Solely purchasing goods or services in person quickly became a thing of past almost 150 years ago thanks to the Montgomery Ward mail order catalog, which debuted in 1872. The Sears, Roebuck & Co. catalog followed in 1894, quickly becoming the premiere book from which the general public could purchase myriad products (I even remember buying “back to school” items from the Sears catalog when my family was stationed overseas). But did you know that these, as well as the Bloomingdale’s catalog that was created in 1896, paved the way for taxation of today’s online retailers? In her article Kelly Phillips walks us down a mail order catalog memory lane of sorts.
Mail Order Catalogs Paved the Way for Taxing Online Retailers
In the past and even still today, retailers that operated through mail-order systems such as catalogs or telephone ordering have not been required to collect and remit sales tax since merchandise was ordered through the mail and not at a brick and mortar store. If the mail order company did/does not have nexus in the state of the purchaser, collection of sales tax is not required. (By the way, it’s not a loop-hole, it’s the company’s Constitutional right.) However, in 1986, Bloomingdale’s By Mail catalog caught the attention of the Department of Revenue in Pennsylvania that wondered why the luxury retailer did not charge sales tax.
It’s no big surprise Bloomingdale’s argued that since items sold were from a catalog and not bought in-store in Pennsylvania, they did not need to collect taxes on products sold in By Mail. However, once the Dept. of Revenue realized that items ordered from By Mail could be returned to Bloomingdale’s stores in the state, the case went to court.
As the article discusses, Revenue argued in Bloomingdale’s By Mail v. Commissioner that By Mail was directly doing business in Pennsylvania for two reasons: The store advertised in the state and that the items for sale in By Mail were largely the same as those sold in its brick-and-mortar locations. Who won the case? Bloomingdale’s! Why? The court ruled that the retailer didn’t have a tax nexus in the state.
There have been several court cases, both at the state level and at the U.S. Supreme Court, that have focused on mail order catalogs. The most famous, arguably at the Federal level is Quill Corp v. North Dakota (1992). But its predecessor National Bellas Hess v Dept of Revenue in 1967 (also a Supreme Court case) largely framed the Court’s decision in Quill. So why do we still care? Because the internet is just like a big virtual catalog, and perhaps surprisingly, we’re talking about the same issues that we were over 50 years ago. Does the seller (catalog retailer, internet retailer) have nexus?
We’ve discussed tax nexus several times in previous blog posts. It basically means that states are required to establish a physical connection between taxpayers and the state before they can impose taxes. Of course, nexus is pretty easy to figure out for brick-and-mortar stores; they’re either in a state or their not. However, mail order catalogs (and, of course, the Internet) made nexus a bit harder to determine. Other things factored in as well, such as whether or not a retailer had a warehouse, call center or factory in the state.
Today, with billions of dollars of sales taking place on the Internet (that big mail order catalog in the cloud), online retailers like EBay and Amazon, as well as much smaller online retailers, are challenging states on nexus. Until there is some federal reform (such as the proposed Marketplace Fairness Act), the basic concept of nexus still applies, and companies are required to charge sales tax on items sold only into states where they have nexus.
While online retailers rein the shopping industry for consumers seeking the latest products at low prices, they truly do owe the way they tax their customers to their forerunners, mail order catalogs.
Photo Credit:Death to the Stock Photo
