High Court to Rule on State Taxes on Mail-Order Sales
In a case being closely watched by California officials, the Supreme Court said Monday that it would reconsider a 24-year-old ruling that shields most mail-order shoppers from having to pay state sales taxes.
In recent decades, mail-order business has grown dramatically, reaching $183 billion in sales in 1989. Nationwide, mail orders account for 15% of total sales, according to recent studies.
Nonetheless, under a 1967 Supreme Court ruling, most of these sales are tax-free. The court said companies may not be required to collect taxes on sales to out-of-state residents. The ruling banned states from imposing tax-collection obligations on businesses that have no store or other “physical presence” within their borders.
The justices reasoned that companies or persons who do not use state services, such as police and fire departments or schools, should not be required to collect taxes to support those services.
But because of the boom in catalogue sales, this 1967 decision now costs state treasuries an estimated $2.2 billion per year, according to the National Conference of State Legislatures.
On Monday, the justices agreed to hear a North Dakota case that directly challenges the long-standing tax exemption for mail-order business.
“We’re ecstatic,” said Dan Bucks, executive director of the Multi-State Tax Commission, an organization of state tax officials. “We hope the court is ready to update its constitutional interpretation to the current economic reality.”
California officials have sought a similar ruling from the federal courts. In 1988, the state passed a law requiring out-of-state mail-order firms that make “substantial and recurring” sales to Californians to collect a state sales tax.
But in June, a federal judge blocked enforcement of this law while the matter is appealed.
North Dakota in 1987 imposed sales taxes on all retail purchases made by state residents, whether or not the seller had a presence in the state. Quill Corp., a national mail-order firm that sells office supplies and is based in Illinois, challenged the tax law.
