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Quill Corp v. North Dakota, 504 U.S. 298 (1992).

NEXUS - USE TAX - DUE PROCESS - COMMERCE CLAUSE - MAIL-ORDER - PHYSICAL PRESENCE - STARE DECISIS - INTERSTATE COMMERCE - MINIMUM CONTACTS

A vendor whose only contacts with a taxing state are by mail or common carrier satisfies the Due Process nexus requirement yet lacks the nexus required by the Commerce Clause to subject the vendor to a state-imposed use tax; thus Congress must ultimately decide if states may tax an out-of-state vendor with no physical presence in the taxing state.

[SUMMARY] | [ISSUE & DISPOSITION] | [AUTHORITIES CITED] | [COMMENTARY]

SUMMARY

Quill Corporation ("Quill") is a mail-order house incorporated in Delaware that sells office furniture, equipment, and other supplies. Quill catered to the national market and solicited its business through catalogs, flyers, periodical advertisements, and telephone calls. Quill maintained no offices or warehouses in North Dakota. None of its employees worked or resided in North Dakota. However, Quill's North Dakota customer base numbered approximately 3,000 patrons and accounted for nearly $1,000,000 in annual sales. The company filled these orders via mail or common carrier from out-of-state distribution centers.

North Dakota law imposes a use tax on all property purchased for storage, use, or consumption within the state that requires every "retailer" to collect the tax from its customers and remit it to the state. See N. D. Cent. Code § 57-40.2-07 (Supp. 1991). The statute defines a "retailer" as any person who "engages in regular or systematic solicitation" of a consumer market in the state. § 57-40.2-01(6).

North Dakota brought an action in a North Dakota state court to compel Quill to collect and pay the use tax for goods sold within the state. The trial court held that the mail-order house was not required to pay the use tax as Quill lacked sufficient nexus with the state to be subject to the tax. The Supreme Court of North Dakota reversed on appeal holding that neither the Due Process clause nor the Commerce Clause required a "physical presence" nexus to validate the imposition of a state use tax upon a defendant with established State contacts. The United States Supreme Court granted certiorari.

ISSUE & DISPOSITION

Issue(s)

1. Whether a vendor whose only connection with a state is through common carrier or the mail system is free from paying a state-imposed use tax because the vendor lacks a proper nexus with the taxing state as required by the Due Process Clause of the U.S. Constitution.

2. Whether a vendor whose only connection with a state is through a common carrier or U.S. mail is exempt from a state-imposed use tax because the vendor lacks proper nexus with the taxing state as required by the Commerce Clause of the U.S. Constitution.

Disposition

1. No. The Due Process Clause speaks to notions of fair play and substantial justice; thus, so long as the commercial actor's activity is purposefully directed towards residents of the taxing state and the tax is related to the benefits received from the state, the actor's physical presence is not necessary to establish the nexus sufficient to impose the tax.

2. Yes. The Commerce Clause speaks to concerns about a state's regulatory effect upon the flow of the national economy; thus, a state whose only connection with the vendor is through mail or common carrier lacks the nexus required by the Commerce Clause to impose the tax. However, because Congress has plenary power to regulate interstate commerce, it retains ultimate authority to decide which taxes unduly burden interstate commerce.

AUTHORITIES CITED

Cases Cited by the Court
Other Sources Cited by the Court

RELATED SOURCES

COMMENTARY

State of the Law Before Quill

States impose a sales tax on commercial transactions characterized by the final sale of goods to the consumer. Hence, the vast majority of sales taxes are collected by local businesses at the point of sale. Complementing the sales tax is the use tax, which states of "destination" in an interstate transaction generally levy. The use tax is imposed upon those transactions where the product would have been subject to the sales tax if the product had been purchased inside the state.

The main case establishing exemption from tax liability for mail-order companies was National Bellas Hess v. Dept. of Rev. of the State of Illinois, 386 US 753 (1967). In Bellas Hess, Illinois attempted to impose the duty of collecting a use tax on a mail order house incorporated in Delaware with its principal place of business in Missouri. The only physical presence National Bellas Hess, Inc. had in Illinois was its catalog distribution and delivery of goods via mail. The Illinois statute charged all "retailers maintaining a place of business" in the state with the duty to collect the use tax. Id. at 755. The statute defined "retailer" to include those soliciting orders through catalogs sent from outside the state. Id.

The US Supreme Court found the Illinois statute to be in violation of both the Due Process and Commerce Clauses. The Court found a violation of due process because there was no minimum connection, characterized as some sort of "physical presence", between the state and the transaction the state wished to tax. Id. at 756. See also Miller Brothers Co. v. Maryland, 347 US 340, 344-45 (1954). Thus, Bellas Hess established that the Due Process Clause requires a seller company to have a physical presence in a state to establish the nexus required for a state to impose the use tax. Furthermore, the Court held that some physical presence by the seller is required in order for a statute to withstand a Commerce Clause objection. Ultimately the Court held that the imposition of a duty to collect a use tax unduly burdens interstate commerce. The Court emphasized that variations in tax rates and allowable deductions as well as difficulties in record keeping and administrative matters all created barriers that obstructed the proper flow of interstate commerce.

Ten years later the Court's opinion in Complete Auto Transit, Inc. v. Brady, 430 US 274 (1977) articulated a four-part test for analyzing the validity of a use tax under the Commerce Clause. Under this test, a use tax will withstand a Commerce Clause challenge if the tax: 1) is applied to an activity with substantial nexus to the taxing state, 2) is fairly apportioned, 3) does not discriminate against interstate commerce, and 4) is fairly related to the services provided by the state. Id. at 279.

Effect of Quill on Current Law

In Quill, the Court outlines the constitutional requirements necessary for a state to impose a tax upon an out-of-state vendor with no physical presence in the taxing state. For a state to justify a use tax on sales solicited through the mail and distributed from out-of-state, a "substantial nexus" must exist between the vendor and the taxing state. While the nexus requirement speaks to both the Due Process and Commerce Clauses, the analysis under each is distinct due to the varied constitutional concerns and policies dictating the requirement. Thus even though a state's tax may accord with the Due Process Clause, it may nevertheless violate the Commerce Clause.

The Court relies on its holding in Shaffer v. Heitner, 433 US 186 (1977) to frame the nexus requirement for Due Process purposes. Shaffer abandoned the formalistic tests relating to an actor's "presence" in favor of a more flexible inquiry into contacts with the forum jurisdiction such that some minimum contact with the state would make it reasonable to require an actor to defend against a suit in that forum. The Court notes that Quill had purposely directed its activities at North Dakota and had benefited from the state's legal and social infrastructures such that Quill maintained contacts with North Dakota that established a nexus. Neither physical presence nor tangible assets need be present in the taxing state in order to satisfy the nexus requirement under the Due Process Clause.

The Commerce Clause focuses on different constitutional concerns having to do with the effect of state regulation on the national economy and the need to limit state burdens on interstate commerce. Thus, the Court upholds the physical presence requirement for purposes of the Commerce Clause. The Court noted that the principle of stare decisis and the need for a bright-line rule benefited interstate commerce by encouraging settled expectations and fostering investment by business. Furthermore, Justice Scalia emphasized that Congress remains free to alter the Court's decision. Hence, Quill shows the Court's acknowledgment of Congress' full discretion to decide the extent to which States may burden interstate commerce through the imposition of use taxes.

Justice White's dissent expressed his concern for maintaining any physical presence requirement in this age of technology. White argued that the Court's Commerce Clause jurisprudence does not support a separate notion of nexus apart from due process concerns. In addition, White argues that Quill's physical presence rule is not justified by the convenience of adhering to a bright-line rule when use of such a rule leads to an unfair result. White's concern is that Quill essentially establishes an interstate tax shelter for mail-order sellers while comparatively disadvantaging local competitors. Thus, White believes that the Court is imposing an economic preference on an industry when instead it should be deferring to state legislatures' attempts to collect their fair share of tax revenue from interstate commerce.

Unanswered Questions

To what extent can states constitutionally require a vendor who sells taxable goods online to local citizens to collect and remit use taxes to the state where the vendor's only connection with the taxing state is through an Internet site?

Prepared by:

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