Nelson v. Sears, Roebuck & Co.
312 U.S. 359, 61 S. Ct. 586, 1941 U.S. LEXIS 924 (1941)
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Rule of Law:
A state may require an out-of-state retailer to collect and remit a use tax on mail-order sales to the state's residents if the retailer maintains a physical presence, such as retail stores, within the taxing state, even if the mail-order sales are separate from the in-state operations.
Facts:
- Sears, Roebuck & Co. (Sears) is a New York corporation authorized to do business in Iowa.
- Sears operates multiple retail stores within the state of Iowa.
- In addition to its retail stores, Sears conducts a separate mail-order business that solicits orders from Iowa residents through catalogs.
- Iowa residents send their mail orders directly to Sears' out-of-state branches.
- These mail orders are filled by direct shipment from those out-of-state branches to the Iowa purchasers via mail or a common carrier.
- Sears collected Iowa's sales tax on transactions occurring at its physical stores but refused to collect the state's complementary use tax on its mail-order sales.
Procedural Posture:
- Sears, Roebuck & Co. brought a suit for an injunction in an Iowa state trial court against the chairman of the Iowa State Tax Commission (Nelson).
- The suit sought to prevent the state from revoking Sears' permit to do business for its refusal to collect the use tax on mail-order sales.
- The Supreme Court of Iowa, the state's highest court, ruled in favor of Sears, holding that the application of the tax collection duty was unconstitutional.
- Nelson, representing the state of Iowa, appealed the decision to the Supreme Court of the United States, which granted certiorari.
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Issue:
Does the Iowa Use Tax Act, which requires an out-of-state retailer to collect use tax on mail-order sales to Iowa residents, violate the Commerce Clause or the Due Process Clause of the Fourteenth Amendment when that retailer also operates physical stores within Iowa?
Opinions:
Majority - Mr. Justice Douglas
No. The Iowa Use Tax Act does not violate the Commerce Clause or the Fourteenth Amendment. A state can constitutionally require a retailer to act as its agent for collecting a use tax on sales to its residents, provided the retailer has a physical presence and enjoys benefits and protections from that state. The tax is on the 'use' of property within Iowa, a local event that the state has the power to tax. Because Sears maintains retail stores in Iowa, it has availed itself of the privileges of conducting business there, creating a sufficient nexus for the state to impose the tax collection duty as a price for those benefits. The fact that Sears' mail-order business is departmentalized and managed out-of-state does not sever this connection, as all of its operations are part of its overall Iowa business. The use tax complements the sales tax, ensuring equality and not discriminating against interstate commerce.
Dissenting - Mr. Justice Roberts
Yes. The application of the Iowa Use Tax Act violates both the Commerce Clause and the Fourteenth Amendment. The mail-order business is pure interstate commerce, separate and distinct from the local activities of Sears' retail stores. By requiring Sears to collect the tax, Iowa is directly burdening and regulating interstate commerce, which it cannot do. This requirement also places Sears at a competitive disadvantage against other mail-order businesses that lack a physical presence in Iowa. Furthermore, since the sales are consummated outside of Iowa, the state is attempting to regulate extraterritorial conduct, which violates the Due Process Clause. Iowa cannot leverage its power over Sears' lawful in-state business to compel compliance with an unconstitutional burden on its separate interstate business.
Analysis:
This decision significantly broadened the scope of a state's power to compel use tax collection by establishing that any physical presence within a state creates a sufficient 'nexus' for that state to impose tax collection duties on all of the company's sales into the state, even those from a legally distinct out-of-state operation. It affirmed that the benefits a company derives from any in-state presence can justify burdens related to its interstate commerce activities directed at that state. This 'physical presence' nexus standard became the controlling precedent for decades, profoundly shaping state tax law for mail-order and, later, e-commerce businesses, until it was eventually overturned by South Dakota v. Wayfair, Inc. in 2018.
