated: "We need not and do not decide today whether the Webster County assessment method would stand on a different footing if it were the law of a state, generally applied, instead of the aberrational enforcement policy it appears to be." The Nordlinger case directly addresses this issue, since it involves a new homeowner paying substantially more tax than her neighbors who are long-term residents, because of an explicit provision in the California constitution.
The Nordlinger case could have enormous impact throughout the country on those states that do not have an effective system of periodic reappraisal to current market values. In Allegheny-Pittsburgh, the Supreme Court hinted that only a system of real estate taxation that included relatively frequent reassessment of all property could satisfy the equal protection clause. Many jurisdictions do not satisfy this standard.
SALES AND USE TAXES
North Dakota v. Quill Coloration is a direct challenge to precedent established by the Supreme Court in National Bellas Hess Inc. v. Illinois Department of Revenue, 386 US 753 (1967). In Bellas Hess, the Supreme Court held that a Missouri corporation that solicited sales in Illinois by mail order catalogs and shipped its goods by common carrier had no obligation to collect the use tax imposed on its customers by Illinois. This "bright line" distinction between mail order sellers and other out-ofstate businesses with more substantial connections, including physical presence in a state, has become the operating principle governing the collection of use taxes. The Supreme Court also emphasized the substantial administrative burden of collecting and remitting use taxes to numerous jurisdictions. …