The Supreme Court: Sales Taxes on Mail Orders

Sales Taxes on Mail Orders

Many of us enjoy the benefits of ordering by mail from out of state companies so we can avoid paying state taxes. Numerous states have tried to require companies to collect sales or use taxes on products sold to its residents through the mail, in print, and on radio or television, but so far have been stopped by the courts. Some states, such as Connecticut, put the burden on its citizens who order from out of state to report these purchases and pay the taxes on them directly to the state.

North Dakota passed a law in 1987 requiring out-of-state mail-order houses to collect and pay a use tax on goods purchased for use in the state. Quill Corporation refused to comply and the state of North Dakota took them to state court. The trial court ruled in Quill's favor and found that based on Supreme Court precedent in a 1969 case (National Bellas Hess, Inc. v. Department of Revenue of Ill.) the law created an unconstitutional burden on interstate commerce based on the Fourteenth Amendment's due process clause. In addition the Supreme Court found it conflicted with the commerce clause because, “The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control.”

States can only require companies to collect taxes if the company has a physical presence in the state. The North Dakota State Supreme Court reversed this decision based on the ruling in another precedent setting case, Complete Auto Transit Inc. v. Brady decided in 1977, which loosened up the rules for physical presence within the state.

The Quill Corporation appealed the State Supreme Court's ruling to the United States Supreme Court. Quill based its case on the fact that it is a Delaware corporation with offices and warehouses in Illinois, California, and Georgia. None of its employees work or live in North Dakota and it owns no tangible property in the state. Quill's only activity in North Dakota was to sell office equipment and supplies through catalogs and flyers, advertisements in national magazines, and telephone calls. At the time Quill argued the case before the Supreme Court, Quill's annual sales volume was $1 million to about 3,000 customers in the state.

The United States Supreme Court reversed the decision of the North Dakota Supreme Court. Justice Steven said in the opinion he wrote for the Court that the commerce clause was not influenced “so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy. Under the Articles of Confederation, State taxes and duties hindered and suppressed interstate commerce; the Framers intended the Commerce Clause as a cure for these structural ills.”

Although it agreed with the North Dakota State Supreme Court that cases subsequent to Bellas Hess adopted a more flexible “presence requirement,” this did compel the United States Supreme Court to “reject the rule that Bellas Hess established in the area of sales and use taxes.” The Court went on to rule:

• “This aspect of our decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions …. Indeed, in recent years Congress has considered legislation that would “overrule” the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to rest. Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”

The Supreme Court threw the issue of who should collect sales and use taxes on interstate commerce back into the lap of Congress. The issue has heated up even more in recent years because of the massive increase in interstate sales thanks to the growth of sales using the Internet. You can probably bet some legislation will find its way into state and federal legislatures soon.

While the United States Supreme Court may not take very many tax cases, whenever they do, it can have a significant impact in many state houses. This ruling overturned numerous state laws.

Now that you have an idea of the types of tax cases the Supreme Court heard recently, we'll take a look at how the Court has ruled on laws affecting your property ownership.