Bellas Hess v. Illinois
The case of Bellas Hess v. Illinois is one of the key decisions that framed the Internet sales tax debut. Ironically, the Supreme Court decision did not involve an Internet company and occurred in 1967.
The facts are pretty straightforward in the Bellas Hess v. Illinois case. National Bellas Hess was a catalog company. It was incorporated in Delaware, but had its principle place of business in Kansas City, Missouri. All parties stipulated and the Supreme Court noted that Hess had no business locations in Illinois.
Like many mail order companies, Hess mailed out catalogs to a mailing list twice a year and then also mailed special advertisers every so often. The recipients on the mailing list came from all parts of the country including Illinois. If a recipient found something they liked, they would send in an order to the company through the mail. The company would then process the order and mail them the product in question. No orders or customer service were handled within the borders of Illinois.
Under Illinois law, any person or company soliciting business in the state in any manner was considered a retailer. Illinois sought out the payment of sales and use tax per the laws of the state and the Supreme Court of Illinois agreed. Hess appealed to the Supreme Court and argued that such an imposition was a violation of its due process rights and constituted an unconstitutional burden on interstate commerce.
The Supreme Court agreed with Hess. The court noted that while a state could impose sales tax on companies in other jurisdictions, it could only do so if those companies had some physical representation in the state. This meant an office, employees, salespersons and so on. Since Hess clearly did not, Illinois was in the wrong. The Supreme Court issued an order reversing the Illinois Supreme Court and giving pause to other states trying the same approach.
The Bellas Hess case is notable because it established a rule that was vital to the issue of Internet taxation. If a company does not have a physical presence in a state, it cannot be forced to pay sales or use tax there. This single decision was the difference between many small internet companies staying in business or failing do to excessively burdensome administrative costs.