Why Are Catalog Orders Not Taxed?

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Why are retailers selling via catalogs generally exempt from the requirement to collect sales taxes? Kelly Erb at Forbes explains the history behind the tax treatment of out-of-state purchases.

August 18 was National Mail Order Catalog Day, a day to honor August 18, 1872, when Montgomery Ward issued the country’s first modern mail order catalog to the general public. What was just a one-page mailing in 1872 ballooned to 240 pages by 1884, writes Erb. Two decades later, 3 million Americans — one for every 25 people — were receiving the company’s catalog.

Other companies followed suit, including Bloomingdale’s in 1885. The store created subsidiary, Bloomingdale’s By Mail, to fulfill and ship orders from centers in Virginia and Connecticut. By Mail operated entirely without retail stores, corresponding with consumers via its mail order catalog.

But tax collectors did not miss the fact that By Mail was not collecting a sales tax. Pennsylvania’s Department of Revenue challenged the store’s practice, insisting that they were doing business in the state of Pennsylvania, even if By Mail lacked a physical store within the state. When the case went to court, the judge ruled in favor of By Mail, concluding that the company lacked enough of a connection (or nexus) with the state of Pennsylvania to be required to collect a sales tax.

This is the same question that went to the Supreme Court in 1992, when it issued its decision in Quill Corporation v. North Dakota. Could a state require an out-of-state retailer to collect a sales tax if that retailer lacked a physical presence in the state? No, said the Supreme Court: the company’s sales to state residents by catalog and phone did not create nexus with the taxing state.

This same nexus principle has been applied to online retailers who make sales across the internet to residents in other states. But because the Supreme Court in Quill suggested that Congress could allow states to require sales tax collection, lawmakers have attempted to pass legislation doing just that. NCPA Senior Fellow Pam Villarreal has written about some of the problems with the Marketplace Fairness Act, a proposal that would allow states to insist that online retailers collect sales taxes. Such a law would be burdensome for retailers, Villarreal says.

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