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April 1992

Update on state tax issues before the U.S. Supreme Court. (State & Local Taxation)

by Ault, William D.

    Abstract- Two key state taxation cases are set for consideration by the US Supreme Court in 1992. These are the 'North Dakota v. Quill Corporation' case and the 'Wisconsin Department of Revenue v. William Wrigley, Jr. Co' case. The Quill case requires a review of the Supreme Court's landmark 1967 decision in the 'National Bellas Hess, Inc v. Illinois Department of Revenue' case. The 1967 decision held that use taxes could not be imposed on companies that deliver goods to the state but do not maintain a direct physical presence in the state. On the other hand, the Wrigley case involves a review of a Wisconsin Supreme Court decision that covers the imposition of corporate taxes on an out-of-state company that leased warehouse space in Wisconsin.


In Quill, the Court is reviewing its 1967 landmark decision in National Bellas Hess, Inc. v. Illinois Department of Revenue (386 U.S. 753), which held that a state cannot constitutionally impose the duty to collect use tax on sales to residents where the seller's only contacts with the state are through the mail or by common carrier. A decision overturning Bellas Hess would adversely affect non-collecting mail-order companies as well as retailers and other multistate corporation that advertise and deliver property into states or localities in which they have no physical presence.

In Wrigley, the Court is reviewing the decision of the Wisconsin Supreme Court that the activities of Wrigley in Wisconsin did not exceed "solicitation" within the meaning of Public Law 86-272 to enable Wisconsin to impose its corporate income tax. A reversal of this decision would clarify the boundaries of the income tax protection provided by this federal statute.

North Dakota v. Quill


Of key importance in this hearing were the urgent requests by Justices Kennedy and O'Connor that Quill's counsel clarify whether he was relying on the Interstate Commerce Clause or the Due Process Clause in arguing that the collection requirement was not constitutionally permitted. Upon clarification by counsel that he was arguing (at least primarily) that the imposition of collection responsibilities would unduly interfer with interstate commerce, Justice O'Connor confirmed that the issue is whether the tests established by Complete Auto Transit, Inc. v. Brady 430 U.S. 274, (1977) permit the state to impose this duty. Complete Auto held that a state may impose a tax upon interstate commerce activities if the following requirements are satisfied: 1. The activity has substantial nexus to the state; 2. The tax is fairly apportioned; 3. The tax does not discriminate against interstate commerce; and 4. The tax is fairly related to the services provided by the state.

The crucial determination, therefore, is whether the regular or systematic solicitation of a consumer market without substantial physical contacts satisfies all of these requirements. The refinement of this issue may imply that due process considerations are satisfied by the economic exploitation of a marketplace through the mail or by common carrier. Justice White confirmed that North Dakota could subject Quill to personal (non-tax) jurisdiction in its courts to defend actions relating to the products sold.

Justice O'Connor was clerly concerned, however, that any decision overturning Bellas Hess could have retroactive effect and noted that Congress (in which the Constitution vests exclusive authority to regulate interstate commerce) was better suited to formulate a prospective-only rule of law. Earlier federal legislation failed, however, to generate enough support to change the rule of Bellas Hess, possibly because the legislation's effect would have been to limit the taxing jurisdiction of local government. Justice White subsequently confirmed that North Dakota's expanded sales and use tax nexus statute had been in effect since 1987.

In response to the central argument advanced by Quill's counsel that requiring collection would impose an impermissible burden on interstate commerce, Justice Scalia questioned why mail-order companies should be protected from this obligation by the Commerce Clause when companies which send their solicitors (or "drummers") into state are not. Counsel responded (in part) that overturning Bellas Hess could also affect large retailers with respect to local jurisdictions in which they have no substantial physical presence (e.g., a store). The fact that such a decision would also adversely affect retailers and other multistate corporations which advertise and deliver property into a state (commonly a contiguous state) in which they have no physical presence was not directly mentioned.

Finally, there was discussion by counsel on both sides as to the relative abilities of states and sellers to collect the use tax from the resident customers (e.g., through the use of computers and the audit process) although there was no indication as to which arguments the Justices found presuasive.

Wisconsin Dept. of Rev. v.

William Wrigley, Jr. Co.

Earlier widely expressed concerns that the Court consider the issues in Wrigley to be somehow related to those in Quill (based on the Supreme Court hearing these cases in tandem) appear to be incorrect. There seemed to be no indication in the statements made by counsel or the Justices that Wrigley is anything other than a statutory construction case. Nothing was said as to the constitutionality of Public Law 86-272 or the concept of economic nexus, and counsel for Wrigley conceded that constitutionally nexus was present.

Initial attempts by Wisconsin's counsel to stress the importance of Wrigley's leasing of warehouse space to store product samples and a company car appeared to be discounted by the Justices as incidental activities (although there was some discussion of whether an incidental or de minimis rule can properly be attributed to P.L. 86-272). Instead, the questions posed by the Justices were directed at substantial, recurring activities such as the replacement of stale gum by Wrigley's salesmen and the less frequent activity of the salesmen supplying gum to retailer in advance of a wholesaler's delivery.

Addressing the propriety and/or applicability of the pre-sale/post- sale standard utilized by certain states (illustrated by Justice Stevens' example of a salesman of a machine who also makes repairs to encourage additional sales), Wrigley's counsel argued that the scope of protected solicitation activities should be determined with respect to the particular industry. In the chewing gum industry, the activity of replacing stale gum was argued to be "inextricably related" to future orders and, therefore, protected as solicitation. Justices Scalia and Souter expressed reservations, however, that the term "solicitation" should be defined on an industry by industry basis.

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