WASHINGTON -- In a case that could affect 45 states and the District of Columbia, Connecticut officials are asking the U.S. Supreme Court to overturn a 1967 ruling and allow states to tax the $150 billion-a-year mail-order industry.
The 1967 ruling, which came in National Bellas Hess v. Department of Revenue, is coming under increasing fire nationally as state courts attempt to apply the high court's rationale.
A favorable decision could help beef up state coffers by at least $3 billion by some estimates. Forty-five states and the District of Columbia currently assess sales and use taxes, while 35 states have enacted statutes that specifically call for tax collections on interstate mail-order sales.
The Connecticut Supreme Court, in Revenue Commissioner v. SFA Folio Collections Inc., on Jan. 22 stood by the Bellas Hess precedent and struck down a state law requiring out-of-state mail order merchants to collect taxes on sales to Connecticut residents.
But the North Dakota Supreme Court in May 7 ruling rejected the Bellas Hess precedent, noting it would be unlikely the U.S. Supreme Court "will abandon its common sense and experience at the courthouse door and ignore the tremendous social, economic, commercial, and legal innovations since 1967, and blindly apply an obsolescent precedent."
Ruling in North Dakota v. Quill Corp., the state high court upheld as constitutional a state law requiring collection of sales taxes on items sold by out-of-state mail order firms to state residents.
Quill Corp., an office supply firm, is expected to appeal the case to the U.S. Supreme Court, but under the court's rules will not have to file a petition until later this summer.
The conflicting rulings by the Connecticut and North Dakota courts, in addition to pending litigation in California, Pennsylvania, and Tennessee, increases the odds the Supreme Court will reexamine its Bellas Hess ruling.
But it is unclear whether the court will agree to hear arguments in the Connecticut case, which it could do as early as today, or simply hold onto the case until the North Dakota dispute makes its way to the court.
Because the North Dakota court explicitly overturned the high court's precedent -- holding that the "economic, social, and commercial landscape upon which Bellas Hess was premised no longer exists, save perhaps in the fertile imagination of attorneys representing mail order interests" -- the Supreme Court would be most likely to wait on it before deciding to review both cases in its next term, which is slated to begin Oct. 7.
The cases already are drawing national attention. California filed a friend-of-the-court brief on Connecticut's behalf, arguing the time has come for the court to revisit the issue. And Oklahoma finance officials, in Oklahoma REVENUE, a state newsletter, estimated the state loses about $50 million annually in unpaid sales taxes on mail-order items.
The Connecticut case arose when the state revenue commissioner informed SFA Folio Collections, the mail-order arm of Saks Fifth Avenue, that it must collect and remit sales taxes on mail-order sales to state residents.
SFA Folio Collections appealed the assessment to the Connecticut Superior Court, which decided against the state. The Connecticut Supreme Court, citing the Bellas Hess ruling, affirmed the lower court judgment.
Under Bellas Hess, which invalidate an Illinois sales and use tax, the court found such levels unconstitutional because mail retailers lacked a sufficient connection with, and derived insufficient benefit from, the state to warrant tax collection responsibility. In addition, the court said the tax collection duty violated the Constitution's commerce clause because it placed an undue burden on interstate commerce.
In its petition to the U.S. Supreme Court, Connecticut argued that a firm's physical presence is often unrelated "to the size and significance of a corporation's economic presence in and benefit from a state." It noted, for example, that SFA Folio Collections distributed 1.3 million catalogs in the state over a two-year period. The state has a population of 3.5 million.
Moreover, Connecticut argues that SFA Folio Collections derives enormous benefits from the state in the form of customers. In addition, the firm relies on Connecticut "to dispose of the millions of catalogs it sends into the state for its own benefit," a direct cost to the state.
Connecticut also argues that the same technological advances that have propelled mail-order sales in recent years makes it possible for firms to easily and cheaply compute state sales taxes.