Taxing & the Internet: Is It Time to “Reevaluate” National Bellas Hess, Inc. v. Department of Revenue of Illinois?

Taxing & the Internet: Is It Time to “Reevaluate” National Bellas Hess, Inc. v. Department of Revenue of Illinois?

Gregory Waterworth*

Marylanders pay taxes on purchases from, but do not pay taxes when shopping at This arbitrary phenomenon stems from one source, National Bellas Hess, Inc. v. Department of Revenue of Illinois.  386 U.S. 753 (1967). Years ago—before the Internet, smart phones, or the ability to have an online order delivered within an hour—the Supreme Court drew a line in the sand.

Bellas Hess determined when a state can require a retailer to collect and remit taxes. Id. Bellas Hess, a clothing retailer based in Missouri, challenged an Illinois law that required out-of-state companies, such as Bellas Hess, to collect and remit taxes for in-state consumers. Id. Illinois argued that because the retailer advertised in the state and delivered orders via common carriers and mail, it had enough of a presence in the state to justify taxing. Id. at 754. The Court disagreed. Id. at 759–60. To the Court, Bellas Hess was an issue of interstate commerce and the ever popular dormant Commerce Clause. Id. The Court reasoned that allowing Illinois to require out-of-state sellers to collect taxes would be the equivalent of inviting every other locality nationwide to do the same. Id. Further, the Court warned that to do so would “entangle [Bellas Hess’s] interstate business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose a fair share of the cost of the local government.” Id. at 759. Thus, the Court created a bright-line rule: no taxing, unless physical presence. Id. at 760. So why do Marylander’s pay taxes on purchases from, as opposed to The answer is an warehouse on 2010 Broening Highway in Baltimore.

The Supreme Court affirmed the physical presence rule in the 1970s, 1980s, and most recently in the 1990s in Quill Corp. v. North Dakota.  504 U.S. 298, 301–02 (1992) (upholding under circumstances indistinguishable from Bellas Hess). But since 1992, American society has undergone drastic technological and societal changes. See Direct Mktg. Ass’n v. Brohl, 135 S. Ct. 1124, 1135 (2015) (Kennedy, J., concurring). The internet, micro-processing, and “smart” phones have revolutionized American society and economics. See id. These drastic changes fuel the Supreme Court’s recent critiques of Bellas Hess and its modern application. Id. The case D.H. Holmes Co. v. McNamara dismissed the notion that any state taxation on interstate commerce was prohibited and allowed Louisiana to levy use taxes on catalogs made by an out-of-state seller and mailed to in-state residents. 486 U.S. 24, 26 (1988). The case Comptroller of Treasury of Maryland v. Wynne is riddled with dissents by Justices Scalia, Thomas, Ginsberg, and Kagan criticizing the physical requirement rule and other similar dormant Commerce Clause rulings as unprincipled, instable, ad hoc, and inconsistent with the original purpose of the Commerce Clause. 135 S. Ct. 1787, 1807–14 (2015). But perhaps Justice Kennedy’s concurrence in Brohl best expresses the Court’s wariness with the physical presence rule. 135 S. Ct. at 1134 (Kennedy, J., concurring).

Brohl primarily concerns itself with jurisdictional issues surrounding the Tax Injunction Act. Id. But the heart of the case is a challenge to state requirements on out-of-state sellers. Id. Colorado, like many other states, is attempting to circumvent the physical presence rule by requiring retailers that do not collect state sales and uses taxes to notify Colorado consumers of their use-tax liability and report such information to the Colorado Department of Revenue. Id. at 1127 (majority opinion). So, in essence, the Colorado law does not require the retailers to collect and remit the tax, but it does provide Colorado with a means of collecting the tax. See id. Following the Court’s opinion on the jurisdictional issue, Justice Kennedy penned a concurrence to shine light on the root of the problem: the physical presence requirement. Id. at 1135 (Kennedy, J., concurring). Justice Kennedy believes that, in light of modern societal and technological advances, “[t]here is a powerful case to be made that a retailer doing extensive business within a State has a sufficiently ‘substantial nexus’ to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.” Id. While the rule initially shielded e-commerce, many believe it does so at the expense of brick-and-mortar stores and state revenue collection. Id. (“California, for example, has estimated that it is able to collect only about 4% of the use taxes due on sales from out-of-state vendors . . . Colorado’s losses in 2012 are estimated to be around $170 million.”).

The physical presence rule once stood as a barrier protecting the small out-of-state sellers from the power states. But as times have changed, so has this dynamic. The physical presence rule may now only serve as a wall hiding a $3.16 trillion per year industry from contributing their fair share to local governments. Id. Justice Clark once warned that “preferential trade areas [are] destructive of the very purpose of the Commerce Clause.” Dean Milk Co. v. City of Madison, Wis., 340 U.S. 349, 356 (1951). Someone in 1951 could not fathom the Internet, let alone the massive role it plays in the national economy. However, in a sense, the Internet did just as Justice Clark warned. Instead of preventing geographically contained trade areas, the physical presence rule inadvertently created one infinite preferential trade area unconstrained by geography. The Internet has and will continue to revolutionize modern society necessitating, as Justice Kennedy opined, the “reconsider[ation] [of] doubtful authority.” Brohl, 135 S. Ct. at 1135 (Kennedy, J., concurring).

*Greg Waterworth is a second-year law student at the University of Baltimore School of Law, where he serves as a staff editor for Law Review, the secretary of the SBA, and a member of the Moot Court Board. He is currently an extern for the Honorable Judge Paul W. Grimm of the United States District Court for the District of Maryland and will join Saul Ewing as a 2017 Summer Associate.

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