Marketplace Fairness Act

Aaron Poffenberger

You may have heard the Senate voted to move forward the regrettably named "Market Place Fairness" act.

Read Your Constitution

Like many I was rather incensed that Congress had taken up the issue of interstate tax collection and appears poised to pass it. Not so much because of the money but by what turns out to be a misunderstanding. I thought Congress was violating the constitution. I was wrong.

Quill v. North Dakota

In 1992 the Supreme Court ruled in Quill v. North Dakota that states could not impose a duty of collecting sales and use taxes on businesses who lacked "substantial nexus," i.e., a significant presence within their state boundaries. For the past 21 years that ruling, and several laws passed by Congress specifically blocking the taxing of internet sales, have kept the states at bay.

All that is changing. The Senate passed the Marketplace Fairness Act today, an act that would specifically authorize states to require businesses to collect sales and use taxes if their annual revenues exceeded $1 million. But does the Congress have the authority to pass such a law? Yes.

Quill and Catalog Orders

In 1992 the state of North Dakota determined that catalog retailer Quill should collect sales tax on purchases by their North-Dakota customers. Quill disagreed. The state sued.

The state lost round one in the local court. Quill argued, and the court agreed, that Quill's activities in the state didn't rise to the level of "substantial nexus". That is, Quill didn't have enough contact with the state for the Due Process Clause to kick in.

Going Back to Bella Hess

The "substantial nexus" and Due Process claim goes back to a ruling in 1967 in National Bellas Hess v. Department of Revenue. National Bellas Hess was a Missouri catalog company that sold to residents in neighboring Illinois. National Bellas Hess would send catalogs twice a year to current and former customers. In Illinois that was sufficient to qualify National as a "(r)etailer maintaining a place of business" in the state.

National argued that the imposition of tax collecting activities violated the Due Process Clause and created an unconstitutional burden on interstate commerce. The Supreme Court agreed. Imposing the duty of tax collection on an entity whose sole contact with the state was via common carrier or US Postal Service was out of bounds.

In their ruling the justices affirmed the "sharp distinction" to determine nexus the court had outlined in previous rulings.

Enter North Dakota's Supreme Court

Though the Supreme Court had affirmed the "sharp distinction" in Bellas Hess in 1967 25 years had passed. In the intervening years the Supreme Court had issued several rulings that led the Supreme Court of North Dakota to think Bellas Hess was obsolete. Indeed, the North Dakota justices stated as much.

Unfortunately for North Dakota tax officials, the justice on their Supreme Court didn't read Bellas Hess closely enough. They missed an important aspect of National's argument: the duty to collect taxes violated both the Due Process Clause and the placed an unconstitutional burden on interstate commerce.

Interstate Commerce

The US Supreme Court agreed with the North Dakota Supreme Court on several points. The justices agreed that Quill conducted enough business in North Dakota to possibly rise to the level of "substantial nexus" thus obviating any argument Quill might bring on the point of Due Process.

But, the court ruled, the North Dakota justices did not take into sufficient consideration the Constitution's complete reservation to the Federal government and Congress in particular the authority to regulate interstate commerce.

The justices on the US Supreme Court anticpated a possible objection to their ruling: Congress hadn't passed any laws governing collection of sales tax across state borders.

Negative and Positive

Like many things in life there's a positive and a negative and the Interstate Commerce Clause contains both positive and negative authority. It reads:

[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes;

That's the positive. Congress has sole authority regulate commerce between the US and other nations, between states and the indian tribes.

But, according to the Supreme Court in opinions dating back 150 years, there's a negative aspect as well. There's an implicit prohibition that prevents the states from enacting any laws of their own to regualte interstate commerce. This reading, the court concluded, is correct and necessary because the framers of the Constitution were very concerned that the states not burden one another with duties and taxes in favor of local business. In other words, Due Process.

Thus, even though Congress had not exercised their authority to regulate interstate commerce in this area, the states were not free to write their own laws. North Dakota, in writing their sales tax laws to "loop-in" out-of-state companies like Quill, had tread on Congressional territory.

That's Not All

The Supreme Court didn't stop there. In addition to ruling that the states couldn't impose a duty to collect taxes where such imposition impinges on interstate commerce, the justices were crystal clear that Congress could, at some later date, allow such impositions:

"Indeed, in recent years Congress has considered legislation that would "overrule" the Bellas Hess rule. [n.11] Its decision not to take action in this direction may, of course, have been dictated by respect for our holding in Bellas Hess that the Due Process Clause prohibits States from imposing such taxes, but today we have put that problem to rest. Accordingly, Congress is now free to decide whether, when, and to what extent the States mayburden interstate mail order concerns with a duty to collect use taxes."


Based on the ruling in Quill v. North Dakota it's indubitable that Congress can pass legislation allowing states to impose a burden of collecting sales and use taxes on business's doing business in their states even if that business is limited to mail, phone orders or the internet. (Assuming, of course, the state can demonstrate Due Process wouldn't be violated.)

So yes, Congress have the authority. That doesn't mean I have to agree with or support how they've chosen to exercise it. The Marketplace Fairness Act is bad legislation and will have unintended consequences. It hasn't passed yet, but the Senate have moved it forward to floor debate. But it's likely some version will pass. Let's hope the House refuses to pass similar legislation.