65 Am. U. L. Rev. 1115 (2016)

*Alva P. Loiselle Professor of Law, University of Connecticut Law School. B.S. summa cum laude, University of Michigan; J.D. magna cum laude, Harvard Law School.  Helen Hecht made invaluable and perceptive comments on an earlier draft of the Article.

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The American University Law Review was prophetic in choosing “Taxing Remote Sales in the Digital Age” as its symposium issue.  The obstacle to any meaningful sales tax reform of the digital economy is the U.S. Supreme Court’s 1992 decision in Quill Corp. v. North Dakota.[1]  In Quill, the Court held that the Commerce Clause requires a vendor to have a physical presence in a state before it can be required to collect that state’s use tax.[2]  That requirement has subsequently been roundly criticized.  Most notably, in March 2015, Justice Anthony Kennedy wrote a concurring opinion in Direct Marketing Association v. Brohl[3] that sent shock waves through the profession,[4] urging the Court to revisit Quill’s legal underpinnings.[5]

Part of Justice Kennedy’s concurrence is reprinted below because it serves as a wonderful, short overview of the issues dealt with at the Law Review’s Symposium and in some of the articles in this Issue.  This Article supports Justice Kennedy by arguing that the Quill decision was intellectually dishonest, politically motivated, and based on shaky precedent.  If the Supreme Court has the opportunity, it should abandon Quill.

I.  Justice Kennedy’s Concurrence

In Direct Marketing Ass’n v. Brohl, the Supreme Court unanimously held that the Tax Injunction Act[6] did not bar the federal courts from hearing challenges to a Colorado statute requiring out-of-state retailers to notify customers of their sales and use tax requirements and to report tax-related information to customers and to the state.  The Court remanded the case and “express[ed] no view on the merits.”[7]  Justice Kennedy, however, took the opportunity to write separately to critique the Quill decision, highlight the states’ interests in taxing Internet commerce, and invite a future challenge to that case.  Part of his concurrence follows:

Almost half a century ago, this Court determined that, under its Commerce Clause jurisprudence, [s]tates cannot require a business to collect use taxes—which are the equivalent of sales taxes for out-of-state purchases—if the business does not have a physical presence in the [s]tate. Use taxes are still due, but under Bellas Hess they must be collected from and paid by the customer, not the out-of-state seller.

Twenty-five years later, the Court relied on stare decisis to reaffirm the physical presence requirement and to reject attempts to require a mail-order business to collect and pay use taxes.  This was despite the fact that under the more recent and refined test elaborated in Complete Auto Transit, Inc. v. Brady, “contemporary Commerce Clause jurisprudence might not dictate the same result” as the Court had reached in Bellas Hess.  In other words, the Quill majority acknowledged the prospect that its conclusion was wrong when the case was decided.  Still, the Court determined vendors who had no physical presence in a [s]tate did not have the “substantial nexus with the taxing state” necessary to impose tax-collection duties under the Commerce Clause.  Three Justices concurred in the judgment, stating their votes to uphold the rule of Bellas Hess were based on stare decisis alone.  This further underscores the tenuous nature of that holding—a holding now inflicting extreme harm and unfairness on the [s]tates.

In Quill, the Court should have taken the opportunity to reevaluate Bellas Hess not only in light of Complete Auto but also in view of the dramatic technological and social changes that had taken place in our increasingly interconnected economy.  There is a powerful case to be made that a retailer doing extensive business within a [s]tate has a sufficiently “substantial nexus” to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet.  After all, “interstate commerce may be required to pay its fair share of state taxes.”  This argument has grown stronger, and the cause more urgent, with time.  When the Court decided Quill, mail-order sales in the United States totaled $180 billion.  But in 1992, the Internet was in its infancy.  By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States.

Because of Quill and Bellas Hess, [s]tates have been unable to collect many of the taxes due on these purchases.  California, for example, has estimated that it is able to collect only about [four percent] of the use taxes due on sales from out-of-state vendors.  The result has been a startling revenue shortfall in many [s]tates, with concomitant unfairness to local retailers and their customers who do pay taxes at the register.  The facts of this case exemplify that trend:  Colorado’s losses in 2012 are estimated to be around $170 million. States’ education systems, healthcare services, and infrastructure are weakened as a result.[[8]]

The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions.  Although online businesses may not have a physical presence in some [s]tates, the Web has, in many ways, brought the average American closer to most major retailers.  A connection to a shopper’s favorite store is a click away—regardless of how close or far the nearest storefront.  Today buyers have almost instant access to most retailers via cell phones, tablets, and laptops.  As a result, a business may be present in a [s]tate in a meaningful way without that presence being physical in the traditional sense of the term.

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill.  A case questionable even when decided, Quill now harms [s]tates to a degree far greater than could have been anticipated earlier.  It should be left in place only if a powerful showing can be made that its rationale is still correct.

The instant case does not raise this issue in a manner appropriate for the Court to address it.  It does provide, however, the means to note the importance of reconsidering doubtful authority.  The legal system should find an appropriate case for this Court to reexamine Quill and Bellas Hess.[9]

Few law reviews can cite the endorsement of a Supreme Court Justice in support of their wisdom in selecting a symposium topic.[10]  The Law Review is also to be complimented for having Senator Heidi Heitkamp—a named party in the Quill case when she was the North Dakota Tax Commissioner and today that State’s U.S. Senator—deliver the opening address at the Symposium.  She was spellbinding, not only because of her magnetic charm, but also because of the “inside baseball” insights she shared as the architect and mastermind of the case, but who unfortunately did not—but should have—argued it before the Supreme Court.[11]

Many, many articles have discussed Quill.  A computer search of only law review articles, notes, and comments that have “Quill” in their titles indicates there are more than seventy.[12]  This number is understated because this simple search ignores treatises, monographs, and other articles that discuss Quill, but do not name the case in their titles.  Almost all of these articles, (as well as the speakers at the Symposium), agree with the sentiments expressed by Justice Kennedy.  It is possible that Justice Kennedy might have been influenced by some of this literature.[13]

Quill reaffirmed Bellas Hess.  And Bellas Hess was informed by Miller Brothers.  Hence, this Article starts by reexamining Miller Brothers.  That case is best remembered today for one of the most quoted statements in state taxation:  “due process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.”[14]  What is forgotten, or perhaps never appreciated, is the pivotal role that case played in the development of the Court’s use tax jurisprudence.

Unfortunately for the states, Justice Robert H. Jackson, one of the most aggressive defenders of Justice Frankfurter’s philosophy that the states could not tax interstate commerce, authored the case.[15]  In the hands of a different Justice, this Symposium might not have been necessary.

After revisiting Miller Brothers, this Article examines the role that case played in Bellas Hess.  This Article then briefly discusses Quill, essentially showing why it was a political decision, intellectually dishonest, and unworthy of great precedential value.  Finally, this Article concludes by introducing the pieces that follow in this Issue.

Miller Brothers v. Maryland

Figure 1:  Miller Brothers’ Store



Figure 2:  Welcome to Delaware


A. The Facts

Miller Brothers sold furniture at its Wilmington, Delaware store.[16]  It did not take orders by mail or telephone.[17]  Delaware has never had a sales tax, a fact that the state happily markets.[18]  Residents of neighboring Maryland, which adopted a sales tax in 1947, shopped at Miller Brothers’ store.[19]  Presumably, many of these purchasers were attracted by the lack of a Delaware sales tax, and although they were liable for the Maryland use tax when they brought the goods home, they probably failed to pay it either through ignorance or the knowledge that the risk of discovery was nearly nonexistent.[20]

Miller Brothers used its own vehicle to transport many purchases to the Maryland customers’ homes in Maryland.[21]  Some purchases were delivered to Maryland by common carrier.  Others were “cash-and-carry,”[22] that is, the customer paid for the purchase and carried it out of the store.

Miller Brothers did not collect the Maryland use tax on any of its sales to Maryland customers.  Maryland filed suit in its own courts, claiming that Miller Brothers should have collected the Maryland use tax on its sales to Maryland customers.  Maryland obtained jurisdiction over Miller Brothers by seizing its vehicle in the State.[23]

Miller Brothers argued that Maryland was seeking to apply its use tax law to a company outside of its borders, in contravention of the Due Process Clause.[24]  Maryland’s highest court held that Miller Brothers was liable for the use tax on the goods delivered to Maryland purchasers, but apparently not on the cash and carry sales.[25]

1.  Nature of Miller Brothers’ advertising

On review, the Supreme Court analyzed whether Miller Brothers “by its acts or course of dealing, ha[d] subjected itself to the taxing power of Maryland,” specifically by advertising to Maryland consumers.[26]  On this issue, the parties stipulated how and where Miller Brothers advertised.[27]  Since January 1, 1951, Miller Brothers engaged in no radio or television advertising anywhere.[28]  Before January 1, 1951, Miller Brothers had purchased limited radio and television advertising in Delaware.[29]  No ad “made an appeal for out-of-state business or in any way was designed directly or indirectly to appeal particularly to Maryland residents.”[30]  In fact, Miller Brothers’ radio slogan was “Furniture Fashion Makers for Delaware.”[31]  The parties also stipulated that Miller Brothers advertised regularly in three Wilmington, Delaware newspapers, which “undoubtedly” had “some” circulation in Maryland.[32]  The newspaper advertisements did not, however, specifically mention or target Maryland residents.[33]

The parties also stipulated that four times each year, Miller Brothers mailed advertisements to prior customers whose names and addresses it had on file.[34]  No advertising was sent to only Maryland purchasers.  To be sure, these advertisements might have attracted additional business from prior customers, some of whom lived in Maryland; however, Miller Brothers never used any mail “for the specific purpose of attracting Maryland buyers.”[35]

B.  The Majority’s Opinion

In a very short 5-4 opinion,[36] full of questionable, bordering on outrageous, statements,[37] Justice Jackson held in favor of Miller Brothers.[38]  The Court reasoned that, although its past decisions were not always clear about the grounds on which a tax was upheld,[39] they all respected one time-honored concept:  “that due process requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.”[40]  Because the Court recently held that a state like Maryland could not have imposed its sales tax on the sales made by a company like Miller Brothers,[41] it “would be a strange law that would make [an] appellant more vulnerable to liability for another’s tax than to a tax on itself.”[42]

1.  Justice Jackson’s eccentric view of the use tax

In his majority opinion, Justice Jackson claimed that the Court was “dealing with a relatively new and experimental form of taxation.”[43]  This statement may have been acceptable in the 1930s, but certainly not in 1954, when the opinion was issued.  States began to adopt general sales and use taxes shortly after the Great Depression began in 1929.[44]  By 1937, more than twenty states had adopted them, and thirty states had general sales and use taxes by the time Justice Jackson claimed they were “relatively new” and “experimental.”[45]

But his apparent hostility did not stop there.  He proceeded to refer to the effects of the use tax as a “protective tariff.”[46]  If that were actually the proper way to view the use tax, it would be unconstitutional.  State tariffs are “the quintessential evil targeted by the dormant Commerce Clause.”[47]  Unfortunately, the Court had already rejected this characterization of the use tax in 1937.[48]

Justice Jackson had better success in rehabilitating his dissent in General Trading Co. v. State Tax Commission of the State of Iowa,[49] a companion case to McLeod v. J.E. Dilworth Co.[50]  Both cases were authored by Justice Frankfurter[51] and handed down the same day.

Dilworth and General Trading involved nearly identical transactions:  an out-of-state vendor employed sales persons who traveled to the market state, solicited orders for goods, sent the orders back to the home office for acceptance or rejection, and if accepted, shipped the goods to the market state.[52]  In Dilworth, the Court held that the market state could not levy its sales tax on the transaction because the sale occurred beyond its borders.[53]  In General Trading, however, the Court held that on the same facts as in Dilworth, the vendor would have to collect the market state’s use tax.[54]  The effect of Justice Frankfurter’s holding in these companion cases was exactly the “strangeness” that Justice Jackson railed against in Miller Brothers.[55]  Had Justice Jackson’s views prevailed in General Trading, a vendor engaged in the very common fact pattern in the case would not be subject to the market state’s sales tax and would not have to collect that state’s use tax.  Assuming the purchaser did not voluntarily pay the use tax, the transaction would, as a practical matter, be tax free.[56]  Indeed, this was the likely result in Miller Brothers.

2.  Did Maryland overreach by including the cash and carry sales?

The stipulation between the parties made it clear that the cash and carry sales were less than a third of the sales delivered in Miller Brothers’ own vehicle.[57]  Specifically, from July 1, 1947 through December 31, 1951, Miller Brothers made at least $2500 in cash and carry sales, compared to at least $8000 of sales delivered in its own vehicle, and at least $1500 of sales delivered by a common carrier.[58]

There were three problems with requiring Miller Brothers to collect use tax on the cash and carry sales.  First, the cash and carry sales had the weakest connection to Maryland.  Even assuming that the store knew which of its purchasers were Maryland residents, which is what the stipulation in the case assumes,[59] the missing link is whether the goods would necessarily be used in that state.  For example, a Maryland customer may have used the purchase at a summer home in a Delaware beach community, given it to her child attending school in Delaware, or taken it to another state altogether.  The record was apparently devoid of evidence regarding the destination of the cash and carry transactions, which would be unsurprising because this fact would be irrelevant to the store.

Second, while a court might have analyzed the cash and carry sales separately without tainting the analysis of the sales that were delivered in Miller Brothers’ own vehicle—Maryland’s strongest case—there was always the risk (and one that actually materialized, as Justice Jackson’s opinion indicates), that the cash and carry sales would “poison” the other transactions.  In other words, the weakness in the cash and carry analysis would fatally distract a court from analyzing Maryland’s strongest argument, Miller Brothers delivering goods in its own vehicle.  Justice Jackson used the small tail of the “cash-and-carry” to wag the big dog of the deliveries in Miller Brothers’ vehicle.

Third, this risk was not worth taking because even winning on the cash and carry issue would probably not have led to much use tax ever being collected.  It is hard to imagine that the Court would have required Miller Brothers to collect the Maryland use tax on sales to Maryland residents regardless of where the goods were to be used, or that the Court would have endorsed an irrebuttable presumption that a purchase in Delaware by a Maryland resident would be used in Maryland.[60]  Realistically, the most that Maryland could have hoped for was a decision that if the goods were to be used in Maryland, then Miller Brothers would have to collect the Maryland use tax.  But how would Miller Brothers determine place of intended use?

Obviously, a clerk could ask the purchaser, but after the first few articles appeared in the regional papers and on radio and television about the tax consequences of answering that question, dishonest customers would not admit they were going to use the goods in Maryland.  One can also imagine a clerk asking the purchaser about intended use with a wink and a nod, even providing advice on how to answer the question.  Perhaps taxpayers were more honest in 1954 when the decision was handed down, but given the ease with which today’s consumers flaunt their use tax obligation on Internet or catalog purchases,[61] one can be a tad skeptical about how much Maryland use tax would have actually been collected.

The cash and carry sales allowed Justice Jackson to make the technical point that:

at the time of the sale, no one is liable for a Maryland use tax.  That liability arises only upon importation of the merchandise to the taxing state, an event which occurs after the sale is complete and one as to which the vendor may have no control or even knowledge, at least as to merchandise carried away by the buyer.[62]

That point is valid for the cash and carry sales because at best, the store knew only the address of the buyers, but not where they were taking the merchandise.  Clearly Miller Brothers knew where it was delivering the goods in its own vehicle, and it knew where it was shipping goods using common carriers.  Nevertheless, the cash and carry sales tainted the analysis in the hands of a hostile justice like Justice Jackson.[63]

Today, it is taken for granted that an out-of-state vendor that has nexus with the market state can be required to collect the use tax if it is arranging for shipment into that state even though, as a technical matter, no use tax is owed by the purchaser at the time of sale.  Under those circumstances, the use tax is merely being pre-collected on the very strong assumption that it will shortly be owed; if it turns out that no use tax is ultimately owed, a refund would be in order.[64]

With the benefit of hindsight (and maybe even without that benefit), it appears that including the cash and carry sales had a serious downside risk with little upside potential, and probably constituted a litigating blunder.

C.  The Dissent

Justice Douglas, authoring a four-person dissent,[65] asserted with no explanation that “[a]ppellant did not sell cash-and-carry without knowledge of the destination of the goods.”[66]  At best, Justice Douglas might have meant that the appellant knew whether the purchasers had Maryland addresses.  Purchasers paying by check presumably would have to provide some form of supporting identification like a driver’s license, which would show a state-specific address.  Moreover, Miller Brothers apparently collected customers’ mailing addresses even in the case of the “cash-and-carry” sales for its subsequent advertising circulars.[67]  The stipulation indicates that Miller Brothers sent mail about four times a year to “everyone who has purchased from [the store] and whose name and address is on the [store’s] records.”[68]  To compile this list, Miller Brothers no doubt made an effort to gather everyone’s addresses.[69]  Because the stipulation identified the amount of purchases by Maryland residents,[70] the store apparently had information on the addresses of the purchasers (at least those willing to provide such information).

Justice Jackson wrote that Maryland claimed it was entitled to use taxes because Miller Brothers sent circulars to all former customers, including those in Maryland.[71]  This might explain why Justice Douglas thought that Miller Brothers knew the addresses of all the cash and carry purchasers.  Nonetheless, that does not answer the more relevant question about where the goods were used.  Perhaps Justice Douglas assumed, quite reasonably, that a Maryland purchaser would use the good in Maryland.

Justice Douglas was on stronger grounds when he stated that “[t]his is not a case of a minimal contact between a vendor and the collecting [s]tate. . . . [I]ts delivery truck was not in Maryland upon a casual, nonrecurring visit.  Rather[,] there has been a course of conduct in which the appellant has regularly injected advertising into media reaching Maryland consumers and regularly effected deliveries within Maryland by its own delivery trucks and by common carriers.”[72]  He correctly focused on the stipulation.  The parties stipulated that for over four-and-a-half years, Miller Brothers had sold “at least $12,000 worth of merchandise . . . to Maryland purchasers for Maryland use”; and Miller Brothers itself had delivered approximately two-thirds of this merchandise to Maryland.[73]  Despite these telling, stipulated statistics, Justice Jackson described the delivery of goods as “occasional.”[74]  While the stipulation makes clear that Miller Brothers in fact delivered a majority of these sales to Maryland, subsequent cases blindly accept Justice Jackson’s characterization.[75]

Of course, given Justice Jackson’s apparent hostility to Maryland’s position, it would not have been relevant how he characterized the delivery of the goods.  In fact, if Maryland were going to lose no matter what, the states were better off going forward in having the deliveries misdescribed as “occasional” because that narrowed the holding of the case and its precedential value.  Future cases holding for the state would be able to dismiss Miller Brothers as involving a fairly weak connection with Maryland:  the occasional delivery of goods.[76]

D.  An Alternative Opinion

In the hands of a less hostile Justice than Justice Jackson, the case might have taken a different turn.  One can only imagine how Justice Rutledge, who left the Court a few years before Miller Brothers, would have decided it.  He would have likely upheld the collection of the Maryland use tax, at least on the goods delivered to Maryland customers, provided some relief would be extended for any sales tax paid on the transaction.[77]

At the time of Miller Brothers, the Court and commentators did not think that nexus had a different meaning under the Due Process Clause than under the Commerce Clause—Quill would later invent that bifurcation.[78]  Miller Brothers had a vehicle in Maryland presumably on a recurring basis.[79]  It sent advertising circulars to former customers with Maryland addresses—not all of them, to be sure, but those for whom it had information[80]—and the Court had previously held that where a sale occurred was irrelevant to determining whether the vendor must collect use tax for the market state.[81]  It would not have taken a heroic effort to hold that the minimum contacts requirement of International Shoe for due process nexus was satisfied.[82]

Sending advertising into Maryland could have been equated with sending in drummers, which had been previously held to constitute nexus.[83]  As the Supreme Court later explained, “In ‘modern commercial life’ it matters little that such solicitation is accomplished by a deluge of catalogs rather than a phalanx of drummers:  [t]he requirements of due process are met irrespective of a corporation’s lack of physical presence in the taxing [s]tate.”[84]  Miller Brothers’ vehicle received the same type of benefits—fire and police protection—that the Court later found to satisfy the Due Process Clause in National Geographic.[85]  In short, in the hands of someone more sympathetic to the states, Miller Brothers might have reached in 1954 the same due process holding that was eventually set forth in Quill.  Had it done so, the Court’s jurisprudence would have taken a different path and Bellas Hess could well have been decided in favor of the states.

III.   Bellas Hess, Inc. v. Illinois Department of Revenue

Figure 3:            Cover of a Bellas Hess Catalog

A.  The Facts

Bellas Hess was based in Missouri and conducted a pure mail-order business.[86]  It had no sales representatives, personnel, offices, or property of any kind in the State of Illinois.[87]  It used the U.S. mail and common carriers to fulfill orders from Illinois residents.[88]

Twice a year, Bellas Hess mailed catalogues to its active or recent customers, including those in Illinois.[89]  The company also supplemented this mailing with advertising “flyers” that were occasionally mailed to both past and potential customers.[90]

Under Illinois law, Bellas Hess was considered a retailer maintaining a place of business in the state because it was soliciting orders through catalogues or other advertising.[91]  Accordingly, the company was obligated to collect the Illinois use tax, which it did not do.[92]

When Illinois brought suit before the Supreme Court for unpaid use taxes, Bellas Hess retained Professor Archibald Cox.[93]  Cox was tall and ramrod straight, regal, bow-tied, and buzz-cut.[94]  He was a Harvard Law Professor, a Boston Brahmin, an early supporter of then-Senator John Kennedy, and the head of a Cambridge brain trust in Kennedy’s 1960 presidential campaign.[95]  When Kennedy became President, he appointed Cox as Solicitor General.[96]  From 1961 to 1965, Cox argued numerous landmark cases,[97] including Baker v. Carr,[98] Heart of Atlanta Motel, Inc. v. United States,[99] Reynolds v. Sims,[100] Peterson v. City of Greenville,[101] Massiah v. United States,[102] Burton v. Wilmington Parking Authority,[103] United States v. Seeger,[104] and Zemel v. Rusk.[105]  He was well-known to the Court, with a reputation for fairness and integrity.[106]  It is apparent from listening to the oral argument in Bellas Hess that the Justices well respected him.[107]

Not surprisingly, Miller Brothers played a prominent role in the briefing and oral argument of Bellas Hess.  Taxpayers had few Supreme Court victories upholding their right not to collect the use tax,[108] so even if Miller Brothers was hardly a model of analytical rigor, as well as a 5-4 decision, it was nonetheless a recent—and favorable—precedent.

In his brief and at oral argument, Professor Cox argued that Miller Brothers “should govern the present case”[109] and emphasized that Miller Brothers “made regular deliveries in Maryland in its own truck driven by its own employees.”[110]  He rejected Justice Jackson’s characterization of Miller Brothers’ deliveries in Maryland as “occasional.”[111]  Instead, Cox recharacterized the deliveries, (more accurately) as “regular.”[112]  By underscoring, rather than trivializing, the store’s deliveries (as well as its advertising),[113] Professor Cox was able to state at oral argument:  “If continuous regular advertising plus delivery with your own trucks is not enough to make jurisdiction, . . . then surely [there cannot be jurisdiction] where you don’t make deliver[ies] with your own truck[.  T]ake away that point of contact[,] and the advertising alone cannot be a sufficient jurisdiction.” He argued that the dissenting Justices in Miller, too, would agree with him in Bellas Hess:  they only would have found Miller Brothers liable because of its deliveries, but in contrast, Bellas Hess did not make any such deliveries.[114]

Illinois responded at oral argument by noting Bellas Hess’s “tremendous reliance” upon Miller Brothers and then rejected Cox’s characterization of the deliveries in Miller Brothers as “regular,” citing Scripto, Inc. v. Carson,[115] in support of Justice Jackson’s characterization.[116]  Illinois had every reason to endorse Justice Jackson’s description of the deliveries as “occasional.”[117]  Further, Illinois attempted to limit the significance of Miller Brothers by emphasizing that buyers went from Maryland to Delaware and that Miller Brothers did not know where the goods were to be used.[118]

Illinois’s goal was to minimize the precedential impact of the case to show how different Bellas Hess was.  Illinois and Justice Jackson were thus odd allies.  Cox had the opposite goal, to show how substantial Miller Brothers’ contacts were with Maryland and that if those could not justify collecting the Maryland use tax, then how could Bellas Hess’s less substantial contacts do so?

B.  The Majority Opinion

Justice Stewart wrote the majority opinion, joined by Chief Justice Warren and Justices Clark, Harlan, Brennan, and White.[119]  The opinion is unimaginative and hardly intellectually bold.  Justice Stewart summarized the Court’s earlier opinions as involving vendors having either real or personal property in the market state.[120]  The common link among these cases was that the “out-of-state seller was plainly accorded the protection and services of the taxing [s]tate.”[121]  The Court, however, never explained why Miller Brothers’ delivery in its own vehicle did not benefit from the protection and services provided by Maryland.[122]  After all, the vehicle traveled on roads supported by state funding and presumably could have received assistance from Maryland’s police and firefighters while in Maryland.[123]

But the Court refused to re-examine its precedents:

In order to uphold the power of Illinois to impose use tax burdens on [Bellas Hess] in this case, we would have to repudiate totally the sharp distinction which these and other decisions have drawn between mail order sellers with retail outlets, solicitors, or property within a [s]tate, and those who do no more than communicate with customers in the [s]tate by mail or common carrier as part of a general interstate business. . . .  [I]t is difficult to conceive of commercial transactions more exclusively interstate in character than the mail order transactions here involved.[124]

The Court also struck a theme that it would later reinforce in Quill.  “[I]f Illinois [could] impose such [use tax] burdens, so can every other [s]tate, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation.”[125]  How this burden would be reduced if there were ten part-time independent solicitors in the state was unaddressed.[126]  The majority essentially accepted Cox’s framing of the issue.  And like Quill twenty-five years later, the Bellas Hess Court was influenced by considerations of stare decisis.

C.  The Dissent

Justice Fortas wrote a stinging dissent, joined by Justices Black and Douglas.[127]  The dissent started by noting the size of Bellas Hess’s sales nationwide in 1961 of $60 million and accounts receivable of $15.5 million.[128]  During the fifteen-month audit period (dates unspecified) Bellas Hess’s sales in Illinois were over $2 million.[129]  None of these figures was cited by the majority.  The dissent attributed this “substantial volume” to “twice-a-year catalogue mailings” and “intermediate smaller ‘sales books’ or ‘flyers.’”[130]

The dissent underscored another point that the majority ignored:  “A substantial part of Bellas Hess’[s] sales [were] on credit.”[131]  That fact allowed the dissent to conclude that doubtless “this large-scale, systematic, continuous solicitation and exploitation of the Illinois consumer market is a sufficient ‘nexus’ to require Bellas Hess to collect from Illinois customers and to remit the use tax, especially when coupled with the use of the credit resources of residents of Illinois.”[132]  Bellas Hess was not simply using the facilities of interstate commerce to serve customers in Illinois.  Rather, “Bellas Hess enjoy[ed] the benefits of, and profits from the facilities nurtured by, the State of Illinois as fully as if it were a retail store or maintained salesmen therein.”[133]  Accordingly, Bellas Hess was obligated to collect the Illinois use tax.[134]

The dissent stressed another point ignored by the majority, and one that has become a rallying cry for overruling Quill:  the unfairness of exempting remote vendors but taxing their in-state competitors.  The dissent argued that excusing Bellas Hess from having to collect the use tax “burden[ed] and penalize[d]” domestic retailers that were obligated to collect the tax[135]:

While this advantage to out-of-state sellers is tolerable and a necessary constitutional consequence where the sales are occasional, minor and sporadic and not the result of a calculated, systematic exploitation of the market, it certainly should not be extended to instances where the out-of-state company is engaged in exploiting the local market on a regular, systematic, large-scale basis.[136]

The dissent underscored yet a final point about how to evaluate the burden on Bellas Hess if made to collect use taxes across the country.[137]  The dissent compared the compliance burden on Bellas Hess with that of a local retailer, concluding that the burdens are comparable.  By doing this comparison state-by-state, the dissent determined that Bellas Hess’s burden was no more significant than what local retailers experienced:

It is hardly worth remarking that appellant’s expressions of consternation and alarm at the burden which the mechanics of compliance with use tax obligations would place upon it and others similarly situated should not give us pause. The burden is no greater than that placed upon local retailers by comparable sales tax obligations.[138]

Although there is certainly a burden that comes with collecting taxes, the dissent explained, the burden experienced by a mail order house located in another state, such as the appellant, is no greater than the burden imposed “on an enterprise in the same [s]tate which accepts orders by mail; and it is, indeed, hardly more of a burden than it is on any ordinary retail store in the taxing [s]tate.”[139]

Finally, anticipating what critics of Quill would later assert, the dissent noted that technology has reduced whatever burdens remote vendors complain about.[140]  It attacked the majority’s concern that “administrative and record keeping requirements could ‘entangle’ appellant’s interstate business in a welter of complicated obligations” as “vastly underestimat[ing] the skill of contemporary man and his machines.”[141]  The dissent claimed that a “realistic approach to the facts of [Bellas Hess’s] business” showed that the state could impose use taxes on the out-of-state vendor without resulting in an undue burden.[142]

The difference between the majority and dissent was stark.  The majority opinion was orthodox in its reasoning, unimaginative, and timid.  No one could accuse the majority of advancing the Court’s jurisprudence.  In sharp contrast, the dissent raised themes the majority ignored (and that were not raised by Illinois)—themes that have come to dominate the current debate over Quill.  Twenty-five years later in Quill, the Court had the opportunity to endorse the dissent in Bellas Hess.

Quill v. North Dakota

A.  Overview

Little need exists to review in depth the facts or the decision in Quill, which is one of the most written about and discussed cases in state taxation.[143]  Certainly everyone at the Symposium seemed familiar with the case, and Justice Kennedy’s concurrence in Direct Marketing Association (“DMA”) can serve as a review.[144]  Quill reaffirmed Bellas Hess and endorsed two bright-line rules.  The first rule, drawn from National Geographic,[145] is that a remote seller must collect the market state’s use tax if it has a physical presence there.[146]  Under the second bright-line rule, drawn from Bellas Hess, a remote seller does not have nexus with a state if it does not have a physical presence in the state and “whose only connection with customers in the [taxing s]tate is by common carrier or the United States mail.”[147]

As Justice Kennedy’s concurrence in DMA indicates, the Quill Court was reluctant to reaffirm Bellas Hess.[148]  The Quill majority eventually affirmed the decision in deference to the reliance interests of the mail-order industry and principles of stare decisis.[149]  The Court perceived an obligation to protect the reliance interests and settled expectations of the direct-marketing industry, which had partially flourished, according to the Court, as a result of Bellas Hess.[150]  How much the competitive advantage of not collecting the use tax mattered to the growth of the industry is a tricky empirical question, but the Court implicitly assumed it was significant.[151]  The Court realized that the underlying jurisprudence would support a decision in favor of North Dakota, but felt that Congress was better suited for dealing with the problems that would accompany overruling Bellas Hess, especially that of retroactivity.

B.  Congressional Response

Reflecting the ambivalence about the wisdom of its decision, the Court extended a clear invitation to Congress to eliminate or modify the Bellas Hess rule.[152]  The Court stated that the Due Process Clause did not prohibit Congress from “decid[ing] whether, when, and to what extent the [s]tates may . . . collect use taxes.”[153]  Many earlier legislative attempts to overrule Bellas Hess failed, partially based on the fear that any legislation would violate the Due Process Clause.[154]  After Quill, the Senate finally passed the Marketplace Fairness Act in 2013,[155] but it languished in the House and was never enacted.[156]  The bill has been reintroduced in the Senate and referred to Committee.[157]

The politics for passing the Marketplace Fairness Act are brutal, as most voters (and many politicians) might see the bill as imposing a new tax that takes away their perceived God-given right to shop on the Internet tax-free, rather than viewing the bill as more akin to the withholding that is routinely accepted in the income tax on wages.  Legislators may increase the likelihood of passage by pairing the bill with pro-taxpayer bills that can blunt or neutralize opposition.  Perhaps Justice Kennedy understood that the Quill Court’s invitation for Congressional reform[158] was politically unrealistic when he suggested judicial redress as an alternative.[159]  That the Senate passed a bill at all, finally accepting the Quill Court’s invitation, might encourage some on the Court to hold off granting certiorari for now, waiting to evaluate the outcome of the November elections and their effect on the passage of legislation.

C.  The Bifurcation of Nexus

Quill was a political decision.  Its novel approach of bifurcating the concept of nexus so that it had a different meaning under the Due Process Clause from its meaning under the Commerce Clause allowed the Court to accomplish two goals:  clearing the way for Congressional intervention while protecting the reliance interests of the mail order industry.  By holding that due process nexus was satisfied, it provided Congress with clear authority for overturning Quill.  Previously, opponents of federal intervention were telling Congress that Bella Hess held that the Due Process Clause prevented out-of-state vendors with no physical presence in a state from having to collect that state’s use tax.  Opponents then argued that Congress could not legislate on matters of due process, even if economic issues were concerned, and thus was powerless to overturn Bellas HessQuill put that fear to rest and simultaneously held that Commerce Clause nexus was not satisfied, which meant that Bellas Hess prevented remote vendors with no physical presence from collecting the market state’s use tax.  Hence, the Court protected the reliance interests of the mail order industry.

The bifurcation of nexus solved the Court’s quandary of removing impediments to Congressional legislation without removing the existing protection for the mail order industry.  This approach, however, came with a high jurisprudential cost.  It had no support in the case law, although the Court tried to tease it from Complete Auto.[160]  The Court described the “different constitutional concerns and policies” animating the Due Process and the Commerce Clauses[161] and underscored Complete Auto’s use of the term “substantial nexus.”  Complete Auto was a Commerce Clause case, and its use of substantial nexus, (a term that had not appeared in any of the Court’s Due Process cases), supported, according to the Court, a different meaning for nexus from that under the Due Process Clause.  Unfortunately, the Court cited no other cases to support its approach.  As two leading scholars noted, the Court’s failure to cite any other cases was not an oversight:  “the Court’s discovery that ‘[d]espite the similarity in phrasing, the nexus requirements of the Due Process and Commerce Clauses are not identical’ is more accurately viewed as a doctrinal epiphany than as a logical inference to be drawn from the careful reading of its precedents.”[162]

Justice White concurred with the majority’s decision to overrule Bellas Hess’s requirement of physical presence for nexus under the Due Process Clause.[163]  But he viewed the Due Process and Commerce Clauses to have the same nexus requirement and would have given Bellas Hess “the complete burial it justly deserves.”[164]  He scolded the majority for its unprincipled approach, noting that “[t]he Court freely acknowledges that there is no authority for this novel interpretation of our cases and that we have never before found, as we do in this case, sufficient contacts for due process purposes but an insufficient nexus under the Commerce Clause.”[165]  Unprecedented though it might be, this bifurcation of nexus allowed the Court to preserve the Bellas Hess result, while removing any perceived barrier to congressional intervention.

D.  Other Flaws in the Opinion

One fundamental problem with Quill is that the Court never explained what physical presence in a state has to do with limiting state burdens on interstate commerce, retreating into bromides about the value of bright lines and how they can be rough around the edges.[166]  Quill states that the Commerce Clause and the substantial nexus requirement are informed by structural concerns about the effects of state regulation on the national economy and limiting state burdens on interstate commerce.[167]  Yet, nowhere does the Court explain why the burden of collecting the use tax is reduced when a mail-order vendor has property in the state,[168] or has engaged the services of ten part-time, independent contractors within the state.[169]

A second analytical flaw in Quill is its overstatement concerning the evolution of its due process jurisprudence.  The Court asserted that “[o]ur due process jurisprudence has evolved substantially in the [twenty-five] years since Bellas Hess, particularly in the area of judicial jurisdiction.”[170]  But as Justice Scalia noted in his concurrence, the Court had held forty-two years earlier that a state’s regulation of a company that had used the United States mail to establish contacts within the state satisfied the Due Process Clause.[171]  Justice Scalia suggested that there was no difference between “jurisdiction to regulate and jurisdiction to tax.”[172]

A third problem is that Quill misleadingly relies on Complete Auto’s “substantial nexus” language in support of its position that nexus for Commerce Clause purposes is different from nexus for due process purposes.[173]  This dubious proposition was irrelevant in Complete Auto.

The issue in Complete Auto was whether a tax on the privilege of doing business within a state can be applied to an activity in interstate commerce.[174]  The issue of nexus was not before the Court—nor could it have been—because there was no doubt that the taxpayer, which was transporting automobiles within Mississippi on behalf of General Motors, had a physical presence in Mississippi.[175]  The case is crystal clear that the taxpayer assumed it had sufficient nexus with Mississippi,[176] and anything the Court might have said about nexus would have been dicta at best.  Complete Auto never had to address whether it viewed nexus as a due process issue or Commerce Clause issue.

Finally, the rather cavalier way Complete Auto vacillated in its description of the nexus requirement was inconsistent with a Court that thought it was formulating a new Commerce Clause interpretation of nexus.  For example, only once did Complete Auto refer to “substantial nexus”;[177] more often, it referred to “sufficient nexus” or “sufficiently connected.”[178]  Additionally, Complete Auto cited cases referring to nexus in its more traditional due process context as a “necessary connection,”[179] or as “sufficient nexus.”[180]  Moreover, a computer search shows that this was the first time the Court ever used the term “substantial nexus” in a tax case.[181]  This was not a Court that attributed any significance to the one time it used the term “substantial nexus” in its opinion; it obviously was not imbuing that term with any new jurisprudential meaning.  As if further evidence is even needed, in National Geographic,[182] decided less than a month after Complete Auto, the Court stated:  “The question presented by this case is whether the Society’s activities at the offices in California provided sufficient nexus between the out-of-state seller appellant and the [s]tate—as required by the Due Process Clause of the Fourteenth Amendment and the Commerce Clause—to support the imposition upon the Society of a use-tax-collection liability.”[183]  If in Complete Auto the use of the modifier “substantial” was purposeful rather than casual, then the Court, without any notice, must have changed its mind less than one month later when National Geographic was decided.  National Geographic was also quite telling in that the Court viewed the concept of nexus as identical under both the Due Process Clause and the Commerce Clause.[184]  Nonetheless, the very thin reed of “substantial nexus” provided the fig leaf the Court needed from otherwise turning Quill into a transparently unprincipled, blatantly political decision.

Although the Quill Court refused to grant certiorari on the question of whether a decision in favor of the State would apply retroactively,[185] Justice White seemed to be signaling that the Court discussed this question at its conference.[186]  That would not be surprising because at oral argument the Court was clearly concerned about this issue in particular and suggested that Congress was better suited to deal with it.[187]

The intellectually suspect bifurcation of nexus gave the Court a way to resolve its concern about retroactivity, though it could not candidly admit to this agenda without undermining the legitimacy of the decision.  At the same time, this suggests that the case is hardly sacrosanct or beyond reproach, as Justice Kennedy’s concurrence in DMA well recognizes and as the 5-4 vote in Miller Brothers and the 6-3 vote in Bellas Hess also suggest.

E.  The Relevance of Pre-Quill Cases on Nexus

An appreciation of the weak foundation upon which Quill is built affects the weight that should be given to the Court’s pre-Quill decisions on nexus.  Some would read such cases very narrowly, essentially limiting them to their facts.[188]  But neither Quill’s language nor its holding supports a narrow reading of the pre-Quill nexus cases.

In addition, some critics would reject pre-Quill cases decided under the Due Process Clause as having no relevance in a post-Quill world where nexus has been bifurcated.[189]  Again, they offer no support for this position from the language or the holding of Quill.

Those views are a logically possible, but improbable reading of the Court’s intent in Quill.  As discussed above, Quill added no new nexus requirement for use taxes.  Nor did Quill invigorate the existing physical presence precedents.  The majority and concurrence claimed they were preserving the physical presence test of Bellas Hess because of their adherence to stare decisis.[190]  There is not even a hint in Quill that the Court, in doing so, was repudiating all of its many cases that gave content to that test.  Indeed, to read Quill as some radical decision—a voyage into uncharted waters—is to treat the Court’s stated concern for stare decisis as claptrap.  A court concerned with preserving existing expectations and providing a bright-line, physical presence test for nexus should not be read as having discarded existing nexus jurisprudence unless it has made an explicit statement to that effect.

Those who would read Quill as rejecting its earlier cases on nexus are left with the task of examining all prior decisions to determine which of those were decided under the Commerce or Due Process Clause.  This task is hopeless.  Prior to Quill, the Court never had any reason to specify whether a nexus decision was grounded on one clause or the other.[191]  Accordingly, the Court could be somewhat casual about the grounds of its decisions, often suggesting that nexus was required by both the Due Process Clause and the Commerce Clause, without even hinting that the concept did not have the same meaning under both clauses.[192]  Nothing in Quill—or in any other case, even Complete Auto—suggests that physical presence had a different meaning under the Due Process Clause than under the Commerce Clause.  Quill does not define physical presence, nor does the Court indicate that it is reexamining, let alone overruling, the definition of physical presence that emerges from those due process cases that found nexus because of a physical presence.

F.  The Meaning of Physical Presence

The term “physical presence” cannot be applied literally to a corporation, which is a legal construct with no physical attributes.  Unlike an individual, who can be physically present in a state, a corporation can be physically present only indirectly, through, for example, some person or property with which it has a legal relationship.  The ownership or leasing of real property is one way in which a corporation can be present in a state.[193]  A corporation can also be physically present in a state through persons acting on its behalf.[194]

Under the case law, a corporation would have physical presence in a state through the actions of an individual soliciting or selling in a state on its behalf.  For example, traveling salespersons who are employees of an out-of-state vendor provide nexus for the employer.[195]

The employer-employee relationship is one polar point on a continuum of possible personal relationships.  At the other end of that continuum are the employees of common carriers or of the U.S. Postal Service, whose actions would not be attributed to the corporation.  As Quill held, mail-order sellers “who do no more than communicate with customers in the [s]tate by mail or common carrier” will not have nexus.[196]

Of course, employees are only one category of individuals who can be physically present within the state.  The in-state actions of agents and independent contractors can also confer nexus.  While the case law does not establish all of the relevant boundary lines, it is clear that an independent contractor does not have to work exclusively for the out-of-state corporation to confer nexus.  In Scripto, for example, the Court held that nexus was created by ten part-time, independent contractors making commissions on the orders they solicited.[197]

The Quill Court described Scripto as “[t]he furthest extension” of the Due Process Clause’s requirement that there be a minimum connection.[198]  Critics have latched onto this language to conclude that solicitation is a necessary condition for nexus.[199]  Nothing in Scripto, however, held that the activities at issue were the only activities that could establish nexus.  The statement in Scripto regarding solicitation is nothing more than an illustration of a sufficient condition for nexus, not a necessary one.[200]  Further, in subsequent cases, the Court held that individuals did not necessarily need to engage in solicitation, but could engage in other activities to establish physical presence within the taxing state, thereby rejecting a crabbed reading of Scripto.[201]

Quill’s description of Scripto as “[t]he furthest extension”[202] of the law was a neutral descriptive statement.  It means what it says—that Scripto extended what constituted sufficient nexus, beyond where it stood in previous cases before the Court.  No basis exists for the position some commentators have taken that the Court, in making that statement, was “intimating that courts in the intervening [thirty-six] years have moved the other way.”[203]

That interpretation is inconsistent with Quill’s eliminating the physical presence requirement under the Due Process Clause.  That is, Quill extends the law substantially further than Scripto by holding that no physical presence is needed to provide nexus under the Due Process Clause.  In other words, if Scripto is a due process case, as these commentators maintain, how could Quill be read as intimating that courts in the intervening years have moved away from Scripto, when Quill itself reversed this so-called “trend” by totally eliminating the physical presence requirement as a precondition to satisfying due process?  Nor is the Court seriously suggesting that nine independent contractors would not be enough to constitute nexus, but that ten would be.

Other categories, all resulting in a finding of nexus, include a general agent,[204] a sales representative,[205] or a jobber, broker, or independent contractor,[206] at least in circumstances where the in-state person would be understood as acting on behalf of the vendor.  No reason exists to believe the Court will interpret these categories narrowly.  The Court has never suggested that it was using terms such as “agent” or “representative” in a narrow, technical sense, or that such terms were to be defined under state law.  If anything, the Court has indicated that labels and “fine distinction[s]” of nomenclature will have no “constitutional significance.”[207]

In addition, the Court has described quite broadly the activities of in-state persons who will constitute a physical presence for out-of-state vendors.  For example, the Court has held that a corporation has a physical presence if the person acting on its behalf has performed activities significantly associated with the corporation’s ability to establish and maintain the in-state market,[208] or made it possible for the company to realize and continue “valuable contractual relations” with its customers.[209]

The Court’s broad view is consistent with its emphasis on substance rather than form in its Commerce Clause cases and on pragmatism rather than formalism, as clearly expressed in Complete Auto.[210]  The Court’s willingness to treat employees, agents, independent contractors, and representatives as constituting physical presence under appropriate conditions is an example of its pragmatic philosophy of focusing on economic reality and practical effects and not on labels.

The Court’s emphasis on substance over form was the key to its holding in Complete Auto, but predates that case.  In 1960, for example, the Scripto Court expressly recognized that the artificial distinction between “regular employees of [Scripto] devoting full time to its service” and independent contractors is “a fine distinction . . . without constitutional significance.”[211]  The Court was also sensitive to the tax avoidance opportunities that would arise if it were to draw such a distinction, noting that “[t]o permit such formal ‘contractual shifts’ to make a constitutional difference would open the gates to a stampede of tax avoidance.”[212]  This suggests that the Court will not interpret its prior cases on physical presence in a narrow or wooden manner, but rather that it will acknowledge that legal relationships often will not fall into traditional employer-employee categories, especially true in a world where outsourcing is becoming increasingly common.

Furthermore, the Court has demonstrated an appreciation of, and sensitivity to, the tax avoidance opportunities that can arise from drawing fine distinctions in contractual arrangements.  For example, the Scripto Court would be unlikely to tolerate a different nexus result if a corporation eliminates an in-house department and then outsources that previous function to independent contractors, some of whom may have been its former employees.[213]  In other words, firing employees and rehiring them as independent contractors is unlikely to break the nexus connection.

V.  Revisiting Quill: Thoughts from the Symposium

How different the history of the Court’s jurisprudence might have been had Miller Brothers held for Maryland, at least with respect to the deliveries made to its residents.  The “cash-and-carry sales” proved to be a small tail that wagged a big dog in the hands of a hostile Justice like Justice Jackson.  Even without those sales, Justice Jackson’s hostility to Maryland’s arguments, as illustrated by his hyperbolic and erroneous statements about the nature of the use tax, and his mischaracterization of the deliveries by Miller Brothers, doomed Maryland’s case.  Professor Cox was able to use Miller Brothers to influence the Bellas Hess majority over a stinging dissent that reads as if it could have been written today.  And what a shaky precedent Bellas Hess was for the Quill Court, which not only was concerned with the issue of retroactivity on which certiorari was specifically not granted, but also had to invent a new theory of nexus to implement its political agenda.  The Court candidly admits its ambivalence about its decision and essentially punts the issue to Congress, which has yet to act.  Meanwhile, the digital age makes the opinion seem quaint and atavistic.  No wonder Justice Kennedy’s frustration spilled over into his concurrence in DMA.

A.  The Main Show

The authors of the remaining articles in this issue would overrule Quill but they also offer strategies that would accommodate the case.[214]  The next article, Beyond Quill and Congress:  The Necessity of Sales Tax Enforcement and the Invention of a New Approach by Lila Disque and Helen Hecht,[215] is a gem.  It is historical and descriptive, as well as prescriptive with a tad of whimsy;[216] and best of all, it proposes a strategy that might be a real game changer.  Building on Colorado’s success in Direct Marketing Ass’n v. Brohl,[217] the authors propose that states adopt statutes that would allow them to obtain information on taxable sales from remote sellers and send notices to instate consumers allowing them to pay, contest, or have the tax withheld by their employer.

A variation of this would be for the employers to make an estimated withholding through payroll deductions based on the preceding year’s data that would be sent to instate purchasers; the current data, when available, would then be used by the purchasers to “true up” the withholding and either claim refunds or pay additional tax at the end of the year when they file their returns.

The authors’ proposal would require the vendor to determine the taxable status of the purchases.  The statute challenged in Direct Marketing Ass’n requires only determining the amount of purchases by dollar amounts, without regard to their taxable status.[218]  Requiring the remote vendor to educate itself about a state’s sales tax sufficient to make a decision about taxability could lay the foundation for subsequent litigation.[219]

The authors also describe the kind of table used by California, Maine, and other states, which estimates by adjusted gross income the amount of use tax owed on out-of-state purchases.[220]  These states allow taxpayers to report use tax based either on their actual purchases and records or by using these tables.[221]  According to the authors, compliance rates under this system are uneven.  Lookup tables are worthy of further refinement[222] and may be an alternative to the authors’ proposed Colorado approach.

The American University Law Review also had panels at its Symposium dealing with the value added tax (VAT).  When the Law Review put the Symposium together, it could not have anticipated that Senator Ted Cruz would actually propose a VAT as part of his plan to reform the federal tax system.[223]  Once again, subsequent events vindicated the Law Review’s good judgment.

The VAT, or what is essentially its equivalent—a national sales or consumption tax collected in stages—is “the most studied tax system that has never been seriously considered by Congress.”[224]  Taxes on consumption have played an important role in the fiscal history of the United States.  Before the Civil War, customs duties were a major source of federal revenue.[225]  The first movement for a general federal sales tax in the United States arose during the Civil War and reflected dissatisfaction with the new wartime income tax and the wide range of excise taxes (national sales taxes limited to specific commodities) that had also been imposed.[226]  Congress rejected a proposed one percent sales tax in 1862.[227]

From the Civil War through World War I, customs duties and excise taxes were equally important.[228]  A second movement for a national sales tax occurred immediately after World War I, motivated again by opposition to high wartime income taxes.[229]  A bill providing for a federal sales tax was defeated in 1918.[230]  In 1921, a proposal for a personal consumption tax was rejected, as were proposals for various forms of sales taxes.[231]  Proposals for a federal sales tax were renewed, again unsuccessfully, during the Great Depression, with famed newspaper publisher William Randolph Hearst as the most outspoken proponent.[232]  From 1933 to 1936, excise taxes again became a major source of federal revenue, but their relative importance later declined with increasing reliance upon the income tax.[233]

To finance World War II, the government considered, but ultimately rejected, a sales tax and personal expenditure tax; instead, the war was financed by income, excess-profits, and excise taxes.[234]  Excise taxes were similarly used to finance the Korean War.[235]  The last vestiges of these wartime excises were generally eliminated in 1965, although the United States still imposes a wide variety of excise taxes on certain goods and services, such as alcoholic beverages, tobacco products, motor fuels, heavy tires and trucks, coal, pistols and revolvers, sports and fishing equipment, domestic air transportation, and breweries.[236]

President Nixon considered a VAT in part to help finance education.[237]  Mayors and governors, who realized that a VAT was just a different means of administering a retail sales tax—which they coveted as their own, unshared revenue source—vehemently opposed President Nixon’s proposal.[238]

In 1971, the American Bar Association charged a special group to study the VAT, as did the American Institute of Certified Public Accountants.[239]  Proposals for a federal VAT were considered by the Treasury in the early 1970’s and formed a major part of the Treasury’s famous 1984 tax reform study.[240]  But the Advisory Commission on Intergovernmental Relations essentially killed interest in a VAT when it concluded that “a massive new [f]ederal program designed specifically to bring about property tax relief is neither necessary nor desirable.”[241]

In 1995 and 1996, proposals for variations of a consumption tax, sales tax, or VAT figured prominently in the inevitable political jockeying preceding the presidential election, but none was ever adopted.[242]  None of these earlier sweeping proposals generated any depth of support in the 2000, 2004, or 2008 presidential campaigns.  In his first term beginning in 2008, President Obama indicated interest in a VAT to deal with the country’s large deficits, but he never made it a priority.[243]

One of the lessons that politicians seem to have drawn from the lukewarm reception the VAT has received is to avoid calling it that, which brings us back to Senator Cruz.  He has proposed a “Business Flat Tax,” but the cognoscenti recognize it as tax-inclusive subtraction-method VAT.[244]

To understand what that means, we are all in good hands.  The iconic Professor Walter Hellerstein has contributed Taxing Remote Sales in the Digital Age:  A Global Perspective to this Issue.[245]  Anything by Professor Hellerstein is worth reading, and this Article is no exception.  This is as good a primer on the VAT as anyone can read:  perceptive, subtle, and insightful.

Applying a global perspective based on his long experience with the VAT, Professor Hellerstein draws three fundamental lessons:  (1) remote sales should be taxed under a consumption tax like the states’ retail sales taxes or a VAT, (2) remote sales should be taxed using a destination principle under a retail sales tax or a VAT, and (3) remote sales can be taxed by adopting simplified registration and compliance regimes for nonresident vendors and by adopting a feature familiar to VATs but uncommon in a retail sales tax:  the reverse charge mechanism.

Turning to the theme of this Symposium, Professor Hellerstein calls for, with his quintessential wordsmithing, “jettison[ing] the archaic rule of Quill, . . . a self-inflicted wound that can be easily repaired with congressional surgery.”[246]

A VAT may have advantages over a retail sales tax, but as Professor Richard Ainsworth makes clear, preventing fraud is not one of them.  He has consistently been ahead of the curve in raising warnings about how technology can be (and is) manipulated to commit fraud, in both the VAT and the retail sales tax.

Professor Ainsworth was the first American scholar to raise the rallying cry against the use of zappers or suppressors, long before the public, including most state tax administrators, had ever heard of them.  These are computer programs, installed using a thumb drive on point of sale electronic cash registers, which erase and permanently delete a percentage of gross receipts.[247]  The program can be customized to the particular needs of a user.[248]  Professor Ainsworth has been a one-person bandwagon, cajoling and coaxing the states to take defensive measures, and some, but not enough, have heard his warning.

His Symposium Article, Sales Suppression—The International Dimension,[249] provides chilling accounts of criminal prosecutions in Canada, where zappers have been used before they apparently spread to the United States, especially to the West Coast.  Similar prosecutions are now following in the United States and are colorfully detailed by Professor Ainsworth, who could easily have another career writing crime thrillers.  Professor Ainsworth criticizes the FBI’s focus on the end user of the zappers and contrasts that approach with the Washington Attorney General, who focused on the salesmen, installers, and service providers of zapper technology in Washington State.

After regaling the reader with prosecutions in Canada and the United States, Professor Ainsworth distills the lessons that should be learned.  Taxing jurisdictions need to have technology that reconstructs the digital transaction records that have been suppressed, or need to have technology that encrypts and saves digital records at the time of their creation.  Professor Ainsworth’s preference is for “real-time secure transmission of encrypted transactional data to a central location where artificial intelligence (AI) conducts a high quality risk analysis.”[250]  Technology exists that would accomplish this and could be mandated by statute.

Through his writings and speeches, Professor Ainsworth has prompted states to adopt legislation to deal with zappers, but attacks some of these statutes as allowing for warrantless searches and seizures.  He also criticizes statutes that make the salesmen and manufacturers of suppression devices liable for the lost taxes as estimated by a tax department.  Because the zappers erase transactional data, reconstructing tax losses is difficult.  He is concerned that salesmen and manufacturers cannot challenge a tax department’s estimates because that process is cloaked in taxpayer confidentiality.

This Issue of the Law Review provides a treasure trove of analysis and support for overturning Quill.  Even if that were not to happen, the authors propose strategies for:  coping with Quill, minimizing its precedential value, and narrowing its holding; improving the administration of the sales tax; using DMA as a springboard for collecting the use tax; and perhaps even adopting a VAT.  The Law Review is to be complimented for assembling a broad and comprehensive resource for judges, lawyers, and policymakers.

        [1].    504 U.S. 298 (1992).

        [2].    Id. at 309–19.  For a discussion of the use tax, see Richard D. Pomp, State and Local Taxation 6-39 to 6-43 (8th ed. 2015).

        [3].    135 S. Ct. 1124 (2015).

        [4].    See, e.g., Ronald Mann, Opinion Analysis:  Online Retailers Win Big in Use-Tax Dispute—For Now, SCOTUSblog (Mar. 4, 2015, 10:16 AM), https://www.scotusblog.com/

2015/03/opinion-analysis-online-retailers-win-big-in-use-tax-dispute-for-now (writing that Justice Kennedy’s “exciting” concurrence will prompt states to pass new use taxes and will surprise many corporate attorneys).

        [5].    Direct Mktg. Ass’n, 135 S. Ct. at 1134–35 (Kennedy, J., concurring).

        [6].    28 U.S.C. § 1341 (2012).

        [7].    Direct Mktg. Ass’n, 135 S. Ct. at 1134.

        [8].    Due to the dynamic changes taking place among remote vendors, anything but very current revenue estimates are likely to overstate the amount of use taxes that are not being collected.  For example, Amazon’s relatively new business model of shipping orders either on the day the order is received or the very next day requires having distribution centers close to major metropolitan areas.  See Jillian D’Onfro, Here Are All of Amazon’s Warehouses in the US, Bus. Insider (Mar. 24, 2015, 1:48 PM), https://businessinsider.com/how-many-fulfillment-centers-does-amazon-have-in-the-us-2015-3.  Amazon typically places these centers in separate entities—LLCs, LLPs, or C Corporations.  Amy Martinez, Amazon.com Fights Sales Taxes After Getting Other Breaks, Seattle Times (Jan. 24, 2011, 6:59 AM), https://www.seattletimes.com/business/

amazoncom-fights-sales-taxes-after-getting-other-breaks.  Those entities obviously have nexus with the states in which the center is located.  At one time, Amazon apparently took the position that it did not have nexus with a state merely because a separate entity that it controlled did have nexus.  Id.  Some of the revenue estimates bandied about reflect that position.  Amazon now seems to have abandoned that argument and collects use tax in states where it has distribution centers owned by controlled entities, which means that it collects for nearly three quarters of the population.  See Pomp, supra note 2, at 9-66.  Any meaningful revenue estimate has to capture that significant change.

Based on a survey of the websites of the largest hybrids in the country, that is, those enterprises that have both dot.coms and retail stores in related entities, this Author concludes that they are collecting use tax on sales made in any state in which their retail stores are located.  Part of the explanation is that some states have passed legislation requiring them to collect use tax.  See id. at 9-71 to 9-74.  The lack of litigation over these statutes suggests that the major hybrids have made the same decision as Amazon, discussed supra, and have decided to collect rather than litigate. Their legal position is even weaker than Amazon’s because the dot.coms often provide that a purchase from them can be returned to, or picked up from, one of their related retail stores.  There may also be a shared proprietary credit card, shared email addresses used for marketing purposes by both the dot.coms and the retail stores, and proprietary gift cards sold at the retail stores that can be used for sales made from the dot.coms.  And, of course, the dot.coms and the retail stores will have similar names and trademarks. See N.M. Taxation & Revenue Dep’t v. Barnesandnoble.com LLC, 303 P.3d 824, 829 (N.M. 2013), aff’g 283 P.3d 298 (N.M. Ct. App. 2012) (holding that these common facts, which described the relationship between Barnesandnoble.com and its Barnes and Noble retail stores owned by separate entities, created nexus for the dot.com, requiring it to collect the New Mexico gross receipts tax).  These seismic changes in the tax landscape have reduced the amount of revenue at stake in overturning Quill.

        [9].    Direct Mktg. Ass’n, 135 S. Ct. at 1134–35 (Kennedy, J., concurring) (citations omitted).  Much has been made of the fact that no other Justice joined Kennedy’s concurrence.  See Jonathan Randles, Kennedy’s Call to Reconsider Quill Could Spawn Test Case, Law360 (Mar. 3, 2015, 6:39 PM), https://www.law360.com/articles/627210/

kennedy-s-call-to-reconsider-quill-could-spawn-test-case.  There are several possible explanations, however, for this fact.  The Court’s composition has changed dramatically since Quill was decided.  Only Justices Kennedy and Thomas of the current Court were on the Quill Court. Perhaps the six current Justices named to the Court since Quill were less familiar with the issue and had no opinion on the merits.  It is also possible that some Justices did not join Justice Kennedy’s concurrence because they believed it was inappropriate, as it had nothing to do with the merits of the case before them—DMA.  Others may have disagreed with the concurrence and wish to leave Quill undisturbed.  This Article leaves it to others to read the tea leaves.

     [10].    And few law reviews are as gracious, supportive, and delightful as the Symposium editors.  They are a real credit to the American University Washington College of Law.  Special thanks are especially due to Ryan Sims, whom Jones Day is lucky to be getting as an associate starting in the Fall of 2016.

     [11].    The case was argued by the North Dakota Attorney General, Nicholas Spaeth, who ran (unsuccessfully) for Governor of North Dakota in 1992. See Quill Corp. v. North Dakota, 504 U.S. 298, 300 (1992); Nicholas Spaeth 19502014, N.D. Sup. Ct. News (Mar. 21, 2014), https://ndcourts.gov/court/news/spaethn.htm.

     [12].    A Westlaw search for <advanced: TI(Quill)> in Law Reviews & Journals returns seventy-one entries.

     [13].    See, e.g., H. Beau Baez III, Taxing Internet Sales:  Trying to Make a Two-Thousand-Year-Old Jurisdiction Test Work in the Dot-Com Economy, 64 Tax Law. 807, 848 (2011) (arguing that either the Supreme Court or Congress should change Quill’s substantial nexus requirement); Geoffrey E. Weyl, Comment, Quibbling with Quill:  Are States Powerless in Enforcing Sales and Use Tax-Related Obligations on Out-of-State Retailers?, 117 Penn St. L. Rev. 253, 281 (2012) (stating that applying Quill to “pure” e-retailers is not always fair).

     [14].    Miller Bros. Co. v. Maryland, 347 U.S. 340, 344–45 (1954).

     [15].    Justices Frankfurter and Jackson were close friends and Justice Frankfurter was said to have had a great influence over Jackson’s opinions.  See H. N. Hirsch, The Enigma of Felix Frankfurter 187–88 (1981).  Justice Frankfurter has also been described as influencing Justices Minton and Burton, who perhaps not surprisingly joined with Jackson in Miller BrothersSee Kim Eisler, A Justice for All:  William J. Brennan, Jr., and the Decisions that Transformed America 88, 100 (1993).  Justice Frankfurter’s feuds with Justices Warren, Black, and Douglas, who all dissented in Miller Brothers, were well known.  See Eisler, supra, at 105, 128; H. N. Hirsch, supra, at 189–90.

     [16].    Miller Bros., 347 U.S. at 341.

     [17].    Id.

     [18].    See Pomp, supra note 2, at 6-39 to 6-40; supra Figure 2.

     [19].    Miller Bros., 347 U.S. at 341.

     [20].    See Pomp, supra note 2, at 6-41; Steven Walters, Just 1% of Taxpayers Report Unpaid Sales Tax, GazetteXtra (Feb. 13, 2012), https://www.gazettextra.com/news/

2012/feb/13/just-1-taxpayers-report-unpaid-sales-tax (reporting that a mere one percent of Wisconsin tax payers complied with that state’s law requiring its citizens to report sales tax owed on online and out-of-state purchases); see also Adam B. Thimmesch, Taxing Honesty, 118 W. Va. L. Rev. 147, 148 (2016) (arguing that “economic, moral, and psychological” factors contribute to states’ inability to collect use taxes, and suggesting alternative methods to enforce such taxes).

     [21].    Miller Bros., 347 U.S. at 341, 349 n.4 (stipulation by the parties).

     [22].    Id. at 342; id. at 358 (Douglas, J., dissenting).  Although the record is silent, a fair inference is that Miller Brothers used its own vehicle to deliver purchases within a certain radius of its store and employed a common carrier to make deliveries to customers outside that radius.

     [23].    Id. at 341 (majority opinion).  The lower court referred to the vehicle that was attached by Maryland as a station wagon, 95 A.2d 286, 288 (Md. 1953), rev’d, 347 U.S. 340 (1954); Justice Jackson refers to it as a truck.  347 U.S. at 341.

     [24].    Miller Bros., 347 U.S. at 341.

     [25].    Miller Bros. Co. v. State, 95 A.2d at 292.  “These two appeals test the constitutionality of the Maryland Use Tax Act . . . as applied to furniture sold by appellant, Miller Brothers Company, a Delaware corporation, at its store in Delaware and delivered to purchasers residing in Maryland.”  Id. at 288 (emphasis added).

     [26].    Miller Bros., 347 U.S. at 344.

     [27].    Id. at 341, 349 n.4.

     [28].    Id.

     [29].    Id. at 349 n.4.

     [30].    Id.

     [31].    Id.

     [32].    Id.

     [33].    Id.

     [34].    Id.

     [35].    Id.

     [36].    Justice Jackson was joined by Justices Reed, Frankfurter, Burton, and Minton.  See supra note 15 and accompanying text.

     [37].    See infra notes 43–48, 55–56, 62–63, 74 and accompanying text.

     [38].    Miller Bros., 347 U.S. at 346.

     [39].    Id. at 344.

     [40].    Id. at 344–45.

     [41].    McLeod v. J. E. Dilworth Co., 322 U.S. 327 (1944).

     [42].    Miller Bros., 347 U.S. at 346.

     [43].    Id. at 343, 352 n.5 (citing Maurice Criz, The Use Tax:  Its History, Administration, and Economic Effects 1 (1941); Robert Murray Haig & Carl Shoup, The Sales Tax in the American States 83 (1934); Jerome Hellerstein, State and Local Taxation 4-12, 338 (1952)).  The first cited source, The Use Tax, was published in 1941, and the page cited has nothing to do with Justice Jackson’s proposition.  The second source, The Sales Tax in the American States, was published in 1934 and could not support Jackson’s statement in 1954.  In any event, the cited page is irrelevant to his assertion.  The third source, State and Local Taxation (an early edition of the now standard treatise in the area), although closer in time to 1954, not only does not support Justice Jackson, but also can be read for the opposite conclusion.

     [44].    Pomp, supra note 2, at 6-5.

     [45].    Id.

     [46].    Miller Bros., 347 U.S. at 343.

     [47].    Comptroller of Treasury v. Wynne, 135 S. Ct. 1787, 1792 (2015) (Maryland personal tax scheme that effectively taxed income earned outside the state at a higher rate than income earned inside the state held to be unconstitutional under the Commerce Clause as having the effects of a tariff).

     [48].    Henneford v. Silas Mason Co., 300 U.S. 577, 586 (1937) (a use tax is not equivalent to a tariff and does not violate the Commerce Clause).

     [49].    322 U.S. 335 (1944).

     [50].    322 U.S. 327 (1944).