Is it constitutional for North Carolina to make you pay the use tax on out-of-state purchases on your state income tax return?
Plain-English summary
Starting with the 1999 tax year, North Carolina added a new line to the individual income tax return: most filers had to add up their out-of-state purchases that had not been subject to NC sales tax and pay the 6% use tax on them along with the income tax. The change came from G.S. § 105-269.14. Representative Cary Allred wanted to know whether the new mechanism was constitutional, given the recent federal Internet Tax Freedom Act (Pub. L. 105-277, 1998) and the line of Supreme Court Commerce Clause cases starting with Bellas Hess and Quill.
Senior Deputy AG Reginald Watkins and Special Deputy George Boylan walked through the relevant authorities and concluded the new bundling statute was fine.
The use tax in context. North Carolina's use tax dated to 1939. It was the partner of the sales tax, designed to capture the same revenue when goods were bought out of state and brought into NC for use. Johnston v. Gill (NC 1944) had described the use tax's purpose: to prevent sales-tax evasion by out-of-state purchasing and to put out-of-state merchants on equal footing with in-state ones. Liability fell on the purchaser under G.S. § 105-164.6.
The Internet Tax Freedom Act. Most of the federal Act addressed online-content access by minors and was not relevant to the question. The relevant provisions were sections 1101(a)(1) and (a)(2), which set a three-year moratorium on state taxes on Internet access and on "multiple or discriminatory" taxes on electronic commerce. The AG read those provisions narrowly: they prohibited taxing the access itself or singling out e-commerce for special treatment. They did not preempt a state's traditional use tax that applied evenly to all forms of out-of-state purchase, online or catalog or otherwise.
The Supreme Court Commerce Clause line. National Bellas Hess (1967) and Quill (1992) addressed a different question: when could a state make a remote vendor collect and remit the use tax on the buyer's behalf? Both decisions held that the vendor needed "substantial nexus" with the destination state, which Quill defined as physical presence. Quill clarified that Bellas Hess's due-process holding was no longer good law, but its Commerce Clause holding survived. Together, the cases blocked vendor-collection mandates for purely remote sellers.
The AG's key move was to distinguish vendor-collection from purchaser-payment. Section 105-269.14 did not force any out-of-state vendor to do anything. It told the in-state purchaser to total up their use tax when filing the income return. The transaction being taxed was the use of property in North Carolina, which was a purely in-state event. Quill and Bellas Hess were inapposite because they limited state power to commandeer out-of-state vendors, and the new statute did not do that.
The Internet Tax Freedom Act, again. The AG also rejected the argument that the bundling provision somehow violated the Internet Tax Freedom Act. The federal moratorium prevented states from taxing Internet access or imposing discriminatory taxes on e-commerce. The NC bundling statute was neither. It collected the same use tax that had been on the books for 60 years, on the same in-state use event, regardless of whether the underlying purchase happened via the Internet, a catalog, a phone order, or a trip across the state line.
Bottom line in 2000. A North Carolina taxpayer who bought a $200 widget online from a Delaware vendor without paying NC sales tax owed NC use tax on that purchase. The new bundling statute made the collection of that tax happen on the income tax return, which was administratively easier than the standalone consumer use return. The Constitution did not stop the state from making that change.
Currency note
This opinion was issued in 2000. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Internet Tax Freedom Act was extended several times after the original three-year moratorium and was made permanent in 2016. South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), substantially overruled Quill's physical-presence test, dramatically expanding state authority to require remote vendors to collect sales and use taxes. North Carolina's own use-tax provisions have been amended multiple times since 2000. The constitutional analysis of vendor-collection mandates today is entirely different from what it was in 2000.
Background and statutory framework
The use tax problem. A use tax is an end-runaround for sales-tax evasion. When state A imposes a sales tax on retail purchases, residents have an incentive to shop in state B (where there is no sales tax) or by mail order. The use tax solves this by imposing the same rate on the act of using or storing the property in state A. The economic burden falls on the purchaser; the legal liability also falls on the purchaser.
G.S. § 105-269.14 (1999). The new provision required most NC residents to report and pay the use tax on their out-of-state purchases on the individual income tax return. Filers who did not file an income return continued to use the consumer use return under G.S. § 105-164.16(d). The statute did not change who owed the use tax. It changed when and how the tax was collected.
Federal Internet Tax Freedom Act framework. The 1998 federal Act had two operative substantive provisions for state taxation:
- A moratorium on state taxes on Internet access.
- A moratorium on "multiple or discriminatory" taxes on electronic commerce.
Neither provision touched traditional sales and use taxes that applied evenly. The Act's text and legislative history were explicit that it did not displace neutral state-level consumption taxes.
Quill and the dormant Commerce Clause. Quill and its predecessor Bellas Hess were vendor-side cases. They held that a state could not require a remote vendor to act as the state's tax collector unless the vendor had a physical presence in the state. The cases did not say a state could not collect use tax from the resident purchaser. The AG flagged this distinction explicitly: "Nothing within G.S. § 105-269.14 attempts to make vendors of goods account for taxes incurred by their vendees. The statute simply does not affect interstate commerce in any way."
Johnston v. Gill (1944). The NC Supreme Court's 1944 decision was the foundational state-law authority for the use tax. It described the use tax's two purposes: preventing sales-tax evasion and putting out-of-state and in-state vendors on equal footing. The AG used the case as background, not as a controlling decision on the constitutional question.
Common questions
Q: Did this opinion say I had to report every coffee mug I bought online?
A: The opinion did not draw a de-minimis threshold. As a legal matter, every out-of-state purchase used in NC was subject to use tax. As a practical matter, NC's income tax return offered a simplified table option for small purchases, but the underlying rule covered everything.
Q: Was I obligated to keep receipts?
A: The opinion did not address recordkeeping. The Department of Revenue's regulations and audit guidance would address that.
Q: What about purchases I picked up while traveling out of state?
A: The same rule applied. The use tax was on the use of the property in NC, not on the purchase itself. If the property came home to NC for use, it was within the use-tax base.
Q: Did this opinion make it easier or harder to evade the use tax?
A: The opinion did not address compliance behavior. Adding the line to the income return likely improved collection by raising visibility, but the opinion was about constitutionality, not practical effect.
Citations from the opinion
- G.S. § 105-269.14
- G.S. § 105-164.6
- G.S. § 105-164.6(d)
- G.S. § 105-164.16(d)
- 1939 Sess. L., ch. 158, s. 800
- Internet Tax Freedom Act, Pub. L. 105-277 (1998)
- Sections 1101(a)(1) and (a)(2) of the Internet Tax Freedom Act
- Johnston v. Gill, 224 N.C. 638, 643-44 (1944)
- Quill Corp. v. North Dakota, 504 U.S. 298 (1992)
- National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967)
Source
Original opinion text
Re: Advisory opinion: Constitutionality of requiring payment of use tax with submission of individual income tax return; Internet Tax Freedom Act; G.S. § 105-164.6
Dear Representative Allred:
Beginning with taxable year 1999, G.S. § 105-269.14 requires that most persons remit unpaid "use" taxes with the filing of their individual income tax returns. Individuals not required to file income tax returns will continue to file the consumer use return. G.S. § 105-164.16(d). In light of the Internet Tax Freedom Act ("P.L. 105-277") (1998), and several federal decisions addressing application of the use tax to interstate commerce, you request our opinion as to the constitutionality of this new provision.
North Carolina's use tax was first enacted in 1939 to complement the sales tax. 1939 Sess. L., ch. 158, s. 800. The tax is imposed upon property acquired for use in North Carolina, other than for sale. G.S. § 105-164.6. The tax is designed to prevent evasion of the sales tax by individuals purchasing tangible personal property outside the state. Johnston v. Gill, 224 N.C. 638, 643-44 (1944). It prevents unfair competition on the part of out-of-state merchants. Id. at 644.
The bulk of P.L. 105-277 is directed at regulating access by minors to the Internet, concerns distinct from your inquiry. However, other provisions seem relevant. Sections 1101(a)(1) and (2) prohibit states for a period of three years from taxing "Internet access" or imposing "multiple or discriminatory taxes" upon electronic commerce.
Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ("Quill") and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967) ("Bellas Hess"), remain seminal cases as to the constitutional restraints upon the powers of states to assess or collect use taxes from multi-jurisdictional companies. In Quill, the Court affirmed Bellas Hess in part and held that the states may not require sellers of goods to collect use taxes levied in the destination states of their buyers unless the sellers actually possess physical presence in such jurisdictions. Id. at 317. Quill holds, however, that to the extent Bellas Hess suggests that "due process" also requires a showing of physical presence, Bellas Hess no longer remains good law. Id. at 308.
Whatever the purported national scope of the Internet Tax Freedom Act, in our opinion it does not prohibit a state from bundling payment of use taxes with payment for income taxes. Liability for the use tax falls directly upon the purchaser of the property. G.S. § 105-164.6(d). The transaction taxed, a defined use of tangible property, is totally different from that activity now pre-empted by federal law: access to the Internet or levies upon electronic commerce.
Moreover, Quill and related decisions speak only to the range within which states can make interstate sellers collect taxes actually owed by their customers. Nothing within G.S. § 105-269.14 attempts to make vendors of goods account for taxes incurred by their vendees. The statute simply does not affect interstate commerce in any way.
We hope the foregoing is helpful.
Signed by:
Reginald L. Watkins, Senior Deputy Attorney General
George W. Boylan, Special Deputy Attorney General