National Bellas Hess Incorporated v. Department of Revenue of Illinois/Opinion of the Court

by Potter Stewart

United States Supreme Court

386 U.S. 753

National Bellas Hess Incorporated  v.  Department of Revenue of Illinois

 Argued: Feb. 23, 1967. --- Decided: May 8, 1967

The appellant, National Bellas Hess, is a mail order house with its principal place of business in North Kansas City, Missouri. It is licensed to do business in only that State and in Delaware, where it is incorporated. Although the company has neither outlets nor sales representatives in Illinois, the appellee, Department of Revenue, obtained a judgment from the Illinois Supreme Court that National is required to collect and pay to the State the use taxes imposed by Ill.Rev.Stat. c. 120, § 439.3 (1965). ^[1] Since National's constitutional objections to the imposition of this liability present a substantial federal question, we noted probable jurisdiction of its appeal. ^[2]

The facts bearing upon National's relationship with Illinois are accurately set forth in the opinion of the State Supreme Court:

'(National) does not maintain in Illinois any office, distribution house, sales house, warehouse or any other place of business; it does not have in Illinois any agent, salesman, canvasser, solicitor or other type of representative to sell or take orders, to deliver merchandise, to accept payments, or to service merchandise it sells; it does not own any tangible property, real or personal, in Illinois; it has no telephone listing in Illinois and it has not advertised its merchandise for sale in newspapers, on billboards, or by radio or television in Illinois.' ^[3]

All of the contacts which National does have with the State are via the United States mail or common carrier. Twice a year catalogues are mailed to the company's active or recent customers throughout the Nation, including Illinois. This mailing is supplemented by advertising 'flyers' which are occasionally mailed to past and potential customers. Ordersfo r merchandise are mailed by the customers to National and are accepted at its Missouri plant. The ordered goods are then sent to the customers either by mail or by common carrier.

This manner of doing business is sufficient under the Illinois statute to classify National as a '(r)etailer maintaining a place of business in this State,' since that term includes any retailer:

'Engaging in soliciting orders within this State from users by means of catalogues or other advertising, whether such orders are received or accepted within or without this State.' Ill.Rev.Stat. c. 120, § 439.2 (1965).

Accordingly, the statute requires National to collect and pay to the appellee Department the tax imposed by Illinois upon consumers who purchase the company's goods for use within the State. ^[4] When collecting this tax, National must give the Illinois purchaser 'a receipt therefor in the manner and form prescribed by the (appellee),' if one is demanded. ^[5] It must also 'keep such records, receipts, invoices and other pertinent books, documents, memoranda and papers as the (appellee) shall require, in such form as the (appellee) shall require,' and must submit to such investigations, hearings, and examinations as are needed by the appellee to administer and enforce the use tax law. ^[6] Failure to keep such records or to give required receipts is punishable by a fine of up to $5,000 and imprisonment of up to six months. ^[7] Finally, to allow service of process on an out-of-state company like National, the statute designates the Illinois Secretary of State as National's appointed agent, and jurisdiction in tax collection suits attaches when process is served on him and the company is notified by registered mail. ^[8]

National argues that the liabilities which Illinois has thus imposed violate the Due Process Clause of the Fourteenth Amendment and create an unconstitutional burden upon interstate commerce. These two claims are closely related. For the test whether a particular state exaction is such as to invade the exclusive authority of Congress to regulate trade between the States, and the test for a State's compliance with the requirements of due process in this area are similar. See Central R. Co. of Pa. v. Commonwealth of Pennsylvania, 370 U.S. 607, 621-622, 82 S.Ct. 1297, 1306-1307, 8 L.Ed.2d 720 (concurring opinion of Mr. Justice Black). As to the former, the Court has held that 'State taxation falling on interstate commerce * * * can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.' Freeman v. Hewit, 329 U.S. 249, 253, 67 S.Ct. 274, 277, 91 L.Ed. 265. See also Central Greyhound Lines, Inc. v. Mealey, 334 U.S. 653, 663, 68 S.Ct. 1260, 1266, 92 L.Ed. 1633; Northwestern States Portland Cement Co. v. State of Minnesota, 358 U.S. 450, 462, 79 S.Ct. 357, 364, 3 L.Ed.2d 421. And in determining whether a state tax falls within the confines of the Due process Clause, the Court has said that the 'simple but controlling question is whether the state has given anything for which it can ask return.' Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444, 61 S.Ct. 246, 250, 85 L.Ed. 267. See also Standard Oil Co. v. Peck, 342 U.S. 382, 72 S.Ct. 309, 96 L.Ed. 427; Ott v. Mississippi Val. Barge Line Co., 336 U.S. 169, 174, 69 S.Ct. 432, 434, 93 L.Ed. 585. The same principles have been held applicable in determining the power of a State to impose the burdens of collecting use taxes upon interstate sales. Here, too, the Constitution requires 'some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.' Miller Bros. Co. v. State of Maryland, 347 U.S. 340, 344-345, 74 S.Ct. 535, 539, 98 L.Ed. 744; Scripto, Inc. v. Carson, 362 U.S. 207-210-211, 80 S.Ct. 619, 621-622, 4 L.Ed.2d66 0. ^[9] See also American Oil Co. v. Neill, 380 U.S. 451, 458, 85 S.Ct. 1130, 1134, 14 L.Ed.2d 1.

In applying these principles the Court has upheld the power of a State to impose liability upon an out-of-state seller to collect a local use tax in a variety of circumstances. Where the sales were arranged by local agents in the taxing State, we have upheld such power. Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62, 59 S.Ct. 376, 83 L.Ed. 488; General Trading Co. v. State Tax Comm'n, 322 U.S. 335, 64 S.Ct. 1028, 88 L.Ed. 1309. We have reached the same result where the mail order seller maintained local retail stores. Nelson v. Sears, Roebuck & Co., 312 U.S. 359, 61 S.Ct. 58, 85 L.Ed. 888; Nelson v. Montgomery Ward & Co., 312 U.S. 373, 61 S.Ct. 593, 85 L.Ed. 897. ^[10] In those situations the out-of-state seller was plainly accorded the protection and services of the taxing State. The case in this Court which represents the furthest constitutional reach to date of a State's power to deputize an out-of-state retailer as its collection agent for a use tax is Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660. There we held that Florida could constitutionally impose upon a Georgia seller the duty of collecting a state use tax upon the sale of goods shipped to customers in Florida. In that case the seller had '10 wholesalers, jobbers, or 'salesmen' conducting continuous local solicitation in Florida and forwarding the resulting orders from that State to Atlanta for shipment of the ordered goods.' 362 U.S., at 211, 80 S.Ct., at 621.

But the Court has never held that a State may impose the duty of use tax collection and payment upon a seller whose only connection with customers in the State is by common carrier or the United States mail. Indeed, in the Sears, Roebuck case the Court sharply differentiated such a situation from one where the seller had local retail outlets, pointing out that 'those other concerns * * * are not receiving benefits from Iowa for which it has the power to exact a price.' 312 U.S., at 365, 61 S.Ct., at 589. And in Miller Bros. Co. v. State of Maryland, 347 U.S. 340, 74 S.Ct. 535, 98 L.Ed. 744, the Court held that Maryland could not constitutionally impose a use tax obligation upon a Delaware seller who had no retail outlets or sales solicitors in Maryland. There the seller advertised its wares to Maryland residents through newspaper and radio advertising, in addition to mailing circulars four times a year. As a result, it made substantial sales to Maryland customers, and made deliveries to them by its own trucks and drivers.

In order to uphold the power of Illinois to impose use tax burdens on National in this case, we would have to repudiate totally the sharp distinction which these and other decisions have drawn between mail order sellers with retail outlets, solicitors, or property within a State, and those who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business. But this basic distinction, which until now has been generally recognized by the state taxing authorities, ^[11] is a valid one, and we decline to obliterate it.

We need not rest on the broad foundation of all that was said in the Miller Bros. opinion, for here there was neither local advertising nor local household deliveries, upon which the dissenters in Miller Bros. so largely relied. 347 U.S., at 358, 74 S.Ct., at 547. Indeed, it is difficult to conceive of commercial transactions more exclusively interstate in character than the mail order transactions here involved. And if the power of Illinois to impose use tax burdens upon National were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary nor remote. For if Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes. ^[12] The many variations in rates of tax, ^[13] in allowable exemptions, and in administrative and record-keeping requirements ^[14] could entangle National's interstate business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose 'a fair share of the cost of the local government.'

The very purpose of the Commerce Clause was to ensure a national economy free from such unjustifiable local entanglements. Under the Constitution, this is a domain where Congress alone has the power of regulation and control. ^[15]

The judgment is reversed.

Reversed.

Mr. Justice FORTAS, with whom Mr. Justice BLACK and Mr. Justice DOUGLAS join, dissenting.

Notes

1. 34 Ill.2d 164, 214 N.E.2d 755.
2. 385 U.S. 809, 87 S.Ct. 58, 17 L.Ed.2d 50.
3. 34 Ill.2d, at 166-167, 214 N.e.2d, at 757.
4. Ill.Rev.Stat. c. 120, § 439.3 (1965).
5. Id., § 439.5.
6. Id., § 439.11.
7. Id., § 439.14.
8. Id., § 439.12a.
9. Strictly speaking, there is no question of the connection or link between the State and 'the person * * * it seeks to tax.' For that person in Miller Bros. Co. v. State of Maryland, 347 U.S. 340, 74 S.Ct. 535, 98 L.Ed. 744, in Scripto, Inc. v. Carson, 362 U.S. 207, 80 S.Ct. 619, 4 L.Ed.2d 660, and in the present case is the user of the goods to whom the out-of-state retailer sells. National is not the person being directly taxed, but rather it is asked to collect the tax from the user. It is, however, made directly liable for the payment of the tax whether collected or not. Ill.Rev.Stat. c. 120, § 439.8 (1965).
10. National acknowledges its obligation to collect a use tax in Alabama, Kansas, and Mississippi, since it has retail outlets in those States.
11. As of 1965, 11 States besides Illinois had use tax statutes which eq uired a seller like National to participate in the tax collection system. However, state taxing administrators appear to have generally considered an advertising nexus insufficient. For they have testified that doubts as to the constitutionality of such statutes underlay their failure to take full advantage of their statutory authority. Report of the Special Subcommittee on State Taxation of Interstate Commerce of the House Committee on the Judiciary, Maryland H.R.Rep.No. 565, 89th Cong., 1st Sess., 631-635 (1965). These doubts were substantiated by the only other State Supreme Court that has considered the issue now before us. The Alabama Supreme Court, dealing with a situation very much like the present one, found that this application of the use tax statute would be invalid under the Federal Constitution. State v. Lane Bryant, Inc., 277 Ala. 385, 171 So.2d 91.
12. 'Local sales taxes are imposed today (1965) by over 2,300 localities. * * * In most States, the local sales tax is complemented by a use tax.' H.R.Rep. No. 565, supra, at 827.
13. In 1964 there were seven different rates of sales and use taxes: 2, 2 1/4, 2 1/2, 3, 3 1/2, 4, and 5%. H.R.Rep. No. 565, supra, at 611-613, 607-608. The State of Washington has recently added an eighth, 4.2%. Wash.Rev.Code § 82.12.020 (Supp.1965).
14. 'The prevailing system requires (the seller) to administer rules which differ from one State to another and whose application-especially for the industrial retailer-turns on facts which are often too remote and uncertain for the level of accuracy demanded by the prescribed system.' H.R.Rep. No. 565, supra, at 673.
15. Congress has in fact recently evidenced an active interest in this area. See Tit. II, Pub.L. 86-272, 73 Stat. 556, as amended by Pub.L. 87-17, 75 Stat. 41, which authorized the detailed congressional study of state taxation of interstate commerce that resulted in H.R.Rep. No. 565, supra. See also H.R.Rep. No. 2013, 89th Cong., 2d Sess. (1966).