SCOTUS Ready to Reverse Bellas Hess & Quill Allowing States to Compel Online Sales Tax Collection

March 3, 2015

Cite as: 575 U. S. ____ (2015)
KENNEDY, J., concurring


No. 13–1032

[March 3, 2015]

JUSTICE KENNEDY, concurring.
The opinion of the Court has my unqualified join and assent, for in my view it is complete and correct. It does seem appropriate, and indeed necessary, to add this separate statement concerning what may well be a serious, continuing injustice faced by Colorado and many other States.

Almost half a century ago, this Court determined that, under its Commerce Clause jurisprudence, States cannot require a business to collect use taxes—which are the equivalent of sales taxes for out-of-state purchases—if the business does not have a physical presence in the State. National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 U. S. 753 (1967). Use taxes are still due, but under Bellas Hess they must be collected from and paid by the customer, not the out-of-state seller. Id., at 758.

Twenty-five years later, the Court relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes. Quill Corp. v. North Dakota, 504 U. S. 298, 311 (1992). This was despite the fact that under the more recent and refined test elaborated in Complete Auto Transit, Inc. v. Brady, 430 U. S. 274 (1977), “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess. Quill Corp., 504 U. S., at 311. In other words, the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided. Still, the Court determined vendors who had no physical presence in a State did not have the “substantial nexus with the taxing state” necessary to impose tax-collection duties under the Commerce Clause. Id., at 311–313. Three Justices concurred in the judgment, stating their votes to uphold the rule of Bellas Hess were based on stare decisis alone. Id., at 319 (SCALIA, J., joined by KENNEDY, J., and THOMAS, J., concurring in part and concurring in judgment). This further underscores the tenuous nature of that holding—a holding now inflicting extreme harm and unfairness on the States.

In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy. There is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet. After all, “interstate commerce may be required to pay its fair share of state taxes.” D. H. Holmes Co. v. McNamara, 486 U. S. 24, 31 (1988). This argument has grown stronger, and the cause more urgent, with time. When the Court decided Quill, mailorder sales in the United States totaled $180 billion. 504 U. S., at 329 (White, J., concurring in part and dissenting in part). But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States. App. 28.

Because of Quill and Bellas Hess, States have been unable to collect many of the taxes due on these purchases. California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors. See California State Board of Equalization, Revenue Estimate: Electronic Commerce and Mail Order Sales, Rev. 8/13, p. 7 (2013) (Table 3). The result has been a startling revenue shortfall in many States, with concomitant unfairness to local retailers and their customers who do pay taxes at the register. The facts of this case exemplify that trend: Colorado’s losses in 2012 are estimated to be around $170 million. See D. Bruce, W. Fox, & L. Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce 11 (2009)(Table 5). States’ education systems, healthcare services, and infrastructure are weakened as a result.

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions. Although online businesses may not have a physical presence in some States, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront. See PricewaterhouseCoopers, Understanding How U. S. Online Shoppers Are Reshaping the Retail Experience 3 (Mar. 2012) (nearly 70% of American consumers shopped online in 2011). Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops. As a result, a business may be present in a State in a meaningful way without that presence being physical in the traditional sense of the term.

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier. See Pearson v. Callahan, 555 U. S. 223, 233 (2009) (stare decisis weakened where “experience has pointed up the precedent’s shortcomings”). It should be left in place only if a powerful showing can be made that its rationale is still correct.

The instant case does not raise this issue in a manner appropriate for the Court to address it. It does provide, however, the means to note the importance of reconsidering doubtful authority. The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.

Bellas Hess, Quill, and online sales tax collection

April 25, 2012

As you’ve likely noticed, there has been quite a bit of news lately about online sales tax collection. In the media coverage of this issue, we’ve frequently seen glancing references to the Supreme Court cases Quill or Bellas Hess—but rarely an actual explanation of how they affect consumers, retailers, and states, let alone what exactly those rulings say.

On this occasion, the eve before the Senate Finance Committee Hearing “Tax Reform: What It Means for State and Local Tax and Fiscal Policy” (where we expect the Marketplace Fairness Act to be discussed at length) we thought it might be helpful to give a brief review of these two landmark Supreme Court cases.

This post is not a scholarly analysis of the (dormant) Commerce Clause, or due process concerns, or states sovereignty and federalism—such analyses are amply handled by greater legal/constitutional minds than ours. Rather, this post is intended as a primer for business leaders, so they can understand why these rulings are important and why the logic underlying them is so out-of-date—warranting attention and action by Congress.

Bellas Hess refers to the 1967 Supreme Court case National Bellas Hess v. Department of Revenue of Illinois. Illinois’s Department of Revenue attempted to force catalog retailer Bellas Hess, which was based in Kansas City, to collect Illinois sales tax. Bellas Hess refused, and the case went all the way to the Supreme Court.

In its ruling, the Supreme Court said that only businesses with nexus in a state have to collect sales tax for that state. Nexus is created by a physical presence, though opinions on what constitutes a physical presence vary. It can be a warehouse, office, retail location, employees, or even vehicles. Some states have argued that having business affiliates in a state creates nexus there.

In any case, the Supreme Court specified that businesses had to have nexus in a state to collect sales tax there because it would be too burdensome for a business located in one state to collect sales tax for another state (possibly every state). Specifically, Justice Potter Stewart wrote in the majority opinion:

The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National [Bellas Hess]’s interstate business in a virtual welter of complicated obligations to local jurisdictions.

(emphasis ours)

Interestingly, in the dissenting opinion, Justice Abraham Fortas wrote that “the Court’s response that these administrative and record keeping requirements could ‘entangle’ appellant’s interstate business in a welter of complicated obligations vastly underestimates the skill of contemporary man and his machines.” We couldn’t agree more—and it’s even more true now, in 2012, than in 1967. We know that technology is able to handle multistate sales tax because we’ve built a service that does so: TaxCloud.

The Bellas Hess ruling went on to say that an act of Congress was necessary to give states the ability to require out-of-state businesses to collect sales tax. Without an act of Congress, the Supreme Court ruling was the ultimate authority on what states could and could not do.

In 1992, the issue of out-of-state sales tax collection arose again. North Dakota tried to require Quill Corporation, a mail-order office supply company incorporated in Delaware, to collect tax on its sales into the state. Quill refused on the grounds that it had no physical operations or employees in North Dakota.

The Supreme Court sided with Quill, citing the previous ruling in Bellas Hess and stating that customers alone (in other words, an economic presence) weren’t enough to create nexus.

However, in the Quill ruling, the Supreme Court specifically invited Congress to exercise its authority to overrule the Supreme Court by enacting legislation:

[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions. See Prudential Insurance Co. v.Benjamin328 U.S. 408 (1946). Indeed, in recent years Congress has considered legislation that would “overrule” the Bellas Hess rule. Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today 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.

Indeed, even if we were convinced that Bellas Hess was inconsistent with our Commerce Clause jurisprudence, “this very fact [might] giv[e us] pause and counse[l] withholding our hand, at least for now. Congress has the power to protect interstate commerce from intolerable or even undesirable burdens.” Commonwealth Edison Co. v. Montana453 U.S. 609, 637 (1981) (White, J., concurring). In this situation, it may be that “the better part of both wisdom and valor is to respect the judgment of the other branches of the Government.”Id., at 638.

(emphasis ours)

In other words, the Supreme Court left the issue up to Congress.

To sum up: The Supreme Court rulings in Bellas Hess (1967) and Quill (1992) determined that a business needs to have a physical presence in a state in order for the state to require the business to collect sales tax. What constitutes a physical presence is still a matter of debate, however.

The Supreme Court also made it clear that Congress has the power to pass legislation changing the outcome of the Supreme Court rulings. And because the Court based its decisions on the idea that collecting sales tax would be too burdensome for remote retailers, an idea that technology has rendered moot, it’s critically important that Congress do so.

We hope Congress will learn enough tomorrow to pass the Marketplace Fairness Act quickly to correct the devastating imbalance impacting retailers, consumers, and local governments across the country.