TAXES : Court Holds Key to States’ Windfall : Justices will rule on whether governments can impose levies on mail-order businesses.

American consumers, desperate to save time and money, have turned increasingly to shopping by mail or by telephone. In 1989, such sales totaled an estimated $183 billion, up from $2.4 billion in 1967.

Half of the nation’s consumers make at least one purchase per year via the mail or the phone, and regular mail-order shoppers find themselves deluged with catalogues. More than 7 billion catalogues are sent through the mail each year.

All this has not escaped the attention of the states, which, desperate for new revenue, are looking longingly at the huge volume of mail-order business. The U.S. Advisory Commission on Intergovernmental Relations says sales taxes on mail order purchases could yield the states more than $3 billion a year in revenue.

But one obstacle stands in the way: a 25-year old Supreme Court precedent. In National Bellas Hess vs. Department of Revenue, the high court in 1967 said that states may not impose their sales taxes on firms which do not have a “physical presence” within their boundaries.

Retailers such as Sears or J. C. Penney must collect state taxes on their mail order sales to consumers because they also have stores, warehouses or sales personnel within the states. But mail-order sellers such as L. L. Bean and Lands’ End can escape those taxes under the Bellas Hess precedent.

But Wednesday, the Supreme Court will hear arguments on whether it should overrule the Bellas Hess precedent and allow states to impose taxes on sales, regardless of where the seller does business.

“Among tax cases, this one is a whopper,” said Maryann Gall, a Columbus, Ohio attorney. She filed a brief urging the court to uphold the “physical presence” rule on behalf of mail order sellers ranging from Publishers Clearing House and the Rodale Press to Bloomingdale’s by Mail.

Not only are state and local governments urging the court to overturn the Bellas Hess precedent, but they have been joined by retailers who say they suffer unfairly from the “mammoth $3-billion tax break” given to direct marketers.

BACKGROUND: In 1967, when the mail-order business was still relatively small, the Supreme Court concluded it would be unfair to tax such firms. After all, they did not use the state’s public services, such as schools, roads or the police. Plus, requiring them to collect sales taxes for the states would be complicated, since 6,500 taxing jurisdictions exist nationwide. At that time, the justices also frowned on state levies on “interstate commerce.”

Since then, the mail order business has changed dramatically, and so too have computer programs, say state officials. Now, even the smallest sellers can buy computer software that can calculate tax rates based on the ZIP codes of the buyers. The high court has also been more willing to allow taxes on interstate transactions, such as long distance phone calls.

In 1987, North Dakota imposed a new sales tax on all sellers who “engage in regular or systematic solicitations” within the state, regardless of where they are located. The law applied to sales via “catalogues, periodicals or advertising flyers, by mail, telegraphy, telephone, computer data base (or) cable.”

The Quill Corp., a nationwide mail order seller of office supplies which is based in Illinois, challenged the law as a violation of the Bellas Hess rule. It noted that it only did business with North Dakotans by mail; it has no offices, warehouses or personnel employed within the state.

But to the surprise of its attorneys, the North Dakota Supreme Court ruled that Bellas Hess is “an obsolescent precedent” and need not be followed “blindly.”

“Clearly the direct marketing of the 1990’s bears little resemblance to the mail order of the 1960s,” the state court said.

The Supreme Court agreed to hear the company’s appeal, and the case (Quill vs. North Dakota, 91-194) will be argued Wednesday.

OUTCOME: Many tax lawyers believe the high court is ready to scrap its precedent and uphold the state taxes. The justices “have been willing to look at economic reality. And the old ‘physical presence’ rule has grown increasingly irrelevant to the realities of national marketing today,” said James Flug, a Washington lawyer who filed a brief on behalf of the Multi-State Tax Commission.

A ruling, which can be expected by July, will have a big budget impact in California. Since 1988, state officials have been seeking to collect a 7.25% sales tax on mail order sellers. Some firms have cooperated, and others have not, Deputy Atty. Gen. Steven J. Green said.

The state has been collecting about $55 million a year, but the direct marketers won a recent federal court order halting further collections. The case has been put on hold pending the high court’s decision in Quill vs. North Dakota. If the high court throws out the Bellas Hess rule, California officials say they expect to collect more than $110 million a year in new sales tax revenue. If not, they may have to refund the money that has been collected since 1988.