Quill Corp. v. North Dakota

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In Quill Corp. v. North Dakota, the U.S. Supreme Court invalidated a state sales tax on an out-of-state mail order company based on the Negative Commerce Clause:

Our interpretation of the "negative" or "dormant" Commerce Clause has evolved substantially over the years, particularly as that Clause concerns limitations on state taxation powers. See generally P. Hartman, Federal Limitations on State and Local Taxation §§ 2:9-2:17 (1981). Our early cases, beginning with Brown v. Maryland, 25 U.S. 419, 12 Wheat. 419, 6 L. Ed. 678 (1827), swept broadly, and in Leloup v. Port of Mobile, 127 U.S. 640, 648, 32 L. Ed. 311, 8 S. Ct. 1380 (1888), we declared that "no State has the right to lay a tax on interstate commerce in any form." We later narrowed that rule and distinguished between direct burdens on interstate commerce, which were prohibited, and indirect burdens, which generally were not. See, e. g., Sanford v. Poe, 69 F. 546 (CA6 1895), aff'd sub nom. Adams Express Co. v. Ohio State Auditor, 165 U.S. 194, 220, 41 L. Ed. 683, 17 S. Ct. 305 (1897). Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 256-258, 58 S. Ct. 546, 82 L. Ed. 823 (1938), and subsequent decisions rejected this formal, categorical analysis and adopted a "multiple-taxation doctrine" that focused not on whether a tax was "direct" or "indirect" but rather on whether a tax subjected interstate commerce to a risk of multiple taxation. However, in Freeman v. Hewit, 329 U.S. 249, 256, 91 L. Ed. 265, 67 S. Ct. 274 (1946), we embraced again the formal distinction between direct and indirect taxation, invalidating Indiana's imposition of a gross receipts tax on a particular transaction because that application would "impose a direct tax on interstate sales." Most recently, in Complete Auto Transit, Inc. v. Brady, 430 U.S. at 285, we renounced the Freeman approach as "attaching constitutional significance to a semantic difference." We expressly overruled one of Freeman's progeny, Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602, 95 L. Ed. 573, 71 S. Ct. 508 (1951), which held that a tax on "the privilege of doing interstate business" was unconstitutional, while recognizing that a differently denominated tax with the same economic effect would not be unconstitutional. Spector, as we observed in Railway Express Agency, Inc. v. Virginia, 358 U.S. 434, 441, 3 L. Ed. 2d 450, 79 S. Ct. 411 (1959), created a situation in which "magic words or labels" could "disable an otherwise constitutional levy." Complete Auto emphasized the importance of looking past "the formal language of the tax statute [to] its practical effect," 430 U.S. at 279, and set forth a four-part test that continues to govern the validity of state taxes under the Commerce Clause.
Bellas Hess was decided in 1967, in the middle of this latest rally between formalism and pragmatism. Contrary to the suggestion of the North Dakota Supreme Court, this timing does not mean that Complete Auto rendered Bellas Hess "obsolete." Complete Auto rejected Freeman and Spector's formal distinction between "direct" and "indirect" taxes on interstate commerce because that formalism allowed the validity of statutes to hinge on "legal terminology," "draftsmanship and phraseology." 430 U.S. at 281. Bellas Hess did not rely on any such labeling of taxes and therefore did not automatically fall with Freeman and its progeny.
While contemporary Commerce Clause jurisprudence might not dictate the same result were the issue to arise for the first time today, Bellas Hess is not inconsistent with Complete Auto and our recent cases. Under Complete Auto's four-part test, we will sustain a tax against a Commerce Clause challenge so long as the "tax [1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State." 430 U.S. at 279.Bellas Hess concerns the first of these tests and stands for the proposition that a vendor whose only contacts with the taxing State are by mail or common carrier lacks the "substantial nexus" required by the Commerce Clause.
Thus, three weeks after Complete Auto was handed down, we cited Bellas Hess for this proposition and discussed the case at some length. In National Geographic Society v. California Bd. of Equalization, 430 U.S. 551, 559, 51 L. Ed. 2d 631, 97 S. Ct. 1386 (1977), we affirmed the continuing vitality of Bellas Hess' "sharp distinction . . . between mail-order sellers with [a physical presence in the taxing] State and those . . . who do no more than communicate with customers in the State by mail or common carrier as part of a general interstate business." We have continued to cite Bellas Hess with approval ever since. For example, in Goldberg v. Sweet, 488 U.S. 252, 263, 102 L. Ed. 2d 607, 109 S. Ct. 582 (1989), we expressed "doubt that termination of an interstate telephone call, by itself, provides a substantial enough nexus for a State to tax a call. See National Bellas Hess . . . (receipt of mail provides insufficient nexus)." See also D. H. Holmes Co. v. McNamara, 486 U.S. 24, 33, 100 L. Ed. 2d 21, 108 S. Ct. 1619 (1988); Commonwealth Edison Co. v. Montana, 453 U.S. 609, 626, 69 L. Ed. 2d 884, 101 S. Ct. 2946 (1981); Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. at 437; National Geographic Society, 430 U.S. at 559. For these reasons, we disagree with the State Supreme Court's conclusion that our decision in Complete Auto undercut the Bellas Hess rule.

504 U.S. 298, 309-12 (1992). The Supreme Court concluded, "Accordingly, contrary to the State's suggestion, a corporation may have the "minimum contacts" with a taxing State as required by the Due Process Clause, and yet lack the "substantial nexus" with that State as required by the Commerce Clause." Id. at 313.

Subsequent Events

Quill was overturned in 2018 by the Supreme Court's decision in South Dakota v. Wayfair, as they ruled that the "physical presence" requirement needed in order to assess and collect sales tax on purchases in a state, in light of the growth of e-commerce sales, was no longer workable.