Nelson v. Montgomery Ward & Co.

Background

A large Illinois retailer that operates stores and mail-order houses across the United States is defending a challenge to Iowa’s use tax. The company is authorized to do business in Iowa, runs 29 retail stores and order offices there, and collects Iowa tax on sales made in its stores and through its local order offices. It refused, however, to collect the Iowa use tax on orders that Iowa customers mailed directly to the company’s out-of-state mail-order houses and which were shipped into Iowa. The Iowa Supreme Court held that applying the Use Tax to those mail orders was unconstitutional.

Reasoning

The central question was whether an out-of-state retailer can be required to collect Iowa’s use tax on mail orders when the store solicits sales in Iowa. The United States Supreme Court said yes. It emphasized that the retailer solicited sales in Iowa through local advertisements and maintained employees and retail operations in the State, so those activities let Iowa impose the collection duty. The Court said that the method of delivery — direct shipment from outside the State — did not prevent Iowa from requiring collection.

Real world impact

This decision means catalog and mail-order businesses that actively solicit sales in a State may have to collect that State’s use tax, even when orders are filled from out of state and shipped in. That shifts tax collection onto sellers who advertise and do business in the State, and it may raise compliance costs for multistate retailers. The ruling reversed the Iowa court’s judgment and will affect how large retail chains handle tax collection.

Dissents or concurrances

Two Justices dissented for the reasons stated in the related Nelson opinion, and one Justice did not participate in the case.