constitutional limits on the ability of states to tax...

November 13, 2012

Constitutional Limits on the Ability of

States to Tax Residents of Other States

Paul D. Clement

Erin E. Murphy

Bancroft PLLC

1919 M Street NW

Suite 470

Washington, DC 20036

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Authors

Paul D. Clement is a partner at Bancroft PLLC. Mr. Clement served as the 43rd Solicitor

General of the United States from June 2005 until June 2008. Prior to his confirmation as

Solicitor General, he served as Acting Solicitor General for nearly a year and as Principal

Deputy Solicitor General for over three years. He has argued more than 60 cases before the

United States Supreme Court, including NFIB v. Sebelius, McConnell v. FEC, Tennessee v.

Lane, Rumsfeld v. Padilla, Credit Suisse v. Billing, United States v. Booker, MGM v. Grokster,

and McDonald v. Chicago.

Erin E. Murphy is an associate at Bancroft PLLC. Ms. Murphy has briefed a number of

significant matters in the U.S. Supreme Court and the federal courts of appeals, including the

landmark constitutional challenges brought by 26 States to the Patient Protection and Affordable

Care Act. Before joining Bancroft, she served as a law clerk to Chief Justice John G. Roberts,

Jr., in the Supreme Court of the United States and Judge Diane S. Sykes of the U.S. Court of

Appeals for the Seventh Circuit, and as a Bristow Fellow in the Office of the Solicitor General.

http://www.bancroftpllc.com/professionals/paul-d-clement/

http://www.bancroftpllc.com/professionals/erin-e-murphy/

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Table of Contents

EXECUTIVE SUMMARY.................................................................................. ES-1

BACKGROUND........................................................................................................ 1

ANALYSIS ................................................................................................................ 3

I. CONSTITUTIONAL LIMITATIONS ON THE POWER OF STATES VIS-À-VIS

OTHER STATES ARE ESSENTIAL TO THE PRESERVATION OF STATE

SOVEREIGNTY AND THE PROTECTION OF INDIVIDUAL LIBERTY ......................... 3

II. PROPOSALS TO AUTHORIZE STATE TAXATION OF REMOTE SALES MUST

BE SQUARED WITH THE DUE PROCESS CLAUSE ................................................. 6

A. Due Process Forbids a State from Exercising Jurisdiction Over a

Party with Whom the State Lacks Sufficient Minimum Contacts ............. 6

B. A “Quill-fix” Cannot Authorize Taxation of Parties Who Lack

Sufficient Minimum Contacts with the Taxing State ................................. 8

C. Due Process Problems Are Particularly Likely with Respect to

Taxation of Online Sales ............................................................................ 9

CONCLUSION ........................................................................................................ 12

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Executive Summary

This white paper addresses constitutional limits on the ability of States to tax residents of

other States and constitutional limits on Congress’ ability to authorize such taxation. In

particular, this white paper addresses the limits on Congress’ ability to override Quill Corp. v.

North Dakota, 504 U.S. 298 (1992), by purporting to authorize States to require out-of-state

retailers with no physical presence in the State to collect and remit state sales and use taxes on

any sales into the State that they make. Quill made clear that such legislation would constitute a

valid exercise of Congress’ commerce power to allow States to impose burdens on interstate

commerce. But a law overriding Quill, just like any other law regulating interstate commerce,

also must be consistent with the Constitution’s other structural provisions and its protections of

individual rights—including the Due Process Clause. Quill gave Congress a green light to

overcome a dormant Commerce Clause problem, not a blank check to do so in a manner

inconsistent with the Constitution’s other limitations and guarantees. Thus, any “Quill-fix” must

be consistent with the Due Process Clause and other structural limits implicit and explicit in the

Constitution that limit the ability of one State to regulate or tax citizens of another State.

Just as the Constitution prevents the federal government from interfering with the integrity,

dignity, and residual sovereignty of the States, so too it limits one State from interfering with the

integrity, dignity, and residual sovereignty of another. Like the limitations on federal power, those

territorial limits on state power ultimately protect individual liberty, by reserving the bulk of the

power to those governments closest and most responsive to the people they seek to govern.

Accordingly, the Supreme Court has repeatedly recognized that the Constitution imposes both

implicit and explicit limits on the extent to which a State may assert legislative or judicial power

over nonresidents. Chief among those is the Due Process Clause requirement, reiterated in Quill

itself, that a State may assert such power only when the nonresident “purposefully avails” itself of

the benefits and protections of a State’s laws and market.

By authorizing States to tax even those remote sellers who have only isolated and

attenuated contacts with the State, a simple Quill-fix could resolve a dormant Commerce Clause

problem only to run afoul of that due process limitation. Although “small business exceptions”

may help alleviate the problem, they will not eliminate it. Myriad retailers that focus on a

particular geographic region will generate substantial sales, but that does not logically suggest that

they can be constitutionally forced to pay taxes in a remote jurisdiction in which they make only

isolated and sporadic sales. Because the Due Process Clause prohibits States from asserting power

over nonresidents based on such attenuated contacts, a simple Quill-fix, with or without a small

business exception, would remain constitutionally problematic in many of its applications.

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Background

“The Commerce Clause and the Due Process Clause impose distinct but parallel

limitations on a State’s power to tax out-of-state activities.” MeadWestvaco Corp. v. Illinois

Dep’t of Revenue, 128 S. Ct. 1498, 1505 (2008). In National Bellas Hess, Inc. v. Dep’t of

Revenue of Illinois, 386 U.S. 753 (1967), the Supreme Court addressed a state tax implicating

both constitutional provisions. Illinois required an out-of-state retailer with no physical presence

in Illinois to collect and remit a use tax on a mail-order sale made to an in-state customer. The

Supreme Court held that this remote tax violated both the Due Process Clause and the

Commerce Clause. Id. at 758–60.

Twenty-five years later, the Supreme Court revisited the constitutionality of remote

taxation in light of intervening developments in its Due Process Clause and Commerce Clause

jurisprudence. In Quill Corp. v. North Dakota, 504 U.S. 298 (1992), the Court overruled Bellas

Hess with respect to its due process holding, concluding that an out-of-state retailer with no

physical presence in a remote State may still be subject to taxation by that State if it purposefully

avails itself of the benefits and privileges that the taxing State provides. Importantly, although

the Supreme Court partially overruled Bellas Hess based on intervening due process decisions,

none of those intervening decisions purported to eliminate due process limits on a State’s ability

to tax non-residents. To the contrary, those decisions clarified that the Due Process Clause was

not offended by taxation on a nonresident who purposefully availed itself of the benefits of the

taxing State. Applying that standard, the Court concluded that the large catalog retailer in that

case had done so because it was “engaged in continuous and widespread solicitation of business

within” North Dakota. Id. at 308.

At the same time, the Quill Court reaffirmed Bellas Hess’ “physical presence” rule under

the Commerce Clause, concluding that the remote tax unduly burdened interstate commerce and

thus violated the Court’s dormant Commerce Clause jurisprudence because Quill lacked an in-

state physical presence. Id. at 317–18. The Court explained that if every State could impose a

use tax like North Dakota’s, retailers would be forced to comply with “‘a virtual welter of

complicated obligations’” regarding different tax rules, rates, exemptions, and administrative

requirements that “might be imposed by the Nation’s 6,000-plus taxing jurisdictions.” Id. at 313

n.6 (quoting Bellas Hess, 386 U.S. at 760).

The Court noted that because the application of North Dakota’s tax to Quill violated the

Commerce Clause but not the Due Process Clause, Congress was free to exercise its plenary

authority over interstate commerce “to decide whether, when, and to what extent the States may

burden interstate mail-order concerns with a duty to collect use taxes.” Id. at 318; see also id.

at 320 (Scalia J., concurring in part) (“Congress has the final say over regulation of interstate

commerce, and it can change the rule . . . by simply saying so.”). Quill thus made clear that

federal legislation overriding Quill’s Commerce Clause holding as to similarly situated out-of-

state retailers would be a permissible exercise of Congress’ commerce power. But that is the

beginning, not the end, of the constitutional analysis. A federal law regulating commerce is

unconstitutional if it violates an individual’s rights, see, e.g., United States v. Stevens, 130 S. Ct.



1577 (2010), or if it impermissibly undermines the Constitution’s core structural principles, see,

e.g., New York v. United States, 505 U.S. 144 (1992). “Quill-override legislation” thus must

comport with all the Constitution’s limitations and guarantees, including the due process

standard that the Court adopted in Quill.



Analysis

I. CONSTITUTIONAL LIMITATIONS ON THE POWER OF STATES VIS-À-VIS

OTHER STATES ARE ESSENTIAL TO THE PRESERVATION OF STATE

SOVEREIGNTY AND THE PROTECTION OF INDIVIDUAL LIBERTY.

It is a bedrock principle of our constitutional structure that “[t]he allocation of powers in

our federal system preserves the integrity, dignity, and residual sovereignty of the States.” Bond

v. United States, 131 S. Ct. 2355, 2364 (2011). Although that allocation is perhaps most

frequently articulated in terms of “the prerogatives and responsibilities of the States and the

National Government vis-à-vis one another,” id., the structural protections inherent in our

Constitution serve the equally important function of ensuring that “each State has a sovereignty

that is not subject to unlawful intrusion by other States.” J. McIntyre Mach., Ltd. v. Nicastro,

131 S. Ct. 2780, 2789 (2011) (plurality opinion). Because “the Framers . . . intended that the

States retain many essential attributes of sovereignty,” the “sovereignty of each State, in turn,

implie[s] a limitation on the sovereignty of all of its sister States—a limitation express or

implicit in both the original scheme of the Constitution and the Fourteenth Amendment.”

World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 293 (1980); see also Donald H.

Regan, Siamese Essays: (I) CTS Corp v. Dynamics Corp. of America and Dormant Commerce

Clause Doctrine; (II) Extraterritorial State Legislation, 85 Mich. L. Rev. 1865, 1885 (Aug.

1987) (describing that limit on state power as among “those foundational principles of our

federalism which we infer from the structure of the Constitution as a whole”). Thus, when a

State acts outside the “territorial limitations on [its] power,” World-Wide Volkswagen, 444 U.S.

at 294 (internal quotation marks omitted), it “upset[s] the federal balance” by intruding upon the

sovereignty of other States. J. McIntyre, 131 S. Ct. at 2789.

Like all structural protections inherent in our Constitution, that protection of state

sovereignty serves the more fundamental purpose of “‘secur[ing] to citizens the liberties that

derive from the diffusion of sovereign power.’” New York, 505 U.S. at 181 (quoting Coleman v.

Thompson, 501 U.S. 722, 759 (1991) (Blackmun, J., dissenting)). Our system of limited and

enumerated federal powers, in which most powers are reserved to governments closer and more

responsive to the people, reflects the Framers’ understanding that liberty is best protected when

individuals are not forced to “rely solely upon the political processes that control a remote

central power” when seeking to influence the manner in which their lives will be governed.

Bond, 131 S. Ct. at 2364. The same principle applies, a fortiori, to the relationship between

individuals and the many States in which they neither reside nor have any meaningful ability to

influence the democratic process.

Indeed, one of the central purposes of the Privileges and Immunities Clause is to guard

against the possibility that States might exploit nonresidents’ lack of meaningful representation

in other States’ political processes to pass laws that specifically disadvantage them. See Travis

v. Yale & Towne Mfg. Co., 252 U.S. 60, 80 (1920) (the Privileges and Immunities Clause

“‘place[s] the citizens of each state upon the same footing with citizens of other states’” by

“‘reliev[ing] them from the disabilities of alienage in other states’” and “‘inhibit[ing]



discriminating legislation against them by other states’” (quoting Paul v. Virginia, 75 U.S. 168,

180 (1868))). That lack of representation has also led the Court to view with suspicion laws that

disadvantage new residents of a State by imposing waiting periods before they are entitled to the

same rights and privileges of the existing residents who put the discriminatory laws into place.

See, e.g., Dunn v. Blumstein, 405 U.S. 330 (1972) (holding year-and-three-month residency

requirement for voter registration unconstitutional). By guarding against the exercise of one

State’s power to disadvantage current or former residents of another, the Privileges and

Immunities Clause “implicates not only the individual’s right to nondiscriminatory treatment but

also, perhaps more so, the structural balance essential to the concept of federalism.” Austin v.

New Hampshire, 420 U.S. 656, 662 (1975) (footnote omitted).

The same sovereignty- and liberty-protecting concerns are evident in several strands of

Supreme Court jurisprudence articulating constitutional limits on the power of States vis-à-vis

other States and the residents of other States. For instance, the Court has frequently held that “a

state court may exercise personal jurisdiction over a nonresident defendant only so long as there

exist ‘minimum contacts’ between the defendant and the forum.” World-Wide Volkswagen, 444

U.S. at 291 (quoting Int’l Shoe Co. v. Washington, 326 U.S. 310, 316 (1945)). While that

restriction on state judicial power serves the practical purpose of “protect[ing] the defendant

against the burdens of litigating in a distant or inconvenient forum,” the Court has also

emphasized that, at a more fundamental level, it “acts to ensure that the States through their

courts, do not reach out beyond the limits imposed on them by their status as coequal sovereigns

in a federal system.” Id. at 291–92; see also Hanson v. Denckla, 357 U.S. 235, 251 (1958),

(“Those restrictions are more than a guarantee of immunity from inconvenient or distant

litigation. They are a consequence of the territorial limitations on the power of the respective

States.”).

Thus, even when neither convenience nor the strength of the State’s interest in the

underlying matter warrants against allowing a State to exercise jurisdiction in a given case, “the

Due Process Clause, acting as an instrument of interstate federalism, may sometimes act to

divest the State of its power to render a valid judgment.” World-Wide Volkswagen, 444 U.S. at

294; see also J. McIntyre, 131 S. Ct. at 2789 (rejecting any personal jurisdiction “rule based on

general notions of fairness and foreseeability” as “inconsistent with the premises of lawful

judicial power”). While a nonresident can still choose to subject himself to the power of a State

by “invoking the benefits and protections of its laws,” absent such “purposeful[] avail[ment] . . .

of the privilege[s]” the State affords its own residents, Hanson, 357 U.S. at 253, exercise of state

legislative or judicial power over nonresidents impermissibly interferes with the “individual

liberty interest” that “[t]he personal jurisdiction requirement recognizes and protects.” Ins.

Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982).

The same federalism concerns are reflected in decisions articulating and applying the

principle that “‘[n]o State can legislate except with reference to its own jurisdiction.’” BMW of

N. Am., Inc. v. Gore, 517 U.S. 559, 571 (1996) (quoting Bonaparte v. Appeal Tax Ct. of

Baltimore, 104 U.S. 592, 594 (1881)). A State’s legislative power over nonresidents is cabined

for the same reasons that its judicial power is—“[i]n either case, ‘any attempt directly to assert

extraterritorial jurisdiction over persons or property would offend sister States and exceed the



inherent limits of the State’s power.’” Edgar v. MITE Corp., 457 U.S. 624, 643 (1982)

(plurality opinion) (quoting Shaffer v. Heitner, 433 U.S. 186, 197 (1977)).

That principle has particular force in the context of imposition of state taxes on

nonresidents, which not only directly interferes with the tax power of other States, but also

imposes a burden that should be tied uniquely to the benefits a State provides. While the

Founding-era refrain of “no taxation without representation” is not enshrined in haec verba in

the Constitution, that basic principle is reflected in the structure of our founding document and

in numerous Supreme Court decisions. See, e.g., Austin, 420 U.S. at 662 (“Since nonresidents

are not represented in the taxing State’s legislative halls, . . . judicial acquiescence in taxation

schemes that burden them particularly would remit them to such redress as they could secure

through their own State; but ‘to prevent (retaliation) was one of the chief ends sought to be

accomplished by the adoption of the Constitution.’” (quoting Travis, 252 U.S. at 82)).

Because the tax power “is exercised upon the assumption of an equivalent rendered to

the taxpayer in the protection of his person and property,” Union Refrigerator Transit Co. v.

Kentucky, 199 U.S. 194, 202 (1905), the constitutionality of a tax on nonresidents turns on a

“‘broad inquiry’” into “‘whether the taxing power exerted by the state bears fiscal relation to

protection, opportunities and benefits given by the state’—that is, ‘whether the state has given

anything for which it can ask return.’” MeadWestvaco, 553 U.S. at 24–25 (quoting ASARCO

Inc. v. Idaho Tax Comm’n, 458 U.S. 307, 315 (1982)). When, as is often the case with a

nonresident, the State is “in no position . . . to benefit the person or property taxed,” taxation

“partakes rather of the nature of an extortion than a tax,” and cannot be imposed without running

afoul of the Constitution’s protection against the taking of property without due process of law.

Union Refrigerator, 199 U.S. at 202.

To be sure, limitations on the States’ tax power emanate from both the Due Process

Clause and the Commerce Clause, see MeadWestvaco, 553 U.S. at 19, and are in part a

reflection of the Constitution’s “special concern” “with the maintenance of a national economic

union unfettered by state-imposed limitations on interstate commerce.” Healy v. Beer Institute,

Inc., 491 U.S. 324, 335–36 (1989). But even in the dormant Commerce Clause context, the

Court has made clear that such limitations also reflect the Constitution’s equally fundamental

concern “with the autonomy of the individual States within their respective spheres.” Id. at 336.

Indeed, that concern has given rise to the independent dormant Commerce Clause restriction that

a State may not “directly control[] commerce occurring wholly outside [its] boundaries.” Id.;

see also Edgar, 457 U.S. at 643; Brown-Forman Distillers Corp. v. New York State Liquor

Auth., 476 U.S. 573, 582 (1986). Even apart from whatever effect it may have on interstate

commerce, such a statute is unconstitutional because it “exceeds the inherent limits of the

enacting State’s authority.” Healy, 491 U.S. at 336. And unlike the potential burden on

interstate commerce, it is not clear that such an independent constitutional defect can be cured

by federal legislation—while Congress may sanction state interference with its own power to

regulate interstate commerce, it has no comparable authority to sanction interference by one

State with the sovereignty of another, or with the individual liberty that the delineation of state

power vis-à-vis other States protects. Cf. Quill, 504 U.S. at 305 (Congress “may authorize state



actions that burden interstate commerce,” but it “does not similarly have the power to authorize

violations of the Due Process Clause”).

In short, “one State’s power to impose burdens on” nonresidents “is not only subordinate

to the federal power over interstate commerce, . . . but is also constrained by the need to respect

the interests of other States.” Gore, 514 U.S. at 571. Just like an attempt by the federal

government to expand its powers at the expense of the States, an attempt by one State to expand

its powers at the expense of another is a threat to our constitutional system of governance and

the individual liberty that robust protection of state sovereignty secures. Accordingly, any effort

by Congress to enlarge the powers that States may exercise over nonresidents must comply with

the structural limitations on state power that are inherent in our Constitution and manifested in

the Due Process Clause.

II. PROPOSALS TO AUTHORIZE STATE TAXATION OF REMOTE SALES MUST

BE SQUARED WITH THE DUE PROCESS CLAUSE.

The Due Process Clause “demands that there exist some definite link, some minimum

connection, between a state and the person, property or transaction it seeks to tax, as well as a

rational relationship between the tax and the values connected with the taxing State.”

MeadWestvaco, 128 S. Ct. at 1505 (internal quotation marks omitted). A use tax is inherently

related to a sale made to an in-state customer, see Quill, 504 U.S. at 308, and thus the key due

process requirement in this area is that an out-of-state retailer have sufficient minimum contacts

with the taxing State. Although Congress “may authorize state actions that burden interstate

commerce,” it “does not similarly have the power to authorize violations of the Due Process

Clause.” Quill, 504 U.S. at 305. Accordingly, any proposed legislation that would empower a

remote State to tax out-of-state retailers that lack sufficient minimum contacts to that State

would be unconstitutional.

A. Due Process Forbids a State from Exercising Jurisdiction Over a

Party with Whom the State Lacks Sufficient Minimum Contacts.

Before Quill, the Supreme Court interpreted both the Due Process Clause and the

dormant Commerce Clause to prohibit state taxation of a sale made to an in-state customer by an

out-of-state mail-order retailer with no physical presence in the taxing State. See Bellas Hess,

386 U.S. at 758. While the Court in Quill retained that bright-line rule for purposes of the

dormant Commerce Clause, it abandoned the physical-presence requirement for purposes of the

Due Process Clause. But rather than simply lifting due process constraints on such taxation, the

Court instead concluded that a State’s ability to tax nonresidents would be governed by the due

process framework set forth in International Shoe for analyzing personal jurisdiction. Quill, 504

U.S. at 307. Under that framework, whether a State may exercise personal jurisdiction depends

on a “flexible inquiry into whether a defendant’s contacts with the forum” are sufficiently strong

that a State’s exercise of jurisdiction comports with “traditional notions of fair play and

substantial justice.” Id. (quoting Int’l Shoe, 326 U.S. at 316); see also id. (State’s exercise of

jurisdiction must be “reasonable, in the context of our federal system of Government”). The

Court has frequently drawn parallels between that personal jurisdiction standard and the



standard for evaluating an exercise of state legislative power. See, e.g., J. McIntyre, 131 S. Ct.

at 2786–87 (same principles that limit “the power of a sovereign to resolve disputes through

judicial process” limit “the power of a sovereign to prescribe rules of conduct for those within

its sphere”); Edgar, 457 U.S. at 643 (“The limits on a State’s power to enact substantive

legislation are similar to the limits on the jurisdiction of state courts.”).

As Justice Kennedy recently reiterated in an opinion for a plurality of the Court, while

the International Shoe inquiry is flexible, “[f]reeform notions of fundamental fairness divorced

from traditional practice cannot transform a judgment rendered in the absence of authority into

law.” J. McIntyre, 131 S. Ct. at 2787. Accordingly, “the principal inquiry” must always remain

“whether the defendant’s activities manifest an intention to submit to the power of a sovereign.”

Id. at 2788. And the answer to that question depends, in turn, on the presence of “some act by

which the defendant ‘purposefully avails itself of the privilege of conducting activities within

the forum State, thus invoking the benefits and protections of its laws.’” Id. at 2787 (quoting

Hanson, 357 U.S. at 253). “[R]andom, isolated, or fortuitous” contacts will not suffice. Keeton

v. Hustler Magazine, Inc., 465 U.S. 770, 774 (1984). Moreover, it is not the raw quantity of

contacts that matters, but their quality. A single act may give rise to jurisdiction if it creates a

“substantial connection” with the forum. See McGee v. Int’l Life Ins. Co., 355 U.S. 220, 222–23

(1957) (ongoing life insurance contract). But repeated acts will not give rise to jurisdiction if the

“nature and quality and the circumstances of their commission create only an attenuated

affiliation with the forum.” Burger King Corp. v. Rudzewicz, 471 U.S. 462, 475 n.18 (1985)

(internal quotation marks omitted).

While the minimum contacts inquiry is by its nature highly fact-specific, “rather fuzzy,”

and “fairly unpredictable,” 1 Lawrence Tribe, AMERICAN CONSTITUTIONAL LAW 1282–83 (3d

ed. 2000), it is clear that the mere formation of a contract with the resident of another State is an

insufficient basis for that State to assert jurisdiction. Burger King Corp., 471 U.S. at 478.

Jurisdiction is proper only as to “parties who reach out beyond one state and create continuing

relationships and obligations with citizens of another state.” Id. at 473 (emphasis added)

(internal quotation marks omitted). Thus, “prior negotiations and contemplated future

consequences, along with the terms of the contract and the parties’ actual course of dealing . . .

must be evaluated in determining whether the [party] purposefully established minimum

contacts within the forum.” Id. at 479. Taking those factors into account, the Court has

“strongly suggested that a single sale of a product in a State does not constitute an adequate

basis for asserting jurisdiction over an out-of-state defendant, even if that defendant places his

goods in the stream of commerce, fully aware (and hoping) that such a sale will take place.” J.

McIntyre, 131 S. Ct. at 2792 (Breyer, J., concurring).

Quill itself makes clear that an out-of-state retailer’s mere delivery of an item to another

State does not give rise to sufficient minimum contacts for due process purposes. If delivery

were sufficient, Quill’s status as a mail-order retailer would have been dispositive. The Court’s

opinion, however, did not leave it at that. Instead, the Court found sufficient contacts based on

Quill’s “continuous and widespread solicitation of business” within North Dakota and its

extensive sales in that State. See 504 U.S. at 308. As the Court explained, “the magnitude of

those contacts [was] more than sufficient” to satisfy the due process inquiry, as Quill completed



“almost $1 million” in annual sales “to about 3,000 customers” in the State, making Quill the

sixth largest vendor of office supplies in North Dakota. Id. at 302, 308.

B. A “Quill-fix” Cannot Authorize Taxation of Parties Who Lack

Sufficient Minimum Contacts with the Taxing State.

Few businesses will have contacts with remote States that are as direct and extensive as

Quill’s contacts with North Dakota. For many smaller or more locally focused businesses,

contacts with distant States will be isolated or attenuated, meaning taxation by those States

would violate due process. Indeed, courts have recognized just that problem when considering

recent constitutional challenges to the Prevent All Cigarette Trafficking Act of 2009, Pub. L.

No. 111-154, 124 Stat. 1087 (2010), which requires cigarette and tobacco retailers to collect

state use and sales taxes for all Internet, mail, and telephone orders. As courts have concluded in

granting preliminary injunctions against its enforcement, the act creates serious due process

problems by “requir[ing] remote sellers who are not physically present in a taxing jurisdiction to

collect state and local excise taxes on cigarette and smokeless tobacco regardless of whether

their existing contacts with that taxing jurisdiction rise to the level of minimum contacts.” Red

Earth LLC v. United States, 728 F. Supp. 2d 238, 248 (W.D.N.Y. 2010), aff’d 657 F.3d 138

(2011); see also Gordon v. Holder, 826 F. Supp. 2d 279, 293 (D.D.C. 2011) (“It would appear

that the PACT Act seeks to legislate the due process requirement out of the equation.”), on

remand from 632 F.3d 722 (D.C. Cir. 2011) (“[t]he government’s suggestion that there can be

no Due Process violation when Congress authorizes state levies based on minimum contacts

collapses the Due Process and Commerce Clause” inquiries).

It is not sufficient to address this due process problem by carving out a “small business

exception” to a State’s authority to demand that remote sellers collect and remit use taxes. As

noted, it is the quality, not just the quantity, of contacts with the taxing State that ultimately

controls. And a fortiori, it is the quality of the contacts with the forum State, not the quantity of

the business’ total sales or even total interstate sales that matter. Quill’s extensive contacts with

North Dakota would justify North Dakota’s ability to tax the retailer, but not South Dakota’s, let

alone Florida’s. Just being a relatively large business or even having a relatively large volume

of sales does not justify the imposition of taxes by a remote jurisdiction as to which the taxpayer

has no significant contacts.

The Due Process Clause demands a jurisdiction-by-jurisdiction analysis. A business

might make enough remote sales nationwide to cross the “small business” threshold, while only

“purposefully availing” itself of the benefits of the markets of a few States. This will be

particularly common for businesses that target a market in a region of the country or in a

metropolitan area, such as New York City or Philadelphia, that spans multiple state lines. For

example, if a Missouri business directed its business activities at the Kansas City metropolitan

area, thereby making enough Kansas sales to justify taxation by Kansas, it would not thereby

become subject to taxation by every State in the nation. If that business made only a single

over-the-counter sale to a Rhode Island resident who wanted the article shipped to his home,

Rhode Island could not constitutionally tax the sale.



The Constitution does not demand minimum contacts with other States in gross. Rather,

the Due Process Clause “requires a forum-by-forum, or sovereign-by-sovereign, analysis,” J.

McIntyre, 131 S. Ct. at 2789, meaning the seller must have sufficient minimum contacts with

each taxing State. See World-Wide Volkswagen, 444 U.S. at 293 (courts cannot “accep[t] the

proposition that state lines are irrelevant for jurisdictional purposes” while “remain[ing] faithful

to the principles of interstate federalism embodied in the Constitution”). Certainly, the retailer’s

purposeful availment of customers in Kansas does nothing to establish minimum contacts with

Rhode Island in that scenario. And the retailer’s isolated contact with Rhode Island clearly

would not constitute “purposeful availment” of the “benefits of [that State’s] economic market”

or the “protection of its laws.” Quill, 504 U.S. at 307; Hanson, 357 U.S. at 253. Rather, such

contact is the very definition of incidental and fleeting; the sale involves the remote State “only

because that is where the purchaser happened to reside.” Boschetto v. Hansing, 539 F.3d 1011,

1019 (9th Cir. 2008). That kind of tenuous contact is plainly insufficient to satisfy the

irreducible minimum of due process. Id. at 1017, 1019; Keeton, 465 U.S. at 774 (“random,

isolated, or fortuitous” contacts are insufficient); see also, e.g., Charia v. Cigarette Racing

Team, Inc., 583 F.2d 184 (5th Cir. 1978) (insufficient contacts for Louisiana to assert

jurisdiction over a Florida seller that sold a boat to a Louisiana purchaser and shipped the boat

F.O.B. to Louisiana).

C. Due Process Problems Are Particularly Likely with Respect to

Taxation of Online Sales.

The due process problems with a Quill-fix are particularly prominent when it comes to

online sales. In order to make a sale to another State, a mail-order retailer such as Quill typically

must first solicit business in that State by purposefully sending catalogs to potential customers

there. E-commerce, by contrast, does not inherently involve such purposeful availment. A

“website is not directed at customers in [a State], but instead is available to all customers

throughout the country who have access to the Internet.” Trintec Indus., Inc. v. Pedre

Promotional Prods., Inc., 395 F.3d 1275, 1281 (Fed. Cir. 2005). Thus when a seller offers an

item for sale on a website, customers from all 50 States may purchase that item—whether or not

the retailer takes conscious steps to target consumers from all 50 States.

The lack of contact between the remote seller and the taxing State is starkest when an

item is placed for sale on a third-party marketplace or auction website, such as the eBay.com

marketplace platform. It is estimated that, even back in 2004, there were more than 5 million

small-volume sellers online—“retailers and individual sellers [that] are too small to measure

activities at a unique web site” and that instead sell via eBay.com and other platforms. Joe

Bailey et al., The Long Tail Is Longer Than You Think: The Surprisingly Large Extent of Online

Sales by Small Volume Sellers, Robert H. Smith School of Business Working Paper at 5, 7 (May

12, 2008). In 2004, these small-volume sellers collectively accounted for sales of more than $65

billion. Efforts by remote jurisdictions to tax such small-volume sellers would raise serious due

process problems.

Consistent judicial precedents have established that merely placing an item for sale on

eBay.com does not constitute “purposeful availment” of the benefits and protections of the

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1132723






purchasing State’s laws. Numerous courts have addressed personal jurisdiction in suits arising

from eBay.com sales and have repeatedly held that such isolated or sporadic sales on eBay.com

are insufficient. See, e.g., Boschetto, 539 F.3d at 1019 & n.6 (collecting cases holding that “use

of eBay as the conduit” for a “one-time transaction” does not give rise to jurisdiction); Metcalf v.

Lawson, 802 A.2d 1221, 1227 (N.H. 2002) (isolated eBay sales insufficient); Winfield

Collection, Ltd. v. McCauley, 105 F. Supp. 2d 746 (E.D. Mich. 2000) (same).1 Quite simply,

courts uniformly have concluded that it is unconstitutional to force an out-of-state seller to

collect and remit a tax based on an isolated online sale.

Even when a seller operates its own website, remote taxation could still prove

unconstitutional. A medium-sized brick-and-click business—i.e., a business with a brick-and-

mortar location that also operates an e-commerce website—could use its website to target a

cross-border market in a particular region, thereby allowing constitutional taxation by a handful

of States while making only “isolated” and “fortuitous” sales to customers in distant States.

Courts thus would likely consider it inconsistent with due process for one of those distant States

to tax those sales.

To be sure, a business must act purposefully to maintain an e-commerce website. And

some courts have held that the mere maintenance of an “interactive” website constitutes

“purposeful availment” in all 50 States. See Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F.

Supp. 1119 (W.D. Pa. 1997). But whether a website is “interactive” is “not necessarily

reflective of the intent and desires of the content provider”; rather, it is a “mere technical

question of programming.” Holger P. Hestermeyer, Personal Jurisdiction for Internet Torts:

Towards an International Solution?, 26 NW. J. INT’L L. & BUS. 267, 278 (2006).

When Zippo was decided in 1997, online retailers needed to hand code their own e-

commerce capability—with each website custom writing the software to manage a shopping

cart, process credit cards, track orders, track shipping, and the like. This process took

considerable technical expertise and effort, and thus as late as 1999, the approximate average

cost to build an e-commerce website was $1,000,000. See David Leggard, Average Cost to

Build E-Commerce Site: $1 Million, THE INDUSTRY STANDARD, May 31, 1999, at 1. Thus in

1997, it was perhaps fair to assume that a business with an interactive website consciously

sought to take advantage of the market nationwide. But technological innovations have made

this assumption obsolete. Rather than hand-coding e-commerce functionality, a business can

now add a third-party “snap-in” e-commerce platform to a website for a small fraction of its

1999 cost. See, e.g., Yahoo! Small Business (Nov. 13, 2012), http://smallbusiness.yahoo.com

(selling basic e-commerce capability for $29.96 per month). As a result, if an established local

brick-and-mortar business adopts an online presence, intending to allow its local customers to

make purchases online, that business will incidentally gain the ability to sell nationwide.

1 Courts have found jurisdiction proper only when the party makes eBay sales regularly or continually.

See, e.g., Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063 (10th Cir. 2008) (thousands of

eBay sales); Dedvukaj v. Maloney, 447 F.Supp.2d 813, 822–23 (E.D. Mich. 2006) (“regular and

systemic” eBay sales); Crummey v. Morgan, 965 So.2d 497, 500 (La. App. 2007) (repeated eBay sales to

the particular jurisdiction).



As the Third Circuit thus has recognized, “mere operation of a commercially interactive

web site” does not show “that the [operator] ‘purposefully availed’ itself of conducting activity

in the forum state.” Toys “R” Us, Inc. v. Step Two, S.A., 318 F.3d 446, 454 (3d Cir. 2003).2

Rather, the critical question is whether the business “directly target[ed] its web site to the state,

knowingly interacting with the residents of the forum state via its web site, or through sufficient

other related contacts.” Id.; see also ALS Scan Inc. v. Digital Serv. Consultants, Inc., 293 F.3d

707, 714 (4th Cir. 2002) (a website must “manifest[]” the seller’s “intent of engaging in business

or other interactions within the [forum] State”). A brick-and-click business that services a local

market will not “directly target” the market in a distant State. If such a distant State sought to

tax an isolated or fortuitous purchase from that retailer, therefore, a court would likely find a due

process violation.

2 Because Zippo was issued by a district court within the Third Circuit, Zippo appears to have been

overtaken not only by subsequent technological developments, but also by subsequent legal

developments.



Conclusion

As the Supreme Court reiterated in Quill, although Congress “may authorize state actions

that burden interstate commerce,” it “does not similarly have the power to authorize violations

of the Due Process Clause.” Quill, 504 U.S. at 305. Accordingly, a simple Quill-fix can address

the dormant Commerce Clause problem, but it cannot eliminate the serious due process and

structural difficulties with remote States purporting to force out-of-state sellers to collect and

remit taxes. Simply put, Congress cannot authorize due process violations, and any Quill-fix

that purported to authorize States to collect taxes from nonresidents without significant contacts

with the taxing forum would almost certainly run into difficulty in the courts. Resulting efforts

by States to tax remote sellers who lack sufficient minimum contacts with the taxing State would

violate the Due Process Clause and infringe upon the state sovereignty and individual liberty

interests that it preserves.

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