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Justices Weigh Taxing Mail-Order Sales

January 22, 1992

WASHINGTON (AP) _ The Supreme Court was urged by a North Dakota lawyer Wednesday to let states tax mail-order sales - a ruling that would have enormous financial impact for consumers, businesses and state treasuries.

But an attorney for a mail-order company told the justices they should reaffirm a 25-year-old decision barring states from collecting taxes from catalog sales companies.

John Gaggini, representing the Quill Corp., said a victory for North Dakota would threaten ″the orderly growth of an open national economy. While the European Community is eliminating trade barriers, North Dakota is advocating the Balkanization of the American market.″

Quill Corp. is a national mail-order business that sells office supplies.

North Dakota’s attorney general, Nicholas Spaeth, said that ″the economic realities of today″ are not the same as in 1967, when the high court barred state taxation of mail-order businesses.

The 1967 decision ″has given mail-order firms an unfair advantage″ because they can sell goods more cheaply than retailers who are forced to pay state taxes, he said. North Dakota is trying to ″level the playing field″ and ″close that enormous tax loophole,″ he said.

A high court ruling is expected by July.

The 1967 ruling, in a case called National Bellas Hess vs. Department of Revenue, said a state may not force out-of-state catalog sales companies to collect taxes its residents owe on mail-order purchases.

The justices said then that states could not impose tax-collection duties on businesses having no ″physical presence″ within their borders.

To do so, the court said in 1967, would violate companies’ constitutionally protected due-process rights and interfere unduly with interstate commerce.

Chief Justice William H. Rehnquist suggested Wednesday the court could amend that ruling without discarding it.

He said the court could decide that it had been mistaken in 1967 in ruling that there was a due-process violation.

Such a decision would still bar states from collecting taxes on mail-order sales. But the ruling would leave Congress free to let the states impose taxes.

That would be ″half a loaf″ for the states, Spaeth said.

Rehnquist’s suggestion could solve a dilemma confronting the justices. A complete victory for North Dakota would free states to seek billions of dollars in back taxes from mail-order companies.

Justice Sandra Day O’Connor said that was a ″really massive concern.″

She said the retroactivity issue could be eliminated if the high court, in effect, frees Congress to give states power to impose the taxes only in the future.

The North Dakota Supreme Court ruled in 1990 that the high court’s 1967 decision was an ″obsolescent precedent″ that should be discarded.

″The burgeoning technological advances of the 1970s and 1980s have created revolutionary communications abilities and marketing methods which were undreamed of in 1967,″ the state court said.

Mail-order sales reportedly top $200 billion a year and are an estimated one-fourth of all retail sales. One reason for their rapid growth is the attraction of tax-free purchases.

North Dakota officials went to court in 1989 to force Quill Corp. to collect the taxes. The company is based in Lincolnshire, Ill., and has warehouses in Illinois, California and Georgia.

Its contact with North Dakota consumers is limited to the catalogs it mails to them and the products it delivers to purchasers.

The case is Quill Corp. vs. North Dakota, 91-194.

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