Court Voids State Mail-Order Tax : Consumers: Justices’ decision, a victory for people who shop from home, could cost states $3 billion a year. Ruling says Congress could pass laws to allow the levies.

In a victory for consumers who shop by mail, the Supreme Court ruled Tuesday that states may not force national mail-order houses to collect sales taxes from their customers, a decision that deprives hard-pressed states of up to $3 billion a year in lost revenue.

The justices made clear that Congress could circumvent the decision by passing a new federal law giving states the power to impose sales taxes on out-of-state mail-order firms, but state officials conceded such a move was unlikely.

The 8-1 ruling reaffirms a 25-year-old precedent that exempts companies from state taxes if they do not have a “physical presence” within the state. Because firms such as Land’s End and L. L. Bean sell their products through the mail, they put no burden on the states and may not be forced to collect their taxes, the court said.

Strapped for revenues, state officials have pressed the courts and Congress in recent years to change this rule, but without success.

Relying on a blizzard of postcards, the “direct marketing” industry has stalled measures in Congress that would lift the tax-free status of the industry.

“Targeting people is their business, and they are very good at it,” said a congressional aide, who asked not to be identified. Whenever Congress has considered such legislation, “we get boxes and boxes of postcards,” he said.

Companies such as Sears and J. C. Penney are usually required to collect sales taxes on mail orders because they also have retail outlets in a state. But the Supreme Court has said states may not collect money from out-of-state firms that do not have offices, stores or employees within the state.

Operating under this tax-free umbrella, mail-order sales have boomed in the United States, up from $2.4 billion a year in 1967 to more than $183 billion a year in 1989. By some estimates, one-fourth of all retail sales nationwide are made via mail, telephone or computer.

The so-called “Main Street” lobby of retail outlets has complained that it suffers from the unfair tax advantage given to sellers who reach their customers by mail. The states also have looked longingly at the huge volume of mail-order business and hoped the high court would permit equal taxes on all retail purchases. But those hopes were mostly dashed Tuesday.

Writing for the court, Justice John Paul Stevens reaffirmed the “bright line rule” that creates “a discrete realm of commercial activity that is free from interstate taxation.” The court said the state may not impose such a direct tax on the free flow of interstate commerce.

The ruling strikes down a North Dakota law that sought to impose a 5% sales tax on the mail-order sales of all retailers who “engage in regular or systematic solicitations” within the state, regardless of where they are located.

The Quill Corp., a nationwide seller of office supplies based in Lincolnshire, Ill., challenged the law as unconstitutional under the 1967 precedent, National Bellas Hess vs. Illinois, which first exempted mail-order sales. To the company’s surprise, however, the North Dakota Supreme Court upheld the law and called the 1967 precedent “obsolete.”

The state court said the retailing world had changed dramatically since 1967, and it was time to change the law too.

When the case of Quill vs. North Dakota, 91-194, reached the high court, it became a multibillion-dollar battle, with the states, local governments and traditional retailers on one side and the direct marketers on the other.

Thirty-five other states, including California, have amended their laws in recent years to collect sales tax from all retailers. Last June, U.S. District Judge Milton L. Schwartz in Sacramento stopped the state from collecting $55 million a year under the new law, pending a high court decision.

“Bellas Hess remains good law,” Stevens declared. This approach “creates a safe harbor for vendors whose only connection with the customers in the taxing states is by common carrier or United States mail.”

But the court opinion also contained one piece of good news for the states. The 1967 decision said a tax imposed on out-of-state companies not only discriminated against interstate commerce, but also violated the company’s right to “due process of law.”

By a 9-0 vote, the justices overruled the earlier statements regarding “due process of law.” This could prove significant because it removes any legal obstacle for Congress to pass a law allowing state taxes on out-of-state firms.

“Congress has the ultimate power to resolve” the issue, Stevens said. Because the Constitution gives Congress the power to “regulate Commerce . . . among the several states,” Congress retains the authority to alter the court’s decision, the justices noted.

Most state officials said they were dismayed by the ruling.

“The court has apparently put a halt to our effort to require mail-order retailers to collect state use taxes,” said California Deputy Atty. Gen. Steven J. Green. “I would hope that in this age of marginally solvent states, that Congress would understand that it can act now.”

North Dakota Atty. Gen. Nicholas Spaeth, who defended the law in the high court, said he had a “mixed reaction” to the ruling. On the one hand, the state lost the case, and its attempt to extend the reach of its tax laws was struck down, he said. “But at least (the decision) clarifies that Congress can take action.”

Several state officials discounted the likelihood that Congress would act. “This is a devastating loss for us. Those people (in Congress) won’t act if they are getting 7,000 postcards a day from Land’s End customers,” said one official who did not want to be named.

Meanwhile, the mail-order industry proclaimed victory. “We are extremely pleased with the court’s decision,” said Jonah Gitlitz, president of the Direct Marketing Assn.

In other actions, the court:

--Made it easier to prosecute public officials who are accused of extorting payoffs. On a 6-3 vote, the court said a public official who receives a payoff for his actions can be convicted of extortion under the Hobbs Act, even if he does not make a specific “demand” for a certain sum of money. (Evans vs. U.S., 90-6105).

--Ruled that people who receive back-pay awards to compensate them for illegal job discrimination must pay taxes on this amount. In a 7-2 ruling, the court said these awards are the equivalent of compensation and therefore are taxable. (U.S. vs. Burke, 91-42).