National Bellas Hess v. Illinois (1967)

How This Case Relates to Affiliate Nexus Tax
Imposing this tax can place an undue burden on an out-of-state retailer. To justify the burden associated with the tax collection, the retailer must either 1) receive some direct benefit as a result of those taxes or 2) receive a benefit from a physical link to the state that the retailer otherwise would not have.

This case demonstrates why out-of-state retailers such as do not want to take on the administration of this tax collection and why Amazon is not constitutionally obligated to collect N.C. sales tax. 1) does not benefit directly from government services provided by the tax. 2) There is no evidence to support that made more sales to N.C. residents as a result of the physical location of N.C. web publishers who posted links to Amazon.

National Bellas Hess [hereafter Retailer] was a mail order company based in Kansas that sent catalogues and flyers to residents of Illinois. The State of Illinois claimed this meant Retailer maintained “a place of business in this State” and imposed tax collection. The Illinois Supreme Court backed the State’s claim that Retailer must collect sales tax. Retailer appealed to the U.S. Supreme Court, which reversed the Illinois Supreme Court decision and relieved Retailer from collecting the tax.

Retailer’s Argument
Retailer asserted the tax collection procedures imposed by the State of Illinois:
1) Were unconstitutional by placing undue burdens on interstate commerce.
2) Violated the Due Process Clause of 14th Amendment.

Burdens Imposed By the State on Retailer
In imposing the collection of sales tax, the State of Illinois stated Retailer must:

• Give the customer a receipt in a “manner and form” dictated by the State of Illinois.
• Maintain records, receipts, invoices, accounting books, documents, memoranda, and other papers required by the State of Illinois.
• Submit to audits (investigations, hearings, and examinations) by the State of Illinois.

The penalty for not keeping the required records and issuing receipts in the required format - a fine of up to $5,000 (in 1965 dollars) and up to six months of prison.

Furthermore, “to allow service of process on an out-of-state company like National, the [Illinois State] statute designates the Illinois Secretary of State as National's appointed agent, and jurisdiction in tax collection suits attaches when process is served on him and the company is notified by registered mail. “

Constitutional and Case Law Tests
Quotes are from the Supreme Court decision authored by Justice Stewart.

Commerce Clause: “The Court has held that ‘State taxation falling on interstate commerce ... can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys.’” Cases referenced: Freeman v. Hewit; Central Greyhound Lines; Inc. v. Mealey; Northwestern States Portland Cement Co. v. State of Minnesota.

Due Process: “The Court has said that the ‘simple but controlling question is whether the state has given anything for which it can ask return.’” Cases referenced: Wisconsin v. J. C. Penney Co.; Standard Oil Co. v. Peck, Ott v. Mississippi Val. Barge Line Co.

“The same principles have been held applicable in determining the power of a State to impose the burdens of collecting use taxes upon interstate sales. Here, too, the Constitution requires ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.’” Cases referenced: Miller Bros. Co. v. State of Maryland; Scripto, Inc. v. Carson; American Oil Co. v. Neill.

“In applying these principles the Court has upheld the power of a State to impose liability upon an out-of-state seller to collect a local use tax in a variety of circumstances.” Cases referenced: Felt & Tarrant Mfg. Co. v. Gallagher; General Trading Co. v. State Tax Comm'n; Nelson v. Sears, Roebuck & Co.; Nelson v. Montgomery Ward & Co.

“In those situations the out-of-state seller was plainly accorded the protection and services of the taxing State. The case in this Court which represents the furthest constitutional reach to date of a State's power to deputize an out-of-state retailer as its collection agent for a use tax is Scripto, Inc. v. Carson. There we held that Florida could constitutionally impose upon a Georgia seller the duty of collecting a state use tax upon the sale of goods shipped to customers in Florida. In that case the seller had ‘10 wholesalers, jobbers, or 'salesmen' conducting continuous local solicitation in Florida and forwarding the resulting orders from that State to Atlanta for shipment of the ordered goods.’” [NOTE: “local solicitation.”]

Key Conclusion
Allowing Illinois to impose this tax collection process on a retailer that clearly does not receive any of the benefit from that state tax is a violation of due process. This unfairness would be compounded by opening up taxation by countless jurisdictions for which the retailer receives no governmental benefit to impose varying tax collection requirements, which violates the commerce clause.

“And if the power of Illinois to impose use tax burdens upon National were upheld, the resulting impediments upon the free conduct of its interstate business would be neither imaginary nor remote. For if Illinois can impose such burdens, so can every other State, and so, indeed, can every municipality, every school district, and every other political subdivision throughout the Nation with power to impose sales and use taxes. The many variations in rates of tax in allowable exemptions, and in administrative and record-keeping requirements could entangle National's interstate business in a virtual welter of complicated obligations to local jurisdictions with no legitimate claim to impose 'a fair share of the cost of the local government.'”