Justices Uphold State Tax Ban on Mail-Order Sales
The U.S. Supreme Court on Monday preserved a significant tax break for the burgeoning mail-order industry by letting stand a ruling that prevents states from taxing most out-of-state catalogue operations.
The ruling comes at a time when deficit-plagued California is trying to collect an estimated $100 million in tax revenue from mail-order sales. The sales have grown steadily the last decade, exceeding $80 billion nationwide in 1990, according to Maxwell Sroge Co., a Chicago mail-order consulting firm.
Regardless of the decision, the high court may address the issue soon, legal experts said. Monday’s decision involved a Connecticut case, but California and other states are pressing ahead with their own legal efforts to reverse the mail-order-tax ban.
Most mail-order companies oppose the taxes because complying with them would be an administrative nightmare, not because they don’t want to pay, said Ruth Owades, president of Calyx and Corolla in San Francisco, which sells flowers by catalogue.
Thirty-five states have passed laws requiring mail-order firms to collect taxes on the states’ behalf, according to Chris Armenante of the New York-based Direct Marketing Assn., an industry trade group. Keeping track of “every (tax) rate in every state plus the exemptions” would be so expensive that many mail-order companies would be forced out of business, she said.
The majority of recent state and federal lower court rulings on catalogue sales and state sales tax have favored businesses and gone against the states seeking a reversal of the mail-order-tax ban, California officials said.
Although the high court’s decision not to review the Connecticut case “doesn’t help,” it “has no direct effect on what we’re doing in California,” said Gary Jugum, chief counsel for the State Board of Equalization in Sacramento.
The reason is that California’s argument for reversing the ban on mail-order taxes is different from Connecticut’s, he said. The Supreme Court ruled in 1967 that a state could not impose sales taxes on mail-order companies that do not have a “physical presence,” such as a headquarters or store, in the state.
Still, California joined in the Connecticut action by filing a friend of the court brief. “The rationale no longer exists for exempting mail-order companies from collecting state taxes,” California’s lawyers argued.
In asking the Supreme Court to reverse the ban, Connecticut argued that the SFA Folio Collections mail-order operation should pay state sales taxes largely because the Yonkers, N.Y.-based company has a “physical presence” in Connecticut, Jugum said.
In 1987 the state ordered the subsidiary of New York City-based Saks & Co. to begin collecting taxes on its mail-order sales in Connecticut. It pointed out that another Saks subsidiary, Saks Fifth Avenue, had a “physical presence” in the state--its store in Stamford.
As a result, Connecticut hit SFA Folio with a $234,450 assessment for taxes it should have collected from Connecticut customers, along with interest and penalties. The company sued to stop from having to collect the taxes. It won judgments at the state District Court and state Supreme Court before Connecticut appealed to the Supreme Court.
California is not using the Connecticut argument about the “physical presence” of a subsidiary, Jugum said.
Most catalogue orders are made by credit card. As a result, California is arguing that the financial companies handling these credit card purchases in the state constitute a physical presence of a sort. The financial companies can be considered arms of the out-of-state mail-order companies.
Jugum said the state’s effort to reverse the mail-order-tax ban centers around a suit filed by the Direct Marketing Assn. to prevent California from requiring out-of-state mail-order firms from collecting taxes on sales in the state.
The case is scheduled to be heard in U.S. District Court in Sacramento on June 28.
But Jugum said the case that may end up reaching the Supreme Court first is a North Dakota case. Last month the North Dakota Supreme Court upheld a lower court ruling that Quill Co. of Providence, R.I., must pay taxes on sales in North Dakota.
North Dakota State Insurance Commissioner Heidi Heitkamp said she expects Quill, an office supplies mail-order company, to appeal the decision.
Mail-Order Spree United States mail-order sales
Five largest mail-order companies ranked by sales
Rank Company 1990 Sales (billions) 1. Sears $4.00** 2. J.C. Penny $2.00** 3. Spiegel $1.79 4. Fingerhut $1.25 5. Home Shopping Network $1.01
**Sales figures for Sears and J.C. Penny are estimates because mail-order revenues are included with other retail sales. Source: Maxwell Sroge Co.
