How the High Court Could Help Amazon

Following other states, Illinois seems likely to require retailers outside the state to collect sales taxes on goods shipped into it.

Besides imposing hefty increases in its personal and corporate income-tax rates, Illinois is also taking steps to require that out-of-state retailers, most notably, collect sales taxes with respect to goods shipped into the state.

Thus, HB 3659 (which passed both houses of the Illinois Congress by exceedingly wide margins) would expand the definition of “retailer” and “serviceman” “doing business” in the state. The new definition would encompass a retailer or service provider who has a contract with a person located in Illinois under which the person refers potential customers to the retailer or service provider by a link on the person’s Website. It would also encompass a retailer or service provider who sells the same or a substantially similar line of products as a person located in Illinois and does so using an identical or substantially similar name as the person located there.

Illinois is not the first state to attempt to bring to heel. New York, North Carolina, Colorado, and Rhode Island have enacted laws similar to the one Illinois is poised to adopt.

Clearly, states and localities have broad latitude when it comes to matters of taxation. But that latitude is not limitless. If the Supreme Court decides to take up the challenge, will it find that these new sales and use tax laws are in violation of the commerce clause of the U.S. Constitution? The answer would seem to depend on whether its previous forays into this difficult area remain “good law.” If the answer is yes, there is, for, some hope that these laws will eventually be struck down.

Physical Presence

Indeed, the High Court has opined on the issue before. In Quill Corp. v. North Dakota, 504 US 298 (1992), Quill, a Delaware corporation, did not own tangible property in North Dakota, and none of its employees worked or resided in the state. Quill sold office equipment and supplies there, soliciting business through catalogues and flyers, advertisements in national periodicals, and telephone calls. It delivered its merchandise to state residents by mail or by common carrier solely from out-of-state locations.

North Dakota imposes a “use” tax upon property purchased for “use or consumption” within the state. The Supreme Court took the position that North Dakota could not compel the company to collect a use tax from its customers in the state.

Willens 1-31-10

It isn’t the due-process clause of the Constitution that bars enforcement of the state’s use tax against Quill, however, but the commerce clause. Indeed, the justices concluded that the requirements of due process are met irrespective of a corporation’s lack of physical presence in the taxing state. Here, the court ruled, Quill purposefully directed its activities at North Dakota residents, and the magnitude of those contacts was more than sufficient for due-process purposes. Moreover, the use tax the state sought to compel Quill to collect is adequately related to the benefits Quill receives from access to the state. Accordingly, the court concluded that the due-process clause did not bar enforcement of North Dakota’s use tax against Quill.


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