QUILL CORP. v. NORTH DAKOTA, BY AND THROUGH ITS TAX COMMISSIONER, HEITKAMP
Through its Tax Commissioner, the state of North Dakota filed an action in state court to force the Quill Corporation, an out-of-state mail-order office equipment retailer, to charge a North Dakota use tax on Quill merchandise to be used within the state. The state court ruled in favor of Quill, grounding its decision on Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 _. In this 1967 case, the United States Supreme court found a similar Illinois statute to be in violation of both the Due Process Clause of the Fourteenth Amendment and the Commerce Clause of the United States Constitution. The North Dakota Supreme Court reversed, basing its decision on a rejection of _Bellas Hess in light of the "tremendous social, economic, commercial, and legal innovations" since it had been decided.
1) Had Bellas Hess become obsolete? 2) Was North Dakota's imposition of a use tax upon the merchandise of the Quill Corporation in compliance with the Due Process Clause and the Commerce Clause?
Legal provision: Due Process
No and No. In a majority opinion authored by Justice John Paul Stevens, the Court admitted that, over time, subsequent cases have allowed for more flexibility than Bellas Hess. Nevertheless, the Court maintained that this evolution does not suggest a rejection of Bellas Hess. The Court also determined that North Dakota's imposition of the use tax did not constitute a breach of the Due Process Clause because the Quill Corporation had sufficient contact with the state's residents and benefited from the state's tax revenue. However, it found the use tax to be unconstitutional because it interfered with interstate commerce, rendering it a violation of the Commerce Clause. Consequently, the Court reversed the North Dakota Supreme Court's decision by ruling in favor of the Quill Corporation.
Argument of John E. Gaggini
Chief Justice Rehnquist: We'll hear argument next in No. 91-194, the Quill Corporation v. North Dakota.
Mr. Gaggini, you may proceed.
Mr. Gaggini: Mr. Chief Justice, and may it please the Court:
This case involves North Dakota's refusal to apply this Court's decision in Bellas Hess.
By that refusal, North Dakota is asking this Court first to abrogate the historic standard for State taxation which has resulted in an orderly growth of an open national economy, and second, to ignore stare decisis and overrule a construction of the commerce clause that is based on 50 years of case law.
The irony of this case is that while the European Community is eliminating locally erected tax barriers in order to complete the creation of a European Common Market, North Dakota and other States are advocating a balkanization of the American market.
Overruling Bellas Hess will destroy the interstate marketplace that we now know it.
Quill is a mail-order company.
It sells more than 9,000 office supply items ranging from paper clips to computer accessories.
Unknown Speaker: I suppose you concede that if Quill had an office in North Dakota that... and solicited out of there, and they had an inventory, there wouldn't be any problem, would there?
Mr. Gaggini: Your Honor, we would not before this Court.
Quill conducts its business exclusively by mail, telephone--
Unknown Speaker: That has hardly balkanized the American market.
Mr. Gaggini: --No, the balkanization occurs because North Dakota and other States are suggesting to this Court that National Bellas Hess is no longer the jurisprudence to determine what is subject to tax.
Under National Bellas Hess, this Court in 1966--
Unknown Speaker: Only where mail order houses are concerned.
Mr. Gaggini: --Yes, sir.
Well, mail order houses and any business that conducts an interstate market that's not covered by a statute such as you've just heard 86272.
In a service industry, an accountant, an architect, communicating with a customer by telephone or mail in another jurisdiction is not covered by 86272.
New Mexico, in briefs filed in this case, would suggest they might be able to tax that activity.
New Mexico files a brief in this case supporting a gross receipts tax.
New Mexico suggests that they're not bound by National Bellas Hess.
It's no longer a legitimate authority.
So the panorama of this case is much more than the direct mail order or market industry, and it's much more than merely collecting taxes.
Unknown Speaker: Is that on the assumption that there's a due process component to Bellas Hess?
Mr. Gaggini: Bellas Hess, Justice Kennedy, involves two aspects, commerce and due process.
And we submit that this Court weighed those tests in 1967, when Justice Stewart for the majority and Justice Fortas for the dissenting, looked at the Illinois market.
The Illinois market at that time was a target, a market that National Bellas Hess was aiming at.
It was sending its mail catalogues; it was sending its merchandise.
And this majority said that looking at prior case law dating back to 1940, the Sears case, that this Court has never imposed tax obligations on an out-of-State vendor unless that vendor conducted in-State business activity.
Unknown Speaker: Suppose we were to conclude that our reading of Bellas Hess is that it's simply a commerce clause case.
From that, then, we simply have an allocation problem, don't we, and the parade of horribles that you present to us is--
Mr. Gaggini: Justice Kennedy, I would submit that under this Court's analysis in National Bellas Hess, Complete Auto, National Geographic, and every case preceding and succeeding, that there is both a commerce and due process nexus question.
Unknown Speaker: --I'm just saying suppose we disagree with that?
Mr. Gaggini: Your Honor, you would have to overturn National Bellas Hess.
National Bellas Hess requires as the first component that there be--
Unknown Speaker: You're saying then that if we find that there is no due process component, at least no viable due process component, then we must overrule National Bellas Hess.
Mr. Gaggini: --Your Honor, I'm suggesting that the commerce clause and the due process component... when we speak of due process, there are two aspects.
There's the State's view of due process, which is personam jurisdiction, and there is this Court's application of due process in the tax area.
Both standards are different.
But I'm suggesting to you, Your Honor, that the commerce clause aspect of this case in Complete Auto requires the first analysis to... the first finding to be that there be a substantial nexus in the taxing forum.
This Court has never held otherwise.
We can go back to 1940 with Sears, Your Honor, and in the Sears analysis, the Court specifically said that there was no way to impose the obligation on the foreign business that didn't have a presence.
That was repeated in National Geographic 1 month after Complete Auto.
Complete Auto held the first part... the first component of the four-part commerce test to require a substantial nexus.
Unknown Speaker: Well, if you want to argue the case on the theory that Bellas Hess must rest on a due process analysis--
Mr. Gaggini: I'm arguing--
Unknown Speaker: --I suppose that that's your choice.
But it seems to me that our due process jurisprudence has progressed to the point where it's very clear that your clients could be held liable for products, liability, et cetera, and that if Bellas Hess rested on due process at one point... if it did, and I'm not sure that it did... that that has been superseded by our jurisprudence.
Mr. Gaggini: --Your Honor, I--
Unknown Speaker: If you want to say that Bellas Hess then must be overruled, I suppose you're at liberty to argue that.
Mr. Gaggini: --I may have been misunderstood.
I am suggesting to this Court that National Bellas Hess relies on commerce clause concerns.
And commerce clause concerns require a finding of substantial nexus, a physical presence, in the taxing forum.
That has been consistently applied in every case this Court has decided.
From 1941 until this Court decided Goldberg, it required a finding of substantial nexus for commerce clause.
And that's what I am suggesting to Your Honor.
Unknown Speaker: Well, that's exactly the point, that is we're forced to address here, whether that physical presence requirement should exist anymore after Complete Auto and the cases following it.
Mr. Gaggini: Yes, Your Honor.
And may I suggest that the State in this case--
Unknown Speaker: I would have thought you might want to rest your argument just on the commerce clause and say it is better left to Congress to change.
I'm a little surprised, as is Justice Kennedy, to hear your argument.
Mr. Gaggini: --Your Honor, again, I must be misspeaking because I am suggesting to you that Bellas Hess relies on the commerce.
It... there are due process underpinnings in that case, but we're saying based on the commerce clause, North Dakota may not impose these tax obligations on Quill because Quill has no physical presence in North Dakota.
National Bellas Hess doesn't stand alone.
This Court has used National Bellas Hess in Complete Auto.
The State suggests that Complete Auto overturns Bellas Hess... 15 years after... that Bellas Hess has been overturned for 15 years.
Complete Auto applied a Mississippi gross receipts tax to a business that was conducted exclusively in Mississippi.
Complete Auto received automobiles in Mississippi at its facilities.
Those automobiles were moved by Complete Auto's personnel to dealers in Mississippi, and this Court held that there must be a substantial nexus with that activity.
There was no question that that activity occurred in Mississippi and that Complete Auto had that nexus.
The State suggests that this Court has abandoned the physical presence test and applied a due process test in determining nexus.
That due process test they they're suggesting is a Burger King analysis, which... which suggests minimum contact.
There's no authority that the State can point to for that argument.
One month after Complete Auto was decided, this Court juxtaposed, hand in hand, Bellas Hess and Complete Auto in answering the question in National Geographic.
The question in National Geographic was was that entity taxable in the State.
The California Supreme Court suggested that the slightest presence rule would create a nexus.
And this Court, the National Geographic Court, looked at that and refused to adopt that analysis, suggesting that National Geographic's presence in the State was sufficient.
And in that opinion, this Court said there are entities, direct marketers, that do not have the requirement to file returns or pay tax.
Those are those that have no nexus... analyzing National Bellas Hess 1 month after Complete Auto was decided.
Unknown Speaker: Was the... in the opinion in Complete Auto, was National Bellas Hess cited?
Mr. Gaggini: --No, Your Honor.
The nexus question wasn't at issue.
And that's the... that's the problem of the State's analysis in this case.
They're citing cases where the nexus issue wasn't a concern.
If you go back to the cases where nexus was involved, and we might start just looking at what was argued in National Bellas Hess.
In National Bellas Hess, the State of Illinois in response to Justice Harlan's question, you have to have some kind of rule, a rule that businessmen can understand.
The State, Attorney General McCarthy arguing for Illinois suggested, oh, definitely, I think there should be some kind of rule they should understand.
And that rule, I suggest, should be distilled from the cases of this Court is a rule which businessmen should well understand.
And that is simply where a business is successful in a State from a business point of view, that should be equated with presence from a legal point of view.
That was Justice Fortas' analysis.
That was the State of Illinois' argument.
That was the presentation that any sale, any economic activity in Illinois would be sufficient.
Justice Fortas, in a very eloquent dissent, went through an analysis of the benefits that Illinois provided to Bellas Hess, a Missouri company.
This Court can juxtapose the recitation of those benefits against the benefits suggested by the State in this case.
They're virtually identical.
Those benefits have never changed.
The rules, the education of the consumer, that still exists, but this Court analyzed that.
There were three dissenters: Justice Fortas, Black... Justices Black, and Justice Douglas.
And the dissenters argued that National Bellas Hess should be required to collect the Illinois tax.
But the majority suggested that, in analyzing prior precedent, no case ever supported that argument.
Yes, there's a market, yes, there's a target, and people can shoot at that target, but if you shoot at it using communication... telephone, U.S. mail, common carrier... that the shooting at that target is insufficient to create a nexus.
That's a commerce clause analysis.
That's not a due process clause analysis in the context of Burger King or International Shoe.
International Shoe, at that time, was a service of process case.
The question, an out-of-State company, who... which had employees in the State, could that company be served.
The question... the underlying question in that case was tax.
It was an unemployment tax.
This Court previously held that unemployment taxes were not commerce clause, were not protected by commerce clause.
And this Court held that in a service of process case, that International Shoe could be served.
I'm suggesting to Your Honors that in 1945, International Shoe was decided.
In subsequent years, McGee was decided, which was an insurance company issue, no commerce clause question.
McGee sold a contract to an insured in California.
California served, by mail, that insurance company which brought that company into the State.
The State of Illinois argued to this Court that the standard adopted by this Court in McGee should be used to support taxation of Bellas Hess.
This Court never applied that standard.
That was an in personam, personal jurisdiction test.
Justice Douglas, in a concurring opinion in Travelers, suggested that there may be different levels of due process.
Your Honors, I'm not arguing due process in this case.
I will not suggest to this Court that Quill could not be served if there was a tort or personal injury problem in Quill... in the State of North Dakota.
What I'm suggesting is that there is a different standard under the commerce clause.
Unknown Speaker: Well, what's the reason for the nexus requirement under the commerce clause?
Is it to prevent discrimination against out-of-State companies?
Mr. Gaggini: It's not only for discrimination, Your Honor, it's for the national marketplace.
If each State could impose restrictions on trading with customers in that State, we wouldn't have the national market that we currently have.
This Court has analyzed that, the openness of the national market... has applied that test.
It's the two different--
Unknown Speaker: You think we have a national market only for mail order businesses?
Mr. Gaggini: --No, sir.
No, Your Honor, I do not.
Unknown Speaker: Well, I mean that's very strange.
But that's what your argument comes down to, that the great national market that the commerce clause set up really only works for mail order business, because certainly, everybody else can be taxed by the individual States that they do business in.
Mr. Gaggini: --Oh, Your Honor, I suggest otherwise.
The briefs of filed... amicus briefs filed in this case at this time, States are not imposing tax liabilities as a result of the commerce clause in Bellas Hess in all of these service industries where their communication is by mail or by telephone or common carrier.
This concept of a national market exists for all of that.
Unknown Speaker: I'm saying that seems to me a very limited notion of what the founders' vision was.
But if that's what you think it was.
Mr. Gaggini: The founders' vision?
Unknown Speaker: We want a national mail order telephone market.
Mr. Gaggini: No, no.
No, I'm not suggesting that.
I'm suggesting the ability of out-of-State vendors to communicate with customers in a State without being burdened by the various burdens of tax compliance.
Your Honor, we talk about the burdens in this case, and they're talked about in a very amorphous concept, as if all that needed to be done is an amount added to the bottom of an invoice.
But Your Honor, there are 6,500 taxing jurisdictions.
It's not disputed.
The ACIR Report, the Advisory Commission of Intergovernmental Relations, suggests that there are over 6,000 taxing jurisdictions.
If we look at the number of tax returns that have to be filed, we're talking about over 5,000 tax returns.
Unknown Speaker: Yes, but you're missing my point.
The same thing... the same objection could be made by the company that doesn't use the telephone, but uses drummers.
Mr. Gaggini: Yes, sir.
Unknown Speaker: And says, my goodness, we send these salesmen out into the so-called national market, and we're going to be taxed by every one of these jurisdictions.
And you say that's okay.
Mr. Gaggini: No, Your Honor, I don't say that's okay.
Unknown Speaker: You don't say national market for that, do you?
Mr. Gaggini: I'm not saying that's okay.
I'm saying this Court in 1967, Justice Stewart and the majority said that looking at this national market, looking at the target, the market of Illinois, that Illinois could not impose extraterritorial burdens on the out-of-State vendor.
This Court said that in 1967.
That decision has be followed by 70 State court decisions, by this Court as citing National Bellas Hess in six other decisions.
The law drawn in 1967 was physical presence was necessary.
This Court's exact words were: we have never imposed a tax obligation on a vendor who has communicated only by common carrier, mail, and electronics.
Unknown Speaker: I'm not sure you're understanding me.
I want you to tell me why this is worse for somebody who operates by telephone or mail than it is for somebody who operates by sending business representatives into all of the States.
Mr. Gaggini: The... the physical presence that... this Court has drawn the mark--
Unknown Speaker: I know what we've done, but you're elevating it to a point of principle and not mere fact.
Mr. Gaggini: --The--
Unknown Speaker: You're saying that this has something to do with our national market.
Mr. Gaggini: --The benefit--
Unknown Speaker: But you're perfectly willing to have the national market fragmented by allowing these... how many thousands of jurisdictions... tax drummers, except for the benefit of a Federal statute.
Mr. Gaggini: --Oh, Your Honor, the presence of a drummer, the warehouse, the retail outlet in the State, the out-of-State vendor is now in State.
It's no longer an out-of-State vendor.
It's an in-State vendor receiving benefits from the State.
This Court has clearly held that in Tyler Pipeline, for example, where a full-time employee.
We have no question that if there was a physical presence.
But this Court drew the line, it weighed the test in '67.
And it said the physical presence test was the rule.
The rule can be justified based on the benefits received with that physical presence.
Unknown Speaker: And would you say that they're part of a local market?
It seems to me that your national market argument works against you.
It seems to me that this statute vindicates the idea that there's a national market, which takes many forms, which has many sorts of structures, but that all should be treated the same.
So that the L.S. Bean Company, or whatever it's called, can pay a sales tax, just as... or use tax, just as a company does if it has small warehouse within the State.
It seems to me that they're quite the same.
They're all part of a single national market.
Mr. Gaggini: Oh, but I think, Your Honor, that when you juxtapose the benefits derived from the vendor in the State, those are clear benefits.
There is no benefit that is directly available to Quill, no benefit distinguishable from those amorphous benefits identified in Bellas Hess.
They're offered to every vendor who is out there communicating.
And by the way, North Dakota does not tie it to an economic basis; North Dakota ties it to three communications, three advertisements.
Three advertisements as nexus.
We're talking about burdens here about local taxes.
The State's brief suggests there's no tax liability for local jurisdictions.
That brief is contrary to a Tax Commissioner Bulletin issued in January of '91 which says there is local taxes.
And, Your Honor, one other aspect of this about discriminatory burdens, a vendor selling into the State, in many States is obligated to collect at the point of destination, where the local retailer is only obligated to collect tax based on the point of sale.
That's a discriminatory burden.
The requirement imposed on the out-of-State vendor to collect in a disparate number of jurisdictions, the ability of a local retailer to collect over-the-counter taxes that the out-of-State vendor cannot collect, the reporting of these multiple jurisdictions.
We're speaking of not 6,500 returns that are filed monthly, but 6,500 entries.
I am repeating burdens that the ACIR Report and Congress Today have considered and said are indistinguishable from the burdens this Court weighed in 1967.
Footnote 14 of National Bellas Hess is a footnote where this Court looked at the Willis Report and identified... which identify the burdens.
If you juxtapose that Willis Report against the ACIR Report and congressional hearings, you will find that the burdens are identical.
Unknown Speaker: Well, I'm sure they are.
But maybe we were wrong in 1967.
Is there some reason why we would... should be more reluctant to change in this case than we ordinarily would be, or less reluctant?
What kind of a case... this is... was a constitutional decision, right?
And we have opinions that say that ordinarily where we think we've gotten it wrong there and are wrongly preventing the States here from doing something they ought to be able to do that we should 'fess up and change our... change our opinion.
Mr. Gaggini: Yes, Your Honor, and I would agree with you except this case is distinguishable.
In this case, we submit that based on the jurisprudence, Bellas Hess was well reasoned in 1967.
There may be a dispute as to which way the Court should have gone, but it was well reasoned.
It provided a workable framework, a framework where taxpayers, State administrators, and courts have followed for over 25 years.
Unknown Speaker: Well, you might go beyond that, Mr. Gaggini, rather than just saying the merits were rightly decided.
This, unlike a lot of our constitutional decisions, Bellas Hess is a decision which Congress can overrule, the same way it provided in the case we heard argued earlier.
Congress... if Congress wants to change the result in Bellas Hess, it can do so, and it's been asked to do so by the State.
Mr. Gaggini: Thank you, Your Honor.
That was my second point, that Bellas Hess--
That Bellas Hess--
Unknown Speaker: Provided it's not on due process.
If it's on the commerce clause, Congress can do that.
Mr. Gaggini: --Your Honor,--
Unknown Speaker: That's why I share the two Justice's comments that we're a little concerned that you're putting it on both pins.
Mr. Gaggini: --Well, I am not suggesting this Court doesn't retain its right to analyze any congressional legislation.
But I have deference to Congress, especially the considerations they have given to this case.
When I say this case, I don't mean to Quill, I'm talking about the issue of Bellas Hess.
The States have petitioned Congress a few years ago, hoping to elicit a change.
And Congress looked at that and said... initially they said, well, let's go with an origin tax.
That is, the State from which the sale is shipped would collect the revenue.
And the State said no, we... we're not too pleased with that because then the tax would be distributed to the States that were selling, and Congress went into a destination tax.
The destination tax initially proposed just said, we're going to allow the States to impose this.
And with consideration of the compliance burdens, et cetera, Congress came in and started drafting a provision that provided for uniform rates, limitation on returns, the limitation on audits.
Congress was familiar with these burdens and tried to tailor legislation that would eliminate the due process concerns.
If Congress enacts legislation, I am confident that Congress will enact legislation that is carefully tailored to consider due process.
But this Court has retained jurisdiction to analyze that.
Unknown Speaker: Counsel, refresh my recollection.
How many of the States have passed legislation that if National Bellas Hess were to be reversed, would mandate retroactive application of State tax laws to situations that had been previously exempt under National Bellas Hess?
Mr. Gaggini: Your Honor, there was an excellent compilation which is attached to--
Unknown Speaker: Well, how many States?
Mr. Gaggini: --Thirty-two States, Your Honor.
Unknown Speaker: Thirty-two.
Mr. Gaggini: Thirty-two have adopted legislation.
Of the 32... and again, we have to put that in historical perspective, if you're interested.
That legislation didn't come about because the law changed, it came about first because Congress was considering legislation and they wanted to be lined up.
If Congress enacted this, they wanted to be behind the locomotive pulling out so that they had effective--
Unknown Speaker: And if we were to overrule National Bellas Hess all those things would have kicked in for several years back, I assume.
Mr. Gaggini: --Yes, Your Honor, there... there's a horrendous... historical... the retroactive liability is so dramatic in this case because it's not the tax liability of the vendor we're talking about.
We're talking about the consumer.
And we see States out there that have alternative procedures for collecting.
And they've been implementing this.
First of all, in our case, Quill sells to businesses.
The State has been auditing returns filed by those businesses.
But instead of assuming that obligation in North Dakota, they're transporting it to an out-of-State vendor.
It's very expedient.
Maine has done the same... has initiated a procedure for consumers.
They have a line on the income tax return, as a number of States have, and there's a report in the amicus brief filed by Direct Marketing Association in this case, which reports the success that Maine has had.
So, Your Honor, in going back to the question that Justice Scalia asked, the first question I responded to; the second factor Chief Justice Rehnquist took my thunder, but it was that Congress may correct this legislation because it's a commerce clause question, and they can correct any misapplication.
And that the third point was that North Dakota advances no compelling reason.
Many other States have alternative methods of collecting.
And I will... I would like to reserve the remainder of my time for rebuttal.
Unknown Speaker: Thank you, Mr. Gaggini.
General Spaeth, we'll hear from you.
Argument of Nicholas Spaeth
Mr. Spaeth: Chief Justice Rehnquist, members of the Court, may it please the Court:
I suppose I ought to begin with a disclaimer.
This is not a Buffalo Bills tie.
The question presented in this case is whether the Court should abandon the physical presence test set out in its 25-year-old decision of National Bellas Hess in favor a standard that focuses on the economic realities of direct marketing sales transaction.
Unknown Speaker: Are you asking that Bellas Hess be overruled?
Mr. Spaeth: --Yes, I am, Justice Blackmun.
This case arose when North Dakota sued Quill when it refused to collect our use tax.
Quill, of course--
Unknown Speaker: Of course, of the present members of the Court, I think only Justice White was here at the time, and he was a member of the majority.
Mr. Spaeth: --Exactly, and that's why I wore this tie today.
As you can see, I'm going to use everything I can to sway that last vote.
It is a Colorado buffalo.
And as you surmised, our--
Unknown Speaker: Do you have any better reasons?
Mr. Spaeth: --If you give me a minute, Justice Kennedy, I'll think of some.
As a matter of fact, Quill does have some small economic presence in the State.
As we argue in our brief, they maintain ownership interest in software that their customers use.
We also believe they own these catalogues that they ship unsolicited into our State to thousands of people.
But the fact that this case could turn on things that small suggests to me the absurdity of the physical presence test, and that's why we're asking this Court today to overrule National Bellas Hess in favor of a standard that takes into account the economic realities of selling today.
Unknown Speaker: Would that involve potential retroactive liability covering several years and in a large number of the States, General Spaeth?
Mr. Spaeth: It might.
And obviously I can't speak for all the States on this.
And it would, of course, depend--
Unknown Speaker: It would be a very substantial in amount, would it not?
Mr. Spaeth: --It could be.
And of course it depends on how the States, and this Court ultimately, because I suspect it would come back here, would apply Chevron and Jim Beam, and in a way to determine--
Unknown Speaker: Well, I suppose you've seen the handwriting on the wall there?
Mr. Spaeth: --Yes.
And we're quite pleased with the handwriting so far.
But the retroactivity issue, of course, is not in front of you.
This case arose in a declaratory judgment action.
We have not assessed Quill for anything at this point in time.
Unknown Speaker: Of course it bears on it in this way: if National Bellas Hess rests on the... dormant commerce clause, certainly Congress can take care of this problem, and it could rightfully weigh the really massive concerns here for retroactive liability and try to sort it out in a fair and reasonable way.
Mr. Spaeth: That's the problem--
Unknown Speaker: Now, that's not going to happen if this Court decides to jump the gun and turn the tide.
Mr. Spaeth: --The problem, Your Honor, is that Congress is, as this Court well knows, ill suited the weigh the complexities of this decision.
Unknown Speaker: They're much better suited to do than we are because they can deal with the retroactivity problem.
Mr. Spaeth: But every time this issue has been presented to Congress it's been stalemated... in no small part because the Direct Marketing Association has argued Bellas Hess is a due process case.
Unknown Speaker: But that doesn't mean the Congress is ill suited to do it, just because it doesn't pass the law that you want.
Mr. Spaeth: I was speaking about the political realities, Chief Justice Rehnquist.
There are so many special interest groups involved in this.
And that... in a situation where there's a lot of money at stake for Congress--
Unknown Speaker: Well, that's the way the game goes.
Mr. Spaeth: --That's right.
But the problem is not Congress.
The problem is this Court and a 25-year-old decision, which the Direct Marketing Association uses today to tell Congress that it's a due process case and you don't have the power to change the result through legislation.
Unknown Speaker: Well, if we were to reverse the Supreme Court of North Dakota here, say that Bellas Hess is still good law, but that was based on the commerce clause, not the due process clause, would that solve some of your problems?
Mr. Spaeth: Well, that would give me half a loaf, Chief Justice Rehnquist.
Unknown Speaker: Better than none.
Mr. Spaeth: It's better than none, but as you might understand, I'm hoping for the whole loaf here today.
And there's been a lot that's happened in this country since Bellas Hess was decided.
There was a $2.4 billion market in direct marketing at that point in time.
It's grown to as much $180 billion today.
It's as much as 25 percent of the retail market in America today.
It continues to grow rapidly at about 15 percent a year.
I'm sure all of you get hundreds of catalogues every year, and some of you probably order products from them.
It's resulted in about a $3.1 billion a year erosion of State taxes.
Unknown Speaker: As Mr. Gaggini would say, that shows you what a free market will do.
Mr. Spaeth: I think it shows you what big 5 or 6 percent tax advantage does as well.
They have a competitive advantage over in-State marketers.
They have a competitive advantage over their other competitors, like Sears, Roebuck and Montgomery Ward that do collect the tax in spite of the parade of horribles of difficulty that my noble opponent has said about collecting this tax.
Unknown Speaker: Is it correct, General Spaeth, that as the record seems to disclose, Quill is only the number 6 in North Dakota?
Mr. Spaeth: That's correct.
Unknown Speaker: Who are the other five?
I thought this was a big operator.
Why did you pick on Quill?
Mr. Spaeth: I think they are the largest direct marketer of office equipment in the State.
We started going against Spiegel, but they gave up.
And so then we went after Quill.
And I'm not sure--
Unknown Speaker: You mean they're collecting the tax?
Mr. Spaeth: --Yes, they agreed to do it after we went after them.
I think they saw, hopefully, the handwriting on the wall.
Unknown Speaker: Are you just saying we were flat wrong in Bellas Hess, or do you think there have been developments since them that make Bellas... that undermine Bellas Hess, or both?
Mr. Spaeth: Well, in all due deference, Justice White, I think you were flat wrong in National Bellas Hess.
But I also would have to acknowledge that there's been a lot that's happened since then that focuses, or that changes the view of this case from the standpoint of collectibility.
You can now buy computer software, and many direct marketers use it right now, that automatically calculate the tax and add it on to a bill.
That software's available.
It takes into account the complexities of every jurisdiction in the country.
And that's what other national marketers are using today.
It's not expensive; Quill could easily purchase it.
This case is not about the complexities of collection, it's about a tax advantage that they enjoy that they don't want to give up.
Unknown Speaker: Why does North Dakota deserve to collect the tax?
That's the real... sort of the question, I would think.
What do you want for nothing?
Mr. Spaeth: We don't provide them anything.
First of all, we facilitate the transaction for them.
They use phone lines in our State; they use our roads to deliver their products.
Unknown Speaker: Is that the State?
Mr. Spaeth: Yes.
We build those roads.
And we also regulate those phone lines.
Unknown Speaker: How about the phone lines?
Mr. Spaeth: We regulate the phone lines.
We provide landfills where their product goes.
But most importantly, we provide the customer base for them.
We're not asking them to pay the tax, you understand, we're asking them to collect it and give it to us.
Unknown Speaker: That's the argument that was rejected in Bellas Hess after being quite eloquently portrayed by the dissent.
Mr. Spaeth: I agree with you, Chief Justice Rehnquist.
It was directly presented in that case and rejected.
But I still think it's the right argument.
It's an argument that focuses on the economic realities of sales transactions by large companies like Quill.
Unknown Speaker: Have there been any other changes in the national market?
You mentioned computerized ability to calculate the tax.
Have there been any changes in the nature of the market itself?
Mr. Spaeth: Yes.
And I think I mentioned it briefly before.
The fact of the matter is direct marketing has become such a big player in the national sales market.
It is, depending on whose estimates you use, 15 to 25 percent of total retail sales in this country.
And I think the combination of the changing marketplace, the ease of communication that goes on that facilitates this, and the fact that the collection burdens have gone down substantially because of technological developments, make the world a very different place in 1992 than it was in 1967 when Bellas Hess was decided.
At the same time, the law has changed.
This Court, in National... in the Complete Auto Transit v. Brady opened the door to the taxation of interstate commerce as long as it met the four-factor test.
The same year, in the National Geographic test... case, which has been alluded to by the other side, this Court severed the connection between the tax and the physical presence.
In that case, National Geographic Society had two advertising offices in the State of California where they solicited advertising.
And the tax at issue there was a tax on their direct mail sales to the State of California from another location.
And this Court said it's okay because of those two offices, even though there was no connection between the activities in those two offices and the tax that was levied.
By severing the connection between the transaction and the tax, all of the economic justification for the physical presence test has been lost, as I think any economist would tell you.
And that's why we need a new standard today, a standard that recognized the realities of the American marketplace today.
And that's why this Court believes it's appropriate for... or the State believes it's appropriate for this Court to adopt something like the standard applied in ordinary civil jurisdiction.
When a State purposely avails itself of the privilege of doing business in North Dakota, in other words, it markets in our State and makes sales, it ought to at least bear the responsibility of collecting the sales tax and remitting it back to the State.
Unknown Speaker: Do you think you could require the out-of-State marketer to qualify to do business in the State?
Mr. Spaeth: To register as a business?
Unknown Speaker: Yes.
Mr. Spaeth: Yes, we could do that.
And we would as part of this.
Unknown Speaker: If you win this case, you would.
Mr. Spaeth: --Yes, we would.
But that only means that we have notice of them and we send them reports to fill out on the use tax.
It doesn't trigger any other responsibilities on their part, simply to pay the use tax.
You know, the physical presence test really doesn't make any sense for at least three reasons.
As I mentioned before, it's got nothing to do with the economic realities--
Unknown Speaker: How do... can you get jurisdiction over these out-of-State sellers in your own courts?
Mr. Spaeth: --Yes, in a variety ways.
Unknown Speaker: What, under your long arm statute?
Mr. Spaeth: Yeah.
Let me give you an example, Justice White.
Part of my office is the Consumer Fraud Division in the State.
We don't have a better business bureau.
We have jurisdiction over out-of-State marketers like Quill all the time on consumer fraud claims.
In fact, 30 percent of the consumer--
Unknown Speaker: Under your long arm statute?
Mr. Spaeth: --Right.
Thirty percent of the consumer fraud claims that come into my office are from out-of-State marketers.
It was mentioned before, tort law would enable us to reach them if there were a defective product.
There are a variety of ways already in which we have regulatory jurisdiction over them.
And so this case would not be a major development in the sense of due process considerations.
We already have jurisdiction over them.
The question is do we have jurisdiction to require them to collect an remit a tax to us.
Unknown Speaker: Well, how long has... the North Dakota law has been in its present form only since you changed the regulations to redefine who a retailer was?
Mr. Spaeth: That's correct.
Unknown Speaker: How long has that been?
Mr. Spaeth: Since 1987.
Unknown Speaker: So '87.
Suppose you win this case and... so you'll go back to '87, I guess, to collect?
Mr. Spaeth: Well, that's not my decision, but there's a possibility.
Unknown Speaker: I know, but I suppose you'll try.
Mr. Spaeth: Yeah, there's a theoretical--
Unknown Speaker: Who would you try to collect from?
Mr. Spaeth: --From Quill.
Unknown Speaker: And not from consumers.
Mr. Spaeth: That's correct.
Because when... Quill had notice as of that date that it had this responsibility.
And of course, it chose to litigate.
And perhaps if I'd been advising them as their counsel, I would have said the same.
But the tax department will make a decision, I suppose, on the retroactivity issue and how far to go back--
Unknown Speaker: Well, you're right now able to move against the consumers, I guess.
Mr. Spaeth: --If we knew who they were.
I mean, as this Court noted in National Geographic, it's virtually impossible for the State to audit consumers.
Unknown Speaker: Well, I just thought you told me... you told us that all these marvelous computer developments around, so everybody knows everything about everything.
You could find out in a flash from them.
Mr. Spaeth: I think it would be very difficult for us to go to all the direct marketing companies that market in the State and try to figure out if they made sales in the State of North Dakota.
And I think this argument's been presented to this Court before.
In National Geographic it was, and this Court said States don't have to do that.
Unknown Speaker: Mr. Gaggini mentioned that some States require filling it out on their income tax returns.
Did you make any out-of-State purchases over, you know--
Mr. Spaeth: He mentioned one State, Maine, and I can explain that in two words: L.L. Bean.
I mean, they're a big player in the State of Maine.
As you notice, the State of Maine is not siding with the other States in this particular case because of the importance of L.L. Bean to that State.
I don't think we need to do that constitutionally.
There's a much easier way, and that's to require companies like Quill to collect and remit the tax.
The physical presence test makes no sense whatsoever.
As Justice Scalia eloquently put, what's the difference between the drummer going through the State and soliciting sales by mail?
There isn't any economic distinction between those two.
When in fact, what's happened, is it's given direct marketers a huge competitive advantage in the State.
They have the advantage that they don't have to collect the tax.
What Bellas Hess did was turn the commerce clause on its head.
Instead of leveling the playing field, it's given out-of-State marketers a competitive disadvantage... advantage over other marketers.
Finally, it's made it profitable for companies to avoid the tax by setting up subsidiaries.
That's how Saks Fifth Avenue does it.
They have stores and they have direct mail.
They have a subsidiary that does the direct mail so that they don't have to collect the sales tax, or use tax, in the States where they actually have stores.
That kind of thing doesn't make any sense.
So I urge this Court to the affirm the decision of the court below to close that enormous tax loophole that exists.
It's unjustified by economic circumstances.
I think the apportionment and nondiscrimination requirements of Complete Auto will be met, will ensure that the collection of the tax doesn't violate any commerce clause considerations, and due process will be satisfied by forcing the seller to collect the tax, only when it purposely avails itself of the privilege of doing business in the State.
Mr. Gaggini mentioned the fact that North Dakota doesn't tie this tax to its sales.
Well, of course it does.
They don't have collect the tax unless they make a sale.
It's clearly tied to sales within North Dakota.
I urge this Court, therefore, in closing, to affirm the decision of the North Dakota Supreme Court, which I think was a finely reasoned decision.
Unknown Speaker: --Thank you, General Spaeth.
Mr. Gaggini, you have 3 minutes.
Rebuttal of John E. Gaggini
Mr. Gaggini: Thank you, Chief Justice.
Just some quick points.
First, National Bellas Hess was larger than Quill.
Quill's sales into North Dakota were one-half when measured against National Bellas Hess' sales in '62.
If we adjust by inflation Bellas Hess' sales, they were nine times the size of Quill.
This is a commerce clause case.
I want to repeat.
It's a commerce clause case.
The State treated it as a commerce clause case, we treated it as a commerce clause case, but the analyzed it under due process.
As to the consumer going outside the State to buy merchandise, the State of North Dakota buys merchandise from Quill.
The State is exempt from tax.
And the State buys, and it's in our brief.
We were surprised.
It came up in a newspaper article.
Due process adjudication, the indication that the State has jurisdictional--
Unknown Speaker: What's the... I don't understand, what's the significance of that?
Mr. Gaggini: --It's that the consumer's decision, and there's a citation to the Congress hearings, Justice Stevens, that the consumer doesn't make a decision necessarily on sales and use tax collection.
And that has been reported to Congress.
And I wanted to emphasize it.
The only reason the State would be buying from us, because they don't pay sales tax, is because either of a variety of product or price.
Unknown Speaker: Yeah, but you're not denying you have a sales... a competitive advantage over those who pay a tax?
Mr. Gaggini: Your Honor, I'm saying that's not a decision of the consumer.
May I just wrap a few points about adjudicatory jurisdiction?
We say that the State has powers, State police powers, but those are not equated with tax jurisdiction.
As to the North... as to the validity of National Bellas Hess, we cite to the North Dakota legislation, where the North Dakota legislators themselves believed National Bellas Hess controlling in 1987, when they enacted their law, and they petitioned Congress to change.
The State's audit of the consumer... this is not a consumer question in this case.
Quill sells to businesses and the State audits those businesses.
As to one State, it's... Your Honor, we cite in our appendix, there are 16 States that have alternative methods of collecting this tax.
Sears... there's been mention that Sears collects this tax.
National Bellas Hess applies to the company like Sears, because when Sears sells into local jurisdictions where they don't have physical presence, they're not collecting.
The Sears-type out-of-State mail order houses are not collecting the tax in the local jurisdictions because they don't have nexus in those jurisdictions.
Unknown Speaker: Thank you, Mr. Gaggini.
Mr. Gaggini: --Thank you.
Chief Justice Rehnquist: Your time has expired.
The case is submitted.
Unknown Speaker: The honorable court is now adjourned until monday next at ten o'clock.
Argument of Justice Stevens
Mr. Stevens: The second case I have to announce is No. 91-194, Quill Corporation against North Dakota.
The case comes to us on a writ of certiorari to the Supreme Court of North Dakota.
Petitioner, Quill, is a mail-order house that maintains neither outlets nor sales representatives in North Dakota.
This case involves North Dakota's efforts to require Quill to collect and pay a use tax on goods purchased for use within the state.
The North Dakota Supreme Court upheld the state's collection effort ruling that social, economic, and legal innovations had rendered obsolete our 1967 ruling in National Bellas Hess versus the Department of Revenue.
In that case, our Court held that a similar tax imposed by the State of Illinois violated both the Due Process Clause of the Fourteenth Amendment and also created an unconstitutional burden on interstate commerce.
Our ruling today has two parts.
First, we observe that our due process jurisprudence has evolved substantially over the last 25 years.
We conclude that under the governing principles of that body of law, a mail-order house like Quill has the necessary minimum contact with North Dakota that are of constitutional prerequisite to that state's taxing jurisdiction.
We, therefore, overrule that part of the holding in the Bellas Hess case and hold that the statute does not violate the due process clause.
On the other hand, the second part of our opinion concludes that the Commerce Clause holding of Bellas Hess remains good law.
Although we have addressed related issues on many occasions, we have never rejected the principle that a vendor whose only connection was customers in the taxing state is by common carrier or the United States Mails lacks a substantial nexus with the taxing state required by the commerce clause.
Accordingly, the judgment of the North Dakota Supreme Court is reversed.
Our ruling today, however, makes entirely clear that Congress retains the ultimate power to address and resolve the complex issues surrounding the taxation of mail-order businesses.
Justice Scalia has filed an opinion concurring in part and concurring in the judgment which Justices Kennedy and Thomas have joined; Justice White has filed a dissenting opinion.