National Bellas Hess v. Department of Revenue of the State of Illinois

86 U.S. 753

Case Year: 1967

Case Ruling: 6-3, Reversed

Opinion Justice: Stewart

FACTS

National Bellas Hess operated a mail-order business primarily specializing in wearing apparel. The company was incorporated in Delaware but had its principal place of business in North Kansas City, Missouri. It advertised its products in catalogs distributed by mail, shipped its goods by common carrier, and allowed purchases to be made on credit. Although National had no offices, warehouses, salespeople, or any other physical presence in Illinois, the Illinois Department of Revenue claimed that the company was to collect use taxes on all sales made to Illinois residents. The Illinois Supreme Court upheld the department’s interpretation that National’s sales in Illinois were subject to state taxes. National appealed that ruling claiming that the Illinois tax was unconstitutional.

 

MR. JUSTICE STEWART DELIVERED THE OPINION OF THE COURT.

National argues that the liabilities which Illinois has thus imposed violate the Due Process Clause of the Fourteenth Amendment and create an unconstitutional burden upon interstate commerce. These two claims are closely related. For the test whether a particular state exaction is such as to invade the exclusive authority of Congress to regulate trade between the States, and the test for a State’s compliance with the requirements of due process in this area are similar. As to the former, the Court has held that ‘State taxation falling on interstate commerce ... can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.’ Freeman v. Hewit. And in determining whether a state tax falls within the confines of the Due process Clause, the Court has said that the ‘simple but controlling question is whether the state has given anything for which it can ask return.’ Wisconsin v. J. C. Penney Co. The same principles have been held applicable in determining the power of a State to impose the burdens of collecting use taxes upon interstate sales. Here, too, the Constitution requires ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’

In applying these principles the Court has upheld the power of a State to impose liability upon an out-of-state seller to collect a local use tax in a variety of circumstances. Where the sales were arranged by local agents in the taxing State, we have upheld such power. We have reached the same result where the mail order seller maintained local retail stores. Nelson v. Sears, Roebuck & Co. In those situations the out-of-state seller was plainly accorded the protection and services of the taxing State. The case in this Court which represents the furthest constitutional reach to date of a State’s power to deputize an out-of-state retailer as its collection agent for a use tax is Scripto, Inc. v. Carson. There we held that Florida could constitutionally impose upon a Georgia seller the duty of collecting a state use tax upon the sale of goods shipped to customers in Florida. In that case the seller had ‘10 wholesalers, jobbers, or ‘salesmen’ conducting continuous local solicitation in Florida and forwarding the resulting orders from that State to Atlanta for shipment of the ordered goods.’

But the Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail. Indeed, in the Sears, Roebuck case the Court sharply differentiated such a situation from one where the seller had local retail outlets, pointing out that ‘those other concerns ... are not receiving benefits from Iowa for which it has the power to exact a price.’ And in Miller Bros. Co. v. State of Maryland, the Court held that Maryland could not constitutionally impose a use tax obligation upon a Delaware seller who had no retail outlets or sales solicitors in Maryland. There the seller advertised its wares to Maryland residents through newspaper and radio advertising, in addition to mailing circulars four times a year. As a result, it made substantial sales to Maryland customers, and made deliveries to them by its own trucks and drivers.

In order to uphold the power of Illinois to impose use tax burdens on National in this case, we would have to repudiate totally the sharp distinction which these and other decisions have drawn between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business. But this basic distinction, which until now has been generally recognized by the state taxing authorities, is a valid one, and we decline to obliterate it....Indeed, it is difficult to conceive of commercial transactions more exclusively interstate in character than the mail order transactions here involved. And if the power of Illinois to impose use tax burdens upon National were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary nor remote. For if Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes. The many variations in rates of tax, in allowable exemptions, and in administrative and record-keeping requirements could entangle National’s inter-state business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose ‘a fair share of the cost of the local government.’

The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control.

The judgment is reversed. Reversed.

MR. JUSTICE FORTAS, WITH WHOM MR. JUSTICE BLACK AND MR. JUSTICE DOUGLAS JOIN, DISSENTING.

In my opinion, this Court’s decision in Scripto, Inc. v. Carson (1960), as well as a realistic approach to the facts of appellant’s business, dictates affirmance of the judgment of the Supreme Court of Illinois....

There should be no doubt that this large-scale, systematic, continuous solicitation and exploitation of the Illinois consumer market is a sufficient ‘nexus’ to require Bellas Hess to collect from Illinois customers and to remit the use tax, especially when coupled with the use of the credit resources of residents of Illinois, dependent as that mechanism is upon the State’s banking and credit institutions. Bellas Hess is not simply using the facilities of interstate commerce to serve customers in Illinois. It is regularly and continuously engaged in ‘exploitation of the consumer market’ of Illinois by soliciting residents of Illinois who live and work there and have homes and banking connections there, and who, absent the solicitation of Bellas Hess, might buy locally and pay the sales tax to support their State. Bellas Hess could not carry on its business in Illinois, and particularly its substantial credit business, without utilizing Illinois banking and credit facilities. Since the case was tried on affidavits, we are not informed as to the details of the company’s credit operations in Illinois. We do not know whether it utilizes credit information or collection agencies, or similar institutions. The company states that it has ‘brought no suits in the State of Illinois.’ Accepting this as true, it would nevertheless be unreasonable to assume that the company does not either sell or assign its accounts or otherwise take measures to collect its delinquent accounts, or that collection does not include local activities by the company or its assignees or representatives.

Bellas Hess enjoys the benefits of, and profits from the facilities nurtured by, the State of Illinois as fully as if it were a retail store or maintained salesmen therein. Indeed, if it did either, the benefit that it received from the State of Illinois would be no more than it now has--the ability to make sales of its merchandise, to utilize credit facilities, and to realize a profit; and, at the same time, it would be required to pay additional taxes. Under the present arrangement, it conducts its substantial, regular, and systematic business in Illinois and the State demandsonly that it collect from its customer--users--and remit to the State the use tax which is merely equal to the sales tax which resident merchants must collect and remit. To excuse Bellas Hess from this obligation is to burden and penalize retailers located in Illinois who must collect the sales tax from their customers. In Illinois the rate is 3 1/2%, and when it is realized that in some communities the sales tax requires, in effect, that as much as 5% be added to the amount that customers of local, tax-paying stores must pay, the importance of the competitive discrimination becomes apparent. While this advantage to out-of-state sellers is tolerable and a necessary constitutional consequence where the sales are occasional, minor and sporadic and not the result of a calculated, systematic exploitation of the market, it certainly should not be extended to instances where the out-of-state company is engaged in exploiting the local market on a regular, systematic, large-scale basis. In such cases, the difference between the nature of the business conducted by the mail order house and by the local enterprise is not entitled to constitutional significance....

In Scripto this Court applied a sensible, practical conception of the Commerce Clause. The interstate seller which, in that case, claimed constitutional immunity from the collection of the Florida use tax had, like appellant here, no office or place of business in the State, and had no property or employees there. It solicited orders in Florida through local ‘independent contractors’ or brokers paid on a commission basis. These brokers were furnished catalogues and samples, and forwarded orders to Scripto, out of state. The Court noted that the seller was ‘charged with no tax-save when ... he fails or refuses to collect it’ and that the State ‘reimburs(ed the seller) ... for its service’ as tax collector. The same is true in the present case. I do not see how Scripto ismeaningfully distinguishable from this case. In fact, Scripto involved the sale of a single article of commerce. The ‘exploitation’ of the State’s market was by no means as pervasive or comprehensive as is here involved, nor was there any reference to the company’s use of the State’s credit institutions....

As the Court says, the test whether an out-of-state business must comply with a state levy is variously formulated: ‘whether the state has given anything for which it can ask return’; whether the out-of-state business enjoys the protection or benefits of the State; whether there is a sufficient nexus: ‘Some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’ However this is formulated, it seems to me entirely clear that a mail order house engaged in the business of regularly, systematically, and on a large scale offering merchandise for sale in a State in competition with local retailers, and soliciting deferred-payment credit accounts from the State’s residents, is not excused from compliance with the State’s use tax obligations by the Commerce Clause or the Due Process Clause of the Constitution.

It is hardly worth remarking that appellant’s expressions of consternation and alarm at the burden which the mechanics of compliance with use tax obligations would place upon it and others similarly situated should not give us pause. The burden is no greater than that placed upon local retailers by comparable sales tax obligations; and 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. There is no doubt that the collection of taxes from consumers is a burden; but it is no more of a burden on a mail order house such as appellant located in another State than on an enterprise in the same State which accepts orders by mail; and it is, indeed, hardly more of a burden than it is on any ordinary retail store in the taxing State.

I would affirm.