How the High Court Could Help Amazon

Following other states, Illinois seems likely to require retailers outside the state to collect sales taxes on goods shipped into it.
Robert WillensJanuary 31, 2011

Besides imposing hefty increases in its personal and corporate income-tax rates, Illinois is also taking steps to require that out-of-state retailers, most notably, collect sales taxes with respect to goods shipped into the state.

Thus, HB 3659 (which passed both houses of the Illinois Congress by exceedingly wide margins) would expand the definition of “retailer” and “serviceman” “doing business” in the state. The new definition would encompass a retailer or service provider who has a contract with a person located in Illinois under which the person refers potential customers to the retailer or service provider by a link on the person’s Website. It would also encompass a retailer or service provider who sells the same or a substantially similar line of products as a person located in Illinois and does so using an identical or substantially similar name as the person located there.

Illinois is not the first state to attempt to bring to heel. New York, North Carolina, Colorado, and Rhode Island have enacted laws similar to the one Illinois is poised to adopt.

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Clearly, states and localities have broad latitude when it comes to matters of taxation. But that latitude is not limitless. If the Supreme Court decides to take up the challenge, will it find that these new sales and use tax laws are in violation of the commerce clause of the U.S. Constitution? The answer would seem to depend on whether its previous forays into this difficult area remain “good law.” If the answer is yes, there is, for, some hope that these laws will eventually be struck down.

Physical Presence

Indeed, the High Court has opined on the issue before. In Quill Corp. v. North Dakota, 504 US 298 (1992), Quill, a Delaware corporation, did not own tangible property in North Dakota, and none of its employees worked or resided in the state. Quill sold office equipment and supplies there, soliciting business through catalogues and flyers, advertisements in national periodicals, and telephone calls. It delivered its merchandise to state residents by mail or by common carrier solely from out-of-state locations.

North Dakota imposes a “use” tax upon property purchased for “use or consumption” within the state. The Supreme Court took the position that North Dakota could not compel the company to collect a use tax from its customers in the state.

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It isn’t the due-process clause of the Constitution that bars enforcement of the state’s use tax against Quill, however, but the commerce clause. Indeed, the justices concluded that the requirements of due process are met irrespective of a corporation’s lack of physical presence in the taxing state. Here, the court ruled, Quill purposefully directed its activities at North Dakota residents, and the magnitude of those contacts was more than sufficient for due-process purposes. Moreover, the use tax the state sought to compel Quill to collect is adequately related to the benefits Quill receives from access to the state. Accordingly, the court concluded that the due-process clause did not bar enforcement of North Dakota’s use tax against Quill.

But the commerce clause did erect such a bar, the court concluded. That clause prohibits certain state actions that interfere with interstate commerce. That aspect of the clause is known as the “dormant” commerce clause. A previous case, National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 US 753 (1967), stands for the proposition that a vendor whose only contacts with the taxing state are by mail or by common carrier lacks the “substantial nexus” required by the dormant commerce clause.

In Quill, the High Court concluded that its decision in Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977), did not undercut the National Bellas Hess rule. North Dakota contended (futilely, as it turned out) that the nexus requirement imposed by the due process and commerce clauses are equivalent. If, as here, a mail-order house that lacks a physical presence satisfies the due-process test, then that corporation, ipso facto, also meets the commerce clause test, the state contended. The court disagreed. A corporation, it noted, may well have the minimum contacts required by the due-process clause yet lack the substantial nexus required by the dormant commerce clause.

The court then observed that the “bright-line” rule of National Bellas Hess “furthers the ends” of the dormant commerce clause. National Bellas Hess, the court noted, created a safe-harbor for vendors whose only contact with customers in the state is by common carrier or U.S. mail. Under National Bellas Hess, such vendors are free from state-imposed duties to collect sales and use taxes.

The Quill court went out of its way to extol the virtues of a bright-line rule: it noted that “. . .the continuing value of a bright-line rule in this area and the doctrine and principles of stare decisis indicates that the National Bellas Hess rule remains good law. . . .” Accordingly, the court was constrained to reverse the decision of the North Dakota Supreme Court, which had held that requiring Quill to collect taxes with respect to sales it made to customers located in North Dakota was well within the state’s authority.

Some 44 years have elapsed since the court rendered its decision in National Bellas Hess and 19 have passed since it reaffirmed its commitment to its principles in Quill. Obviously, the manner in which business is now done has changed dramatically compared with the commercial landscape at the time those two cases were decided. Some would argue that those cases are anachronisms and should be overturned. But until the court tells us that the bright-line test set forth in National Bellas Hess and affirmed in Quill has to be updated to reflect the realities of the marketplace, there is at least some doubt that, if the court chooses to resolve a 21st century sales and use tax dispute, the initiatives by Illinois and other states will be found in conformance with the dormant commerce clause.

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for