NATIONAL GEOGRAPHIC v. CAL. EQUALIZATION BD.
Legal provision: Article 1, Section 8, Paragraph 3: Interstate Commerce Clause
Argument of Arthur B. Hanson
Justice William J. Brennan: We will hear next number 75-1868, National Geographic Society versus the Board of Equalization.
Mr. Arthur B. Hanson: Mr. Justice Brennan, distinguished associate justices, may it please at the Court.
National Geographic Society appears before the Court today to ask that this Court reverse the decision of the Supreme Court of California, handed down on April 1, 1976.
That decision represents the farthest reach in asserted use tax collection liability by any State Supreme Court, since this Court struck down the decision of the Supreme Court of Illinois in National Bellas Hess against Department of Revenue in 1967.
The test for asserted use tax collection liability set forth in the Supreme Court of California’s opinion is that the slightest presence within such taxing state, without regard to the nature of such presence, is enough for a liability to attach.
This proffered test geodetically created in California as “No genesis” in the jurisprudence related to this subject.
Nor has any state legislature or the Federal Congress ever attempted to assert legislatively such a clear cut violation of the Commerce Clause of the constitution, as set forth in Article 1, Section 8, Clause 3, of the Constitution of the United States.
Likewise, the California decision is an egregious violation of the Due Process Clause of the federal constitution, as set forth in the Fourteenth Amendment to the constitution.
This Court has specifically addressed the subject in this field in Wisconsin against J.C. Penney Company, referred to at pages 3, 4 and 8 of the society’s reply brief.
In saying, “a state is free to pursue its own fiscal policies unembarrassed by the constitution.
If by the practical operation of a tax, the state has exerted its power in relation to opportunities which it has given, to protection it has afforded, the benefits which it has conferred by the fact of being an orderly civilized society.”
In all cases decided by this Court upholding the sales-related taxing authority of states, there has been meaningful instate exploitation of that state’s resident customers.
Such instate customer exploitation is clearly a benefit which satisfies the due process requirements of the constitution.
The California Court of Appeal, First District also stated the relationship requirements succinctly in 1969 in the case of Montgomery Ward and Company against State Board of Equalization, referred to at pages 16 and 22 of the society’s jurisdictional statement, page 22 of the society’s brief, and page 3 of the society’s reply brief, where the California Appeals Court said, “The protection afforded and the benefits conferred must have some relationship to the transaction which the state seeks to burden.”
It is interesting to note that the Supreme Court of California refused to hear this case in 1969 and this Court denied certiorari in this very case in 1970.
This same question was raised in the instant case and most properly answered by the California Court of Appeal, First District, where in 1975, it stated in pertinent part “What did the state of California give in relation to the out of state sales, that the state can ask a return by way of requiring the society to collect the use taxes.
The answer is that the state provided no protections or benefits which were related to the out of state sales.
All parts of the transactions were conducted through the federal mail with the state playing no part, and providing no benefits or protections.
Justice Byron R. White: Except the magazines that came through the mails to the customers, carried the advertising, I suppose, some of which was sold in California.
Mr. Arthur B. Hanson: No, no advertising was sold in California, Mr. Justice White.
All advertising that is solicited in California…
Justice Byron R. White: Well, I will put it “solicited” in California.
Mr. Arthur B. Hanson: Some may have been.
Unknown Speaker: Well, they had two offices for that.
Mr. Arthur B. Hanson: That is correct.
Unknown Speaker: They just did not keep in there for nothing.
Mr. Arthur B. Hanson: No, of course not.
They solicited advertising and the record is clear on that.
Unknown Speaker: Do you have any idea what the total volume of advertising was from California?
Mr. Arthur B. Hanson: It is not in the record but it is in a total volume in a given year in the period of this case, which ran about $16 million.
California supplied about $1 million.
Justice Byron R. White: If you took the magazine’s return from its advertising and compare it with its magazine sales the take from California might be rather substantial?
Mr. Arthur B. Hanson: Not at all.
There were over 800,000 members of the society in California and at $8.50 the arithmetic is not very difficult to figure out.
Justice Byron R. White: What did you say the volume of advertising was?
Mr. Arthur B. Hanson: About $1 million.
Justice Byron R. White: Is it eight to one?
Mr. Arthur B. Hanson: No, it is much more than eight hundred thousand times eight gives you a figure of about 48.
Justice Byron R. White: Oh, yes.
Mr. Arthur B. Hanson: Yes, 64.
Justice Byron R. White: 64, what?
Eight hundred thousand times what?
Mr. Arthur B. Hanson: It is about; I am not very good on arithmetic today, Mr. Justice White, but.
Eight times eight hundred thousand times six would be.
Unknown Speaker: 6, 400, 000
Mr. Arthur B. Hanson: Yes, 6, 400, 000.
It is about 6, 400, 000, right.
It is more than six to one, but I would like to point out another thing while we are on that subject.
Justice Byron R. White: It is not insignificant, the advertising returned from California.
Mr. Arthur B. Hanson: We did not say it was insignificant.
Justice Byron R. White: Well you said that the state did not furnish anything if you had two offices in state of California to solicit advertising?
Mr. Arthur B. Hanson: The state also furnished something else.
They furnished a statute which specifically exempted the magazine and its related offices to an exempt position within the state from any tax burden.
Justice Byron R. White: Well, apparently, it does not.
Mr. Arthur B. Hanson: No, it now asserts that it does not, but the statute is very clearly set forth in the way.
Justice Byron R. White: That is the way it has been construed, is it not?
Mr. Arthur B. Hanson: The Supreme Court of California has construed it that way.
Justice Byron R. White: What the law is now?
Mr. Arthur B. Hanson: In California, until this Court looks at it.
Justice Byron R. White: We are bound by it too.
Mr. Arthur B. Hanson: No, you are not sir.
Justice Byron R. White: We are bound by what the California law covers.
Mr. Arthur B. Hanson: I would say not if the California law had stayed by the Supreme Court of California is purely contrary to the constitution of the United States.
Justice Byron R. White: That is a different question.
Mr. Arthur B. Hanson: Well, but that is why we are here.
Justice Byron R. White: You said that California furnished a law which exempted this.
The California Supreme Court said it did not.
Mr. Arthur B. Hanson: That was its interpretation of that law.
We respectfully disagree with them and that again is one of the reason we are here and the complete opinion of the Court of Appeal that I referred to.
Justice Byron R. White: You really do not ask us to differ with the California Supreme Court on construing its own statute, do you?
Mr. Arthur B. Hanson: I do not think that that statute is going to be determinative of what is decided in this case.
The complete opinion of that Court is set forth as appendix B to the society’s jurisdictional statement beginning at page 17A.
As admitted by the State Board of Equalization on page 10 of its brief, the only benefits afforded to society by the state of California, relate to the society’s advertising solicitation activities.
Justice John Paul Stevens: Mr. Hudson, does the record tell us whether these sales are made on credit or does the customer send a check in when he places the order?
Mr. Arthur B. Hanson: Do you mean the advertising sales?
Justice John Paul Stevens: No, I am talking about the sales and taxes imposed on globes and maps and things like that, is it not?
Mr. Arthur B. Hanson: On that subject, Mr. Justice Stevens, the record states very clearly that they either paid with order or they are on credit.
Justice John Paul Stevens: But it cannot be credit sales and presumably will be possible for collection activities thereafter to take place within the state of California?
Mr. Arthur B. Hanson: That subject was covered very thoroughly in National Bellas Hess.
Justice John Paul Stevens: I understand that.
Mr. Arthur B. Hanson: It was not determinative there as we know.
Clearly, if California chose to impose a tax on services, the due process test set forth in Wisconsin against J.C. Penney, referred to earlier, would be satisfied.
The state of California however, has chosen not to impose a tax on such activities and its election to not so tax those activities does not entitle the state constitutionally, that tax is a more convenient alternative, other totally unrelated out of state activities of the society for which the State of California has clearly given nothing for which it can ask return.
The questions in positions of the parties in this case have been thoroughly briefed by both parties.
National Geographic Society will not reargue those papers.
Rather, having stated the two constitutional questions at the outset, the society will endeavor to outline the basic fallacy of the state board’s case and point out the effect that an affirmation of the California decision would have throughout this country.
As this has been ably pointed out, the amicus curiae brief from the Direct Mail Marketing Association Inc., urging reversal of the California Court’s decision, beginning on page 3.
Some 45 states and the District of Columbia require out of state sellers to collect use taxes on sales made to the residents of the state.
As has also been pointed out, there has been no uniformity in the state’s statutes on this subject and the Federal Congress has not yet enacted a uniform Sales and Use Tax Act, although extensive hearings have been held.
Both the state and we have referred to those hearings in parts of our brief and in part of our reply brief, thus the only protection for the society and others similarly affected is to rely on the federal constitution and this, the highest court of our land.
The exact language of the test, California would have this Court adopt as this follows:
Where an out of state seller conducts substantial mail order businesses with the residents of a state, imposing a use tax on such purchasers and the seller’s connection with the tax instate is not exclusively by means of the instruments of the interstate commerce.
The slightest presence within such tax in state, independent of any connection through interstate commerce, will permit the state constitutionally to impose on the seller, the duty of collecting the use tax from such mail order purchasers and the liability for payer to do so.
To us, this proposed test is a little short of ludicrous.
Does this mean that if the society sends a writer and a photographer to California, that the state could impose use tax collection liability based on their presence in the state?
Suppose, a writer is a resident of California and submits a story to the society which is accepted for publication, does that make the society liable?
The answer should be resoundingly “no.”
Yet, the state might well argue to the contrary where this proposed test to be permitted to stand.
We used an example in our reply brief of the society owning a parking lot in California, not operating, merely owning it.
Under the state’s view of this case, that would immediately attach us to use tax liability, although there is absolutely no connection between that and the sales that are discussed in this case.
This Court must face the real test of use tax collection liability.
This is the first case before this Court, where a state court has asserted that a non-sales related presence in a state, that is one that has no connection with or relationship to any sales whatsoever, will justify a position of use tax collection liability on interstate sales.
Neither the state nor anyone else can point with a single case where such liability has attached absence on direct retail, sales-related activity in the state.
Justice Harry A. Blackmun: Mr. Hanson, you have not yet mentioned or conceded or covered the fact in this case that there were in fact retail sales-related activities in the state during a part of this taxable period?
Mr. Arthur B. Hanson: During a period of about nine months, which the California Court of Appeal regarded as the de minimis and the California Supreme Court said that it was not necessarily even consider that.
Justice Harry A. Blackmun: No, the California Supreme Court did not find it necessary to even consider that in order to rule against you, but even though we fully agree with you on the agreement you are now making, that unless there is a sales-related activity within the states, then Bellas Hess has control of this.
Nonetheless, in this case, there was a sales-related activity.
I trust you are going to get to that.
Mr. Arthur B. Hanson: I am coming to it but let me address it for a moment now.
There is a reason as to why the state board and we agreed to set up two periods for the courts to consider.
We set up one period where there were sales activities, minor as they were, in the San Francisco and Los Angeles offices.
Justice Harry A. Blackmun: Very same items that are sold here by in that order.
Mr. Arthur B. Hanson: That is correct and in return, we set up the second period beginning with the quarter that ended in September, where those activities had ceased.
They actually ceased on May 6 and we paid the tax on the period where we had sales-related activities and did not ask for a refund.
We asked for a refund of the tax assessed for the period in which the sales-related activities had ceased.
There is only a period from the first of August 1963, to May 6, 1964, in which there were any sales-related activities in this.
There were never any before, and there have never been any since, but I will cover that further as we go along.
In every case where a liability has attached, there have been either retail sales outlets in the state or salesperson soliciting orders in the state or as in the case of Standard Pressed Steel Company against Washington Revenue Department, referred to at page 21 of the society’s jurisdictional statement, page 28 of the society’s brief, and page 17 of the society reply brief, in a case which we think was rightly decided.
An in state resident employee, someone who is living in the state who has something to do with the sales involved.
In this case, he was an Engineer.
He consulted with the end user of his company’s products, and he also worked with his company’s engineers at least three days every six weeks on the very subject of the sales which involved the Boeing Aircraft Company, guiding both the end user and his company’s engineers on the needed technical requirements.
He also acted as a troubleshooter if something went wrong with their materials.
Justice Harry A. Blackmun: Mr. Hanson, I want to be sure about that.
You do concede the correctness then of the Pressed Steel.
Mr. Arthur B. Hanson: We do, indeed.
We do not think it is applicable in this case.
The society’s advertising solicitors made no retail sales, I might say, Mr. Justice Blackmun and we stated that in our reply brief in the concluding part of it where we have discussed in the state of New York’s amicus, which made much of Washington Pressed Steel and we stated there that we felt it was rightly decided.
Justice Harry A. Blackmun: That case was vigorously argued here and I just wanted to show you that.
Mr. Arthur B. Hanson: I know it was, sir, but we think based on the factual statement that the record shows that it was rightly decided.
The society’s advertising solicitors made no retail sales of goods in California or anywhere else.
The society’s advertising offices in California were restricted in authority and function solely to the solicitation of national advertising copy for the Exempt Magazine, except for the brief period of August 1, 1963 to May 6, 1964.
As noted on pages 7 and 8 of the society’s jurisdictional statement and page 26 of the society’s brief, the California Court of Appeal found a few sales in this period to be de minimis and the Supreme Court of California disregarded these sales for purposes of its decision.
I think it might be well to note just what the percentage involved in the period at that time was.
In the reply brief of the appellant, if you look at page 11, you will find a discussion of the Miller Brothers sales which were rather interesting, where in Miller Brothers against Maryland, there was $12,000.00 worth of sales, of which eight were delivered in Maryland by Miller Brothers’ truck.
Well, that was a five to four decision.
When we come to the society’s picture, the San Francisco office sold a sum of $679.20 worth of goods.
The Los Angeles office was $2,161.85.
While during that period from August 1, 1963 to May 6, 1964, the society sold through interstate commerce to California, $452,470.00 worth of goods.
That is on to the bottom of page 13 of the reply brief and that figure was 0.63% of the volume of mail-order sales, the amount that was actually sold to offices.
One of those offices was at the 10th story of an 18-story building and the other was, at that time, on the 2nd story of a 2-story building and is now on about 15th or 20th floor of a 28-story building.
They are not designed for retail sales, they never have been.
The society took no mail orders in California.
The society had no door-to-door solicitors in California, seeking mail orders to be filed outside California.
The society had no local advertising by either written or electronic media, advertising its products in California.
The society made use of no local flyers or handbills for the solicitation of mail orders from California residents.
In this connection, the California Court of Appeal expressly stated the solicitation of advertisements to appear in the magazine had no effect upon whether California residents would purchase products of the society, which they so advertised in the magazine or in mailed circulars.
Justice Harry A. Blackmun: I suppose throughout this period the magazine had been sold on newsstands or over-the-counter in the state, although there was no instate activity with respect to the mail-order sales?
Mr. Arthur B. Hanson: I think again, it would depend on how they got to the newsstands as you, perhaps know.
Justice Harry A. Blackmun: Let us assume that National Geographic sold the amount of their own establishments?
Mr. Arthur B. Hanson: Do you mean that they would have newsstands that they maintain in California?
Justice Harry A. Blackmun: Yes.
Mr. Arthur B. Hanson: I think it would be a completely different case.
Justice Harry A. Blackmun: Well, I know it would be different, but what would be the result?
Mr. Arthur B. Hanson: Well, I think that in all probability that a use tax would apply.
Justice Harry A. Blackmun: Even though there was no instate activity with respect to the specific sales not be taxed.
Mr. Arthur B. Hanson: No, but we would have had to, at that point we had been licensed to do business in the state.
We would be operating under the protection of state on a substantial business.
We are advertising the goods in the magazine and at that point, I think that…M
Justice Harry A. Blackmun: So your answer is there is no need to be in state activity with respect to the specific sales sought to be taxed as long as there is some other retail activity?
Mr. Arthur B. Hanson: Well, let us take a look at Nelson against Sears, Roebuck.
Justice Harry A. Blackmun: You accept that decision I gather.
Mr. Arthur B. Hanson: We do accept it, but we do not accept is the application by the Supreme Court of California.
Justice Harry A. Blackmun: I understand that.
Mr. Arthur B. Hanson: In Nelson also, the records in this Court which we went through very thoroughly, point out that Sears, Roebuck maintained 12 stores in the state and that their volume of sales which appears, I think on page 12 of our brief, show that Sears, Roebuck, again in our reply brief, the volume of sales with the instate stores was $5,040,000.00 and the sales by mail order, it is at the top of page 14, $5,080,000.00 in the sales in the stores and $5,900,000.00 in the mail-order sales and they were selling exactly the same goods in both and in addition to that, the record showed that a number of those sales were actually processed in the retail stores.
So they were obviously involved in that and in addition, in Nelson, they of course were licensed by the state to do business in the state.
The state had jurisdiction over it.
Justice Harry A. Blackmun: So you have reached the same result, I suppose, if the geographic — let us assume in Nelson, the local retail sales made by Sears, Roebuck, never was of the same goods that were never on the mail order.
I suppose you get the same result.
Mr. Arthur B. Hanson: I do not see how the results would really differ because of the involvement of the organizational company in the state.
Justice Harry A. Blackmun: Would you call this, let us say, a local sale of advertising, retail or not?
Mr. Arthur B. Hanson: No, I would not.
Justice Harry A. Blackmun: What is it?
Mr. Arthur B. Hanson: For the first place it is not a sale, it is a solicitation.
I am sorry I am not quibbling with you.
Justice Harry A. Blackmun: That is alright, I understand what you mean because the advertising that you…
Mr. Arthur B. Hanson: The advertising was all sent to Washington and cannot go into magazine until it is approved here, there is no contract made there.
A man goes and tries to interest these things.
Justice Harry A. Blackmun: But it is a solicitation for a sale at retail?
Mr. Arthur B. Hanson: It is a solicitation for the sale of services and this is not the sale of retail goods.
There is a reason on the case that is not pertinent here today, but I think that the Virginia Pharmacy Case, in which we find it got to what I hope, was my view of how advertising matter should be treated by the Court.
It was treated by it as opposed to the way the Pittsburgh Pressed cases.
Justice Harry A. Blackmun: I suppose if the transactions had been completed within California that would have been subject to a California sales tax.
Mr. Arthur B. Hanson: No, again, because it is a sale of services and California has nothing.
Justice Harry A. Blackmun: Is there an exemption of the service?
Mr. Arthur B. Hanson: That section 63 or 62 of the California Code specifically exempts it.
Justice Harry A. Blackmun: They do not treat it like a laundering.
Mr. Arthur B. Hanson: No, not a bit.
It is not a can of beads.
The society made no use of local handbills or flyers and if it was not for the existence of the two advertising offices this case would be factually on all force with National Bellas Hess.
It would appear lie between Miller Brothers and Nation Bellas Hess, but much closer to the latter.
The solicitations made for the society for the sale of its products were through its magazine and circulars were placed in the interstate mails.
In effect, the magazine was the society’s catalog and the difference between it and Bellas Hess is that Bellas Hess had a catalog with about 5,000 items advertised in it in a typical mail order house.
In the two exhibits in the record here, the society had a three quarter page ad in one issue and a quarter page ads in another and they do not advertise these goods in each one of the magazines that put out.
In light of these facts, it is difficult to understand how the state of California reached the conclusion it did, unless it believed that the need for revenue at the state level is assumed to be as all important, as eluded to by the brief of the state of New York as Amicus Curiae in support of the state of California.
The main point in that brief centers on the need of states for revenue and in effect, as to the California Supreme Court’s test be accepted, where that helps the state’s revenue needs.
Certainly, no revenue major can be set solely on need, disregarding constitutional principles.
The states have many ways to obtain revenues without violating the constitution of the United States.
Unknown Speaker: Mr. Hanson, just so that I got it completely clear.
You are relying entirely on the Commerce Clause or do you also rely on the Due Process Clause?
Mr. Arthur B. Hanson: We rely on together and the reason for that is that every case involving this subject, which this Court has addressed, has combined the two together.
Justice Harry A. Blackmun: So you rely on them both.
Mr. Arthur B. Hanson: Yes, sir.
The other major hurdle that the state must overcome to place use tax collection liability on any retailer is to show that the instate activities of the retailer are related to the retail sales sought to be taxed.
Stated in another way, California must show that the instate activities are not dissociated from the operations which generate the alleged use tax collection liability.
It must be remembered that the California decision is grounded entirely on non-sales related activities.
No clearer case for dissociation exists than here.
Starting with Connecticut General Life Insurance Company in 1928, cited by the Amicus in support on pages 8 and 9 of its brief, Norton Company in 1951 and American Oil Company in 1965, this Court has consistently refused to assess tax liability where the instate activities were held to be dissociated from the activities generating the asserted tax liability.
The basic flaw in the Supreme Court of California’s opinion was pointed out on pages 27 and 28 of the society’s brief.
The California Court tried to justify its whole lien by misstating the language in National Bellas Hess.
That case clearly stands for the proposition that there must be instate contacts with the customers before there can be a use tax collection liability for mail-order sales and that a totally non-sales related contact by the out-of-state seller with the state will not suffice.
Justice Harry A. Blackmun: Do you mean an instate connection with the customers to whom the sales were thought to be taxed?
Unknown Speaker: Yes, you Honor.
Justice Harry A. Blackmun: How about Nelson?
Mr. Arthur B. Hanson: No problem with Nelson it was an instate contact.
Justice Harry A. Blackmun: Well not with the customers to whom the mail orders were made.
Mr. Arthur B. Hanson: Well, there was indeed, according to the record.
Justice Harry A. Blackmun: Not with the customers to whom the mail-order sales were made.
Mr. Arthur B. Hanson: There was an instate contact, as justified in the Court’s view and I think rightly so.
Justice Harry A. Blackmun: It was an instate contact with retail customers.
Mr. Arthur B. Hanson: No, local advertising was carried on by Sears, Roebuck of the exact same products that were involved in the mail-order sales.
They carried on both radio and written media advertising and in addition, they process many of these orders in the local retail stores in Iowa.
Justice Harry A. Blackmun: They taxed those, alright?
Mr. Arthur B. Hanson: They taxed them both.
Justice Harry A. Blackmun: There was no any argument about those, but the mail-order sales.
Mr. Arthur B. Hanson: The mail-order sales contact was held to be the advertising and the fact that the same articles are being sold in the retail stores or being sold by mail order and that the presence of Sears, Roebuck in Iowa, and the understanding of that made that the final concluding item.
Justice Harry A. Blackmun: You give emphasis to the selling of the same products?
Mr. Arthur B. Hanson: Yes.
Justice Harry A. Blackmun: I suppose that factor were absent, what then?
Mr. Arthur B. Hanson: I would say that under the Nelson v. Sears doctrine, with 12 stores in the state and a national organization heavily flooding the state with other products, realistically we know it does not work that way, but to work that way as you posed it Mr. Justice Blackmun, I think that there would be, certainly a use tax collection liability could be assessed.
Unknown Speaker: So the tax factor is not important, then?
Justice Harry A. Blackmun: No, that was really my same question if your client was selling baseball bats or shoes inside California, then you could seek the benefits of it?
Mr. Arthur B. Hanson: If we were in California with an active retail presence in California and a totally different sale coming in from out of state, I think we would be stuck with it.
I do not think there are any questions on that.
Unknown Speaker: That is I understood what you said earlier.
So as my brother Blackmun suggest in his question that the same product is really not dispositive at all, no.
Mr. Arthur B. Hanson: Yes.
I have jus if I may…
Justice William J. Brennan: What if the baseball bats that were being sold were not actually sold in California, but there was active solicitation for the sales in California.
Mr. Arthur B. Hanson: Well, but then you got Scripto, you have got Scripto layer.
Justice William J. Brennan: Well, and what would be the result.
Mr. Arthur B. Hanson: Well, I think that a use tax would apply.
Justice William J. Brennan: And you could collect it from the solicitor?
Mr. Arthur B. Hanson: No, not from the solicitor, but from the vendor.
Justice William J. Brennan: I mean from the company.
Mr. Arthur B. Hanson: Yes, if I might...
Justice William J. Brennan: So the baseball bat transaction is certainly to be concluded in California.
Mr. Arthur B. Hanson: No, that is right.
If I might, Mr. Justice Brennan, I had just two more paragraphs and we have had some extensive questioning.
To say that the California Court tried to justify it wholly by misstating the language of National Bellas Hess, it is clear that under the prior decision, I point that out if you read pages 27 and 28 of our brief, they were beautifully elided, a sentence out of it and we put the right sentence back in, the way Mr. Justice Stewart wrote that opinion.
It is clear that under the prior decisions of this Court, no tax in nexus has been found to exist in the absence of meaningful in state sales-related activity under the facts of this case, no such instate sales-related activity exist, which will permit California to make the National Geographic Society its tax collector.
Accordingly, it is most respectfully urged that the decision of the Supreme Court of California be reversed and the decision of the California Court of Appeal be reinstated with whatever reinforcement this Honorable Court deems is appropriate.
Thank you very much.
Argument of Philip M. Plant
Mr. Philip M. Plant: Mr. Justice Brennan and May it please the Court.
The appellant has referred repeatedly to the opinion of the California State Supreme Court.
I respectfully submit that we are here before this Court, on the facts of this case and it should be viewed in that context.
On the facts of this case, the issue before this Court pertains to the constitutionality of the California statute which imposes a use tax collection requirement on a foreign retailer having a place of business within the taxing jurisdiction.
This is not unusual.
The 1965 special subcommittee on state taxation of interstate commerce found that from 7 to 23 of the 36 sales tax states then reporting to its survey, had similar provisions.
Also, following this 1965 report, there were repeated attempts and introductions of bills in the Congress to regulate the state taxation of commerce among the several states and none of which passed, but all of which bills provided that the ownership or leasing a property within the taxing jurisdiction would support the imposition of a use tax in collection requirement.
As Mr. Hanson has said, there are two constitutional challenges to the statue, the Due Process and the Commerce Clause.
Both of these provisions are based on principles of fairness.
The interstate Commerce Clause is satisfied if the state tax in question does not constitute an undue burden upon the commerce among the several states.
The Due Process Clause is satisfied if the state has given something for which it can ask return.
That is if the benefits given and the opportunities conferred bear a fiscal relation to the exertion of taxing powered by the state.
We submit that the requirement of the presence of a business office within the taxing jurisdiction as a condition precedent to the requirement of a foreign retailer collecting a use tax satisfies both of these tests.
Firstly, it does not constitute an undue burden on interstate commerce.
At the outset, it is appropriate to note that the purpose of the use tax is not to discriminate against the foreign retailer, but rather to place the foreign retailer under a tax equal in amount to that borne by the local retailer who is subject to the sales tax.
Unknown Speaker: If these two offices were moved to Arizona, I take that you would concede that the California use tax does not apply?
Mr. Philip M. Plant: That is correct, Your Honor, that would be National Bellas Hess.
Unknown Speaker: Suppose the society from its office in Arizona sent a salesman to solicit advertising into California?
Mr. Philip M. Plant: In that situation, the relationship is such that under analogy to Scripto, we might as well assert a tax.
We might say that the solicitation of the advertising supports a magazine which in turn is a primary vehicle through which the society advertised its offerings of maps, atlases, globes and books.
Moreover, it constituted the mailing list used by the society in soliciting these mail-order sales to California residents and finally, the good will established by the prestige of the society’s name carried over to enhance its sales of these maps, atlases, globes and books.
Justice Harry A. Blackmun: That would be an extension of Scripto, however, which would directly support the taxation of the advertising?
Mr. Philip M. Plant: That is correct, Your Honor.
Unknown Speaker: What if any significance is the fact that you do not require them a license to do business in general?
Is there any?
Mr. Philip M. Plant: We submit it does not.
There are several cases, notable among is Sears, Roebuck and its companion case of Nelson versus Montgomery Ward, which make reference to retailers being registered to do business.
Now, on the other hand, this Court has decided in such cases as general trading and felt entrant that there is a sufficient nexus to support such a tax in the absence of registration to do business.
Our position with regard to that—
Unknown Speaker: Mr. Deputy Attorney General, while I have you interrupted, I take it from what you have said that the solicitation of retail sales and the accomplishment of those sales for the nine months period that had been mentioned is of no importance to your case, the sales of articles?
Mr. Philip M. Plant: There were solicitations of advertisements to be placed in the magazine.
Unknown Speaker: I am drawing the distinction between solicitations for advertisements on the one hand and the sale of goods within California on the other?
The California Supreme Court said that the sales of goods for the nine months period were de minimis, as I understand it?
Mr. Philip M. Plant: The Supreme Court held that it need not consider them because it found taxation independent of that ground.
Unknown Speaker: Right, but what I am asking you is whether you consider those sales of goods are relevant to your position?
Mr. Philip M. Plant: We consider them relevant in the two particulars, You Honor.
In the first instance, we consider them relevant because we feel they are not de minimis.
We feel that to the extent, they overlap the first taxable quarter.
They constitute approximately 2.3% of the taxes during that particular time when the over-the-counter sales overlap with the mail-order sales here disputed.
That is 2.3% which we think more than de minimis.
Furthermore, we noticed that in the second quarter, after they discontinued over-the-counter sales, their mail-order sales dropped off from 45,000 to 38,000.
So we say, there might be some significance to that and we take the position that there should be.
Secondly, the fact that they made over-the-counter sales is very material to the question of whether or not they were registered to do business.
We submit as one of our arguments that they did in fact by stipulation, do business in California and that they should not be rewarded for their failure to register by having a more restrictive liability in regard to use tax collections.
Unknown Speaker: Even if you are correct on both those points and even if further the fact that the intrastate retail sales were made of these same items during the period, even though a fairly small percentage of the total, should bring this case within Montgomery Ward and Sears, Roebuck yet that would still be true only for that taxable period during which the intrastate retail sales were made, that would continue forever, would it?
Mr. Philip M. Plant: That would be correct, Your Honor.
But, this will further develop our argument.
We do not feel that the presence of a local retail operation is essential to the concept of Nelson.
Unknown Speaker: But if it is, it would give your state power to tax; impose the use tax only for a specific taxable period.
Mr. Philip M. Plant: Well, that is correct, Your Honor.
Unknown Speaker: You concede that that it does not damn this people forever?
Mr. Philip M. Plant: To the extent that it is essential that they have a retail activity in state, that is correct Your Honor.
The Due Process Clause is satisfied if the state has given something for which it can ask for return, if the benefits given and the opportunities confer, bear a fiscal relation to the taxing power exerted by the jurisdiction.
Now, under the Commerce Clause, it does not constitute and undue burden.
As I earlier noted, the purpose of the use tax is that of competitive parody.
Next, I think we should consider the holding of this Court in National Bellas Hess.
In that court, they found a violation of due process and a violation of the Commerce Clause in a purely mail order situation that is to say where the foreign retailers’ only contacts with the taxing jurisdiction were through the use of the US mails and common carriers.
Now, the Court in considering the Commerce Clause, Brown, made reference to the fact that if a interstate mail order retailer had to file a separate return at a different rate under different administrative requirements in every state, political subdivision, local county and school district, that there would result an administrative entanglement, which would constitute and undue burden on interstate commerce.
In the instant situation, we are only seeking to impose a use tax collection requirement on a foreign retailer maintaining a place of business within our state.
Now, the 1965 special subcommittee on state taxation of interstate commerce specifically concluded that the vast majority of mail order retailers have business offices only in two or fewer states.
For this reason, there would not result the administrative entanglement productive of the undue burden condemned in National Bellas Hess.
Moreover, we should note that California has a centralized collection procedure, whereby its local use taxes are collected by the state so there is only one collector.
Turning to the due process clause as noted earlier it would ask no more than a fair return.
We feel that conditioning the imposition of the use tax collection liability upon the maintenance of a place of business within California meets that test because by maintaining places of business, the foreign retailer necessarily, substantially draws upon the benefits conferred and opportunities given by the state.
In this regard, it is interesting to compare the Standard Pressed Steel Case.
In the Standard Pressed Steel Case, they found sufficient nexus to support the collection of a $33,000.00 tax liability on the basis of one engineering consultant who worked out of his home.
If that meets a due process test with regard to the question of state opportunities and benefits conferred, then surely, the maintenance of two-employee staffed advertising offices in California would do likewise.
There are also benefits that do accrue to a foreign retailer purely by virtue of mail-order sales.
Now, while it is true that National Bellas Hess held that that alone is insufficient, it nevertheless is note worthy that the Court in General Trading Company did observe that the foreign retailer doing a mail order business benefits by virtue of the fact that the state protection makes possible, the California purchaser’s use of the product, which is a sine-qua-non of the sale itself, therefore, there is that benefit.
Further, there is a benefit that the California facilities are available to the foreign retailer if as here, there is a possible credit sale problem where they need to collect delinquent accounts.
So even in a mail order business, there are benefits.
Now, it would be insufficient in and off themselves we feel that it is one leg up towards supporting taxation.
The other thing that we would like to observe is that the society did indeed exploit the California market in substantial manner with their mail-order sales and this is a factor to be considered.
The court in Miller Brothers versus Maryland held that where there is no intentional continuous systematic exploitation of the market of the jurisdiction attempting to impose a tax, there is insufficient nexus.
However, it is also recognized that where there is exploitation, that is an important factor and we feel that the society, as a matter of stipulation, had $452,470.00 worth of mail-order sales from the period August 1, 1963 to May 6, 1964.
There is pending, as reflected in the pleadings, a determination by the state of California for subsequent periods.
It covers a nine-period and a board has been assessed for mail-order sales exceeding $3,000,500,000.00.
Unknown Speaker: Now, how much of that came through either these two offices?
Mr. Philip M. Plant: As regards to the assessment I just referred to, none.
As regards to the amount over the counter from those offices—
Unknown Speaker: So what you are saying is that but for the offices, you would not have any case?
Mr. Philip M. Plant: Well, your honor.
Unknown Speaker: Yes or no?
Mr. Philip M. Plant: I am saying that advertising soliciting activities support the tax.
I am saying that we do not need those over-the-counter mail-order sales.
Unknown Speaker: If you advertise and solicit through the mail is that taxed?
Mr. Philip M. Plant: As long as you do not maintain a place of business within the taxing jurisdiction.
Unknown Speaker: Even though the business had nothing to do with the subscription?
Mr. Philip M. Plant: Well, that is correct, you Honor.
We do not feel the need of a relational requirement.
Unknown Speaker: Mr. Plant, you have referred to Miller Brothers, do you think the result below in this case is entirely compatible with the result in Miller Brothers?
Mr. Philip M. Plant: Yes, I do, your Honor.
I think that Miller Brothers only stands for the proposition that where there is no intentional exploitation of the local market, that there can not be nexus.
Miller Brothers and National Bellas Hess together can be read as conveying the message that nexus, to support taxation, is a mix of physical presence in the jurisdiction and exploitation of the local market.
Bellas Hess said you got to have some physical presence and Miller Brothers says you got to have intentional exploitation.
Unknown Speaker: Well, they sent their truck over into Maryland and serviced their product over there, did they not?
Mr. Philip M. Plant: That is true, but that was for deliveries that, according to the Court, were resulting from the residents of Maryland going across the border to the store in the other state, and they ordered material and then they delivered it with their truck.
But, as the court in Scripto versus Carson clarified, Miller Brothers versus Maryland, they said that Miller Brothers did not go to Maryland.
The Marylanders went to Miller Brothers, and that was emphasized.
Unknown Speaker: I am not being critical, I am just wondering whether the decisions up here have been entirely consistent, that is really, what I am saying, I guess.
Unknown Speaker: Mr. Attorney General if National Geographic takes out two offices out right now, that is the end?
Mr. Philip M. Plant: If they take their advertising soliciting offices right now, they are not liable for use tax collection liability, Your Honor.
Unknown Speaker: A while ago, they sent advertising solicitors into the state.
Mr. Philip M. Plant: That is correct.
That was in response to hypothetical that they pulled them out and they put somebody else in.
But, if they pull out the advertising soliciting offices now, they have nothing.
Now, I would like to touch upon the reason we feel that qualification to do business should not influence a result in this.
First of all, as I mentioned, it is stipulated that the society did do business and they should not be heard to benefit because of the fact that they did not register as they should have done.
Secondly, as a matter of logic, the benefits accruing to the foreign retailer or the burdens if any imposed on interstate commerce will remain the same, whether or not they went to the formality of registering to do business.
Unknown Speaker: Well, that is a matter whether or not a company needs to qualify to do a business as a matter of local statutory law.
It has nothing to do with the constitutional issue.
Mr. Philip M. Plant: That is correct, Your Honor, but there are references like in Sears, Roebuck Case, to the fact that the foreign retailer there was registered to do business and I feel that the formal act of qualifying to do business should irrelevant.
I like to make one further comment on that point, and that is as a matter of policy, the 1965 special subcommittee noted that there is a severe compliance problem with foreign retailers not registering to do business in states at that time.
I think that if this Court were to increase a foreign retailer’s susceptibility to taxation by virtue of the fact that he voluntarily had registered to pay state taxes that would only encourage evasion of the state requirement.
So we feel that it is inadvisable on that ground.
Now, addressing briefly the relation point, that is the appellant’s position that the local activity must be related to the transaction taxed.
Unknown Speaker: The local activity must be retail sales activity instead of the submission, as I understood it.
Mr. Philip M. Plant: If there is no requirement that the local activity bear a relationship to the transaction taxed, then the question becomes “What possible difference could it make what the local activity is?”
It does not seem in terms of—
Unknown Speaker: The retail sales activity because that is the subject to this tax?
Mr. Philip M. Plant: Well, that is right, but we are taxing mail order sales.
Unknown Speaker: Take the hypothetical case that the local activity was the writing of an article in California by a California author for National Geographic.
That would be local, clearly, local activity, he would be writing the article, a resident of California writing an article for his submission and publication of the National Geographic that would clearly be local activity and that under the phraseology of the Supreme Court of California’s opinion would be enough to constitutionally permit the state to impose use tax on these mail order sales.
Mr. Philip M. Plant: I think the language of the California State Supreme Court decision has to be a read in context of the statute for which it was applying.
In the statute which it was applying, would not I do not believe allowed taxation in an instance such as that.
The statute in question said that the tax could be imposed on a retailer doing business within the state and went to define doing business within the state to mean a retailer who established a sales office warehouse, several other things or any other place of business in the state.
So therefore, what we are really looking at here is not how you could hypothetically expand, add info item, the dicta of the California Supreme Court decision, but the validity of the California—
Unknown Speaker: It is not the dicta; it is the test that it framed?
Mr. Philip M. Plant: Well, it is the test that it had framed, but it framed it as whether or not the statute.
Unknown Speaker: I do not have any presence however, no matter how slight or however slight, whatever it said
Mr. Philip M. Plant: That is correct, Your Honor.
But my position is only that I respectfully submit that you have to look at the statute because I feel that if the state did not have—
Unknown Speaker: (Inaudible) solicit the sale of advertising regularly in the state?
Mr. Philip M. Plant: Well, that is correct Your Honor.
Unknown Speaker: But you do not need the sale, was it? (Inaudible)
Mr. Philip M. Plant: That is right Your Honor that is our position in which you should just look at the facts of this case.
Unknown Speaker: As I understood your statement at the very outset of your argument, you are not necessarily defending all the language of the Supreme Court of California?
Mr. Philip M. Plant: That is correct Your Honor.
Unknown Speaker: Did I misunderstand you?
Mr. Philip M. Plant: No, you did not Your Honor.
We just feel on the facts of this particular case…
Unknown Speaker: Yes, that is what I thought.
Mr. Philip M. Plant: That is correctly decided.
With regard to the question of whether or not the local activity need to be related to the transaction taxed.
Our position is in essence that a physical presence within the taxing jurisdiction should be enough and we can draw an analogy to the area of in personam jurisdiction over foreign corporations, whether or not they can be subjected to suit and we note that in Perkins versus Bengay Mining Company in 342 US, it was held that a foreign corporation having administrative activities within the taxing jurisdiction, was held subject to suit for a cause of action arising outside the state, which cause of action bore no relationship whatsoever, to the in state activities.
Several commentators have recognized the similarity of the due process requirements in the area of taxation on one hand, and the area of in personam jurisdiction on the other hand.
Unknown Speaker: Do you not like to find some nexus?
For example, if National Geographic set up a rest home and golf club for its employees in Palm Springs, you would not put stales tax on them, would you?
Mr. Philip M. Plant: Well, under out statute, I do not think we would, but I would think—
Unknown Speaker: It has to have some nexus, does it not?
Mr. Philip M. Plant: I do not know that constitutionally it is required to relate to the transaction, I think if you can show that they are in a state and that they are deriving benefits.
Well, it is not a matter of taking on a big load as much as it is trying to equalize the position of our local retailers vis-à-vis foreign retailers and the ones that is most affected by this decision are the big ones.
When you limit the requirement to just having use tax collection liabilities upon a foreign retailer with a business office in the state, you are looking only at the rather large foreign retailers, who are the biggest competitive threat that the intent of the use tax was to neutralize.
We wish to argue that the dissociation test which was set forth in American Oil Company versus Neill should not be applied in this case and that involved an excised tax, the incidence of which fell on the foreign retailer, whereas in this case the incidence of the tax is on the local user and the foreign retailer is required to collect the tax.
Now, this Court has, in several cases recognized this distinction, particularly in McLeod versus Dilworth in the Norton Company Case.
It is a logical distinction because in one case, the foreign retailer bears the brunt of the tax and he is neither authorized nor required as a matter of law to pass that burden on to his purchaser.
In the instance of a use tax collection situation, however, the foreign retailer is but a conduit and he is to pass the tax on to the local user.
Unknown Speaker: He is ultimately liable though, is he not if he…?
Mr. Philip M. Plant: If he defaults in his performance as such he is ultimately liable, that is correct, Your Honor.
I had only two matters to touch upon before closing.
Comments were made regarding the periodical exemption.
The periodical exemption is set forth at page 3 of the appendix 2, the brief of appellee and it merely provides that the magazines or all the materials that go into make up the magazines as a periodical are exempt from sales and use tax and it has always been our consistent position that whereby state legislative grace, we exempt the particular activity from sales and use tax, does not mean that we blindfold ourselves to consider that as a factor in supporting the use tax collection liability that is appropriate on the mail order sales.
We noted that the society conceded that if the magazine was sold from its own newsstands in California, that the disputed tax on the mail order sales would be proper.
We say then to why not extend it to this situation where there are advertising soliciting offices, both activities would equally draw up on the benefits conferred by the state.
There would an, either, event be no greater burden on interstate commerce.
It would then seem that the character of the local contact, if it need not be related to the transaction taxed is fairly irrelevant so long as it is substantially draws up on the benefits that this state has conferred.
In summary, we feel that the requirement of a use tax collection liability on foreign retailers maintaining a place of business within the taxing jurisdiction meets the requirements of the due process and Commerce Clause test.
Justice William J. Brennan: Thank you gentlemen.
The case is admitted.