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​From Ed Goff of Birns & Goff in Philadelphia posted yesterday on the Birns & Goff blog​:

On April 22, 2103 the U.S. Senate voted to move forward with consideration of the Marketplace Fairness Act of 2013, a bill designed to allow states to force internet vendors to collect sales and use taxes all across the country.[1] Since 1954, the states have been effectively prohibited from requiring remote sellers to collect and remit sales and use taxes.[2] The rule requires a seller to have a physical presence in the state, either through physical stores located in the state or through a sales staff that regularly visits the state.[3] This physical presence rule is sometimes called the rule of Bellas Hess[4], because it was upheld by the U.S. Supreme Court in 1992 in Quill v. North Dakota on the basis of “settled expectations” that come from the earlier case.[5]

Quill makes clear that Congress has the authority to change the physical presence rule because it arises under the Commerce Clause of the U.S. Constitution.[6] However Congress doesn’t have the power to allow states to “deprive any person of life, liberty or property without due process.”[7] So will the Marketplace Fairness Act of 2013 violate Due Process? The answer depends on the particular remote seller.

State taxes meet the requirements of the Due Process clause when the remote seller has “certain minimum contacts” with the state such that the maintenance of a law suit against the remote seller would not offend “traditional notions of fair play and substantial justice.”[8]According to Justices Kennedy, Scalia and Thomas and Chief Justice Roberts, those minimum contacts will be enough when the remote seller “targets” the state:

“The defendant’s transmission of goods [into a state] permits the exercise of jurisdiction only where the defendant can said to have targeted the forum; as a general rule it is not enough that the defendant might have predicted that its goods will reach the forum state.”

J. McIntyre Machinery Ltd. v. Nicastro, 131 S. Ct. 2780, 2788 (2011).[9]

In that case Justices Breyer and Alito had a similar but slightly different opinion.  They said that the established rule was enough.  It would only require a seller to purposely avail itself of the privilege of conducting activities within the state or requiring that the seller delivered the goods in the stream of commerce “with the expectation that they will be purchased” in the state. Id. at 2792.[10]

It is easy for remote sellers to decide whether they will “target” particular states but when can a remote seller say that it does not expect sellers from a particular state?  I would suggest that where there are only one or two sales with a destination state, those would be sales that meet both the “targeted” test of Justice Kennedy, and the “expectation” test mentioned by Justice Breyer.

The risk, however, is with the remote seller.  If it collects and remits the tax, the destination state is satisfied but at a price disadvantage that may turn its buyers away.  If it choses not to collect and remit, it takes the risk that the destination state will come to him to collect the unremitted tax.  At that point the remote seller may or may not have to pay the tax and/or pay to defend a lawsuit, but by then it will have no opportunity to go back and recoup the tax from the original buyer.

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[1].         The record of the vote is here.  The text of the bill  is here.

[2].         Miller Bros Co. v. Maryland, 347 U.S. 340 347 (1954) (Delaware furniture store not required to collect and remit Maryland sales tax despite Maryland advertisements and Maryland deliveries absent “active and aggressive operation within a taxing state.”), available here.

[3].         Nelson v. Sears Roebuck & Co., 312 U.S. 359, (1951) (physical stores) availablehere; Scripto v. Carson, 362 U.S. 207 (1960) (continuous local solicitation by independent sales agents) available here.

[4].         National Bellas Hess v. Dept. of Rev. of Illinois, 386 U.S. 753 (1967) available here

[5].         504 U.S. 298 (1992) available here.

[6].         U.S. Const. art. 1 §8, cl.3 (“The Congress shall have the power … To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”)

[7].         U.S. Const. Amend. 14 §1  (“nor shall any State deprive any person of life, liberty or property without due process of law ….”)

[8].         International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945) available here, quoting Milliken v. Meyer, 311 U.S. 457, 463 (1940) available here.

[9].         Available here.

[10].       Quoting Worldwide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297-298 (1980) available here.