WASHINGTON -- The Supreme Court is set to hear arguments in mid-January in two closely watched cases that could define more clearly the taxing power of states and fill their cash-strapped treasuries with more than $3 billion.

In one case, Quill v. North Dakota, state officials are asking the high court to allow them to impose sales tax collection responsibilities on out-of-state mail-order retailers.

But such a move would require the court to overturn a 1967 ruling in National Bellas Hess Inc. v. Department of Revenue, in which the court struck down as unconstitutional an Illinois sales and use tax because mail retailers lacked a sufficient connection with, and derived insufficient benefit from, the state to warrant tax collection responsibility.

In addition, the court in Bellas Hess said the tax collection duty violated the Constitution's commerce clause because it placed an undue burden on interstate commerce.

But the phalanx of municipal government groups lining up behind North Dakota in the current Supreme Court effort claim that much has changed since 1967. They argue that mail-order sales have steadily mounted since the mid-1960s, growing 18.9% between 1988 and 1990, to $57.75 billion from $48.3 billion.

According to the National Governors' Association, states lose an estimated $3 billion annually because the Bellas Hess precedent prohibits them from requiring out-of-state mail-order companies to collect sales taxes.

However, because of the steadily escalating growth of the mail-order industry and states' needs for cash, at least 34 states have enacted laws imposing tax-collection responsibilities on out-of-state retailers. Those laws have spurred a spate of lawsuits which, in the end, will hinge upon the high court's ruling in the Quill case.

Quill Corp. is a national mail-order company that sells office supplies through catalogs and advertising fliers, receiving orders at offices and warehouses located in Illinois, California, and Georgia.

In 1987, North Dakota amended its use tax to require any firm that regularly solicits sales of tangible property through catalogs or other such devices to collect and remit state sales taxes.

The state then sought to have Quill Corp. declared a retailer subject to the tax collection responsibility. The state district court declined the request on the basis of the high court's Bellas Hess ruling, but the state supreme court earlier this year reversed the ruling, holding Bellas Hess an "obsolescent precedent."

Municipal groups hailed the U.S. Supreme Court's decision to hear arguments in the matter, but it remains unclear how the justices will resolve the case. Some observers have said they believe the court will merely reiterate its Bellas Hess ruling and upbraid the North Dakota high court for overturning the 1967 precedent. The justices generally guard their decisions and defer to themselves the ability to overturn previous rulings.

The high court is scheduled in January to consider a dispute pitting the Wisconsin Revenue Department against the William Wrigley Jr. Co. At issue is the degree to which state governments can tax out-of-state firms and what types of business practices constitute solicitation of orders.

Federal law provides companies operating outside their home states with a partial shield from taxation, prohibiting states from imposing a net income tax on an out-of-state firm's efforts to solicit orders.

State supreme courts interpreting the law have reached vastly different results, ranging from a narrow reading of the tax exemption for solicitation in Arkansas to a relatively broad interpretation in Wisconsin.

Wisconsin officials attempted to tax Wrigley in 1980 for the six tax years spanning 1973 through 1978. The $246,641.04 tax bill was levied because of the work of five Wrigley's sales representatives, who replaced stale gum for their clients and installed and maintained product displays -- actions that revenue department officials viewed as going beyond order solicitation.

The Wisconsin Supreme Court disagreed, ruling solicitation "includes activities incidental to the initial contact between buyer and seller."

Thirty-three states filed a friend-of-the-court brief on Wisconsin's behalf, arguing that the Wisconsin Supreme Court incorrectly interpreted the tax exemption. The signatory states also claimed the issue is one of fairness.

"The broad interpretation used by the supreme court of Wisconsin allows an out-of-state company to do practically anything in a state that a local company would do, and benefit from the same state services as the local company, but not pay and tax to the state to help pay for those services," the state officials, led by Iowa's attorney general, said.

The Supreme Court is scheduled to hear arguments in both the Quill and Wrigley cases Jan. 22. Decisions in the disputes are expected by summer.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.