WASHINGTON -- States cannot require interstate mail order firms to collect and remit state sales taxes, the Supreme Court ruled yesterday.
The high court, ruling 8 to 1 in Quill Corp. v. North Dakota, said that imposing tax collection responsibilities on catalogue and phone retailers puts an unconstitutional burden on interstate commerce.
But the justices unanimously ruled that such tax collection requirements do not violate the Constitution's due process guarantees.
Though technical, the distinction drawn by the court between interstate commerce and due process provides a significant, if partial, victory for states. Indeed, it could pave the way for a battle royal in Congress between direct marketers and state officials.
Under the Constitution, Congress has sole authority to regulate interstate commerce. Congress is thus free to pass legislation specifically authorizing states to impose tax collection responsibilities on mail order firms.
But if the high court had ruled that the tax collection duty violated due process guarantees, Congress would have been powerless to act because the Supreme Court, and not the legislature, has the final say over what constitutes due process.
As it is, the justices have specifically invited Congress to act.
Writing for the court, Justice John Paul Stevens said the issue presented by the Quill case "is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve."
Stating that the court was specifically overruling a previous decision that sales tax collection requirements for mail order firms violate the due process clause, Justice Stevens said, "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 justice added.
In 1967, the Supreme Court in National Bellas Hess Inc. v. Department of Revenue held that an Illinois law requiring out-of-state mail order firms to collect and remit sales and use taxes violated both the due process and commerce clauses of the Constitution.
The court reasoned that because Bellas Hess had no outlets or sales representatives within Illinois, the firm did not have the required contact, or nexus, with the state.
The justices revisited the nexus issue in the Quill case yesterday. They unanimously concluded that Quill, an office supply company, had "purposefully directed its activities at North Dakota residents," and that the magnitude of the firm's North Dakota activities was sufficient for due process purposes, even though Quill had no operations or employees in North Dakota.
But having concluded that Quill had sufficient contact with North Dakota to be saddled with tax collection requirements under the due process clause, the court went on to rule 8 to 1 that there was not a sufficient connection between the firm and the state to impose the requirements under the commerce clause.
The court explained that due process is concerned with the fairness of a governmental activity. As a result, the court analyzes whether a firm's contact with a state is substantial enough to warrant the state's exercise of power over the business when confronted with a due process challenge to a state tax.
"In contrast, the commerce clause, and its nexus requirement, are informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy," Justice Stevens wrote.
Because Quill's contact with North Dakota's customers was limited to mailed catalogues, the court majority concluded there was insufficient nexus for the tax collection requirement under the due process clause. The court thus affirmed the portion of its Bellas Hess ruling that requires states to show a catalogue firm has a physical presence in the state before being allowed to make it collect sales taxes.
Justice Stevens said the physical presence requirement provides a "bright-line rule" that "establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes and reduces litigation concerning those taxes."
Justice Bryon R. White wrote a partial dissent in the case, expressing dismay that the court did not give Bellas Hess "the complete burial it justly deserves."
He said physical presence has little relevance in today's economy: "Wire transfers of money involving billions of dollars occur every day. Purchasers place orders with sellers by fax, phone, and computer linkup. Sellers ship goods by air, road, and sea through sundry delivery services without leaving their place of business."
Moreover, Justice White said, out-of-state direct marketers receive numerous benefits from the states in which they do business, and should be subject to tax collection responsibilities.