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Direct marketers versus the states.

One of the most significant business cases ever heard by the U.S. Supreme Court, Quill Corp. V. North Dakota, will be decided during the current term. At issue is whether a state can require a direct marketing company with no discernible physical presence in the state to act as its agent with respect to collecting use taxes.

IF the U.S. Supreme Court upholds the North Dakota Supreme Court's 1990 decision, it will overrule its precedent established in National Bellas Hess v. Illinois Dept. of Revenue [368 US 753 (1967)]. That case generally has been interpreted to impose an absolute ban on taxing interstate commerce when the connection between the state and the prospective taxpayer is considered to be tenuous.

Nevertheless, National Bellas Hess could be overruled if the tests set forth in Complete Auto Transit, Inc. v. Brady [430 US 274 (1977)] are satisfied. These tests are met if

* The state is able to demonstrate a sufficient "nexus" or connection between itself and the corporation subject to tax.

* A quid pro quo exists, with the state providing benefits in exchange for exacting the disputed tax.

In the absence of a physical presence, nexus will exist only if the High Court, as did the North Dakota tribunal, accepts the notion an "economic presence" (through the substantial and continuous exploitation of the consumer market) can by itself create nexus. Further, this nexus (if found) must be accompanied by tangible benefits provided by the state.

In Quill, the North Dakota court found such benefits in light of the fact the state disposed of the discarded catalogues mailed into the state and provided police and fire protection for goods received by state residents during the period between receipt and expiration of the return period - during which the seller retained ownership.

Observation: Despite the surface appeal of the Quill court's reasoning, it is by no means certain the Supreme Court is primed to reject its physical presence standard. Moreover, it is unlikely National Bellas Hess will be overruled simply because technological advances have made it easier for direct marketers to compile the data necessary for expedient tax collection.

Cases that involve constitutional question (here, the Commerce Clause because of interstate commerce concerns) are rarely decided on the basis of administrative convenience.
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Apr 1, 1992
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