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Dept. of Rev. v. Nat. Bellas Hess

OPINION FILED JANUARY 25, 1966.

THE DEPARTMENT OF REVENUE, APPELLEE,

v.

NATIONAL BELLAS HESS, INC., APPELLANT.



APPEAL from the Circuit of Cook County; the Hon. WILLIAM V. BROTHERS, Judge, presiding.

MR. JUSTICE HOUSE DELIVERED THE OPINION OF THE COURT:

Rehearing denied March 23, 1966.

Defendant National Bellas Hess, Incorporated, a non-resident mail-order vendor, appeals from a summary judgment entered by the circuit court of Cook County against it for the sum of $93,242.18, representing taxes of $74,593.75 assessed under the Illinois Use Tax Act, (Ill. Rev. Stat. 1961, chap. 120, pars. 439.1 et seq.,) for the period of July 17, 1961, through October 31, 1962, plus a 25% penalty of $18,648.43. Constitutional questions, as well as the public revenue, are involved.

There is no dispute about the following facts which are gathered from the pleadings. Defendant is a national mail order company. It issues annually two main catalogues, described as "Spring and Summer" and "Fall and Winter," and it also issues during the year a number of intermediate smaller "sales books" or "flyers." The catalogue contains approximately 4000 different items of merchandise for retail sale, and it is mailed to the company's own list of customers. This list, which contained 5,000,000 names when the company acquired it in 1932, is kept current with active and recent customers. The "flyers," which are less costly to distribute, are mailed to a less restricted list of customers or potential customers. They are occasionally mailed in bulk addressed to "occupant" or enclosed in the parcels sent to customers in filling orders from a prior "flyer" or catalogue.

The company's only plant is located in North Kansas City, Missouri, and all of its mail-order activities occur there, except for purchasing, which is done initially by a wholly owned subsidiary in New York. All of the catalogues and "flyers" are mailed from North Kansas City; orders from customers are received and accepted there; the goods are mailed or shipped by common carrier from there; and payment by the customer is mailed there.

The company is a Delaware corporation and is qualified to do business only in Delaware and Missouri. It does not maintain in Illinois any office, distribution house, sales house, warehouse or any other place of business; it does not have in Illinois any agent, salesman, canvasser, solicitor or other type of representative to sell or take orders, to deliver merchandise, to accept payments, or to service merchandise it sells; it does not own any tangible property, real or personal, in Illinois; it has no telephone listing in Illinois and it has not advertised its merchandise for sale in newspapers, on billboards, or by radio or television in Illinois.

Section 3 of the Use Tax Act, which became effective in July, 1955, imposes a tax "upon the privilege of using in this State tangible personal property purchased at retail * * * from a retailer." It also provides that the tax "* * * shall be collected from the purchaser by a retailer maintaining a place of business in this State * * *." (Ill. Rev. Stat. 1961, chap. 120, par. 439.3.) The constitutionality of the act was adjudicated and a determination of its operating incidence was made by this court two years later. (Turner v. Wright, 11 Ill.2d 161.) Section 2 of the act, which defines various terms used in the act, was amended effective July 17, 1961, (the commencement date of the assessment here in question) by adding a new paragraph to the definition of a "retailer maintaining a place of business in this State." The new paragraph, referred to as the "catalogue amendment", defines a "retailer maintaining a place of business in this State" as any retailer "Engaging in soliciting orders within this State from users by means of catalogues or other advertising, whether such orders are received or accepted within or without this State." Ill. Rev. Stat. 1963, chap. 120, par. 439.2.

The Use Tax Act was also amended in July, 1961, by adding a new section, section 12a, which provides for substituted service of process on a nonresident falling within the definition of "retailer maintaining a place of business in this State." It provides that, "Any non-resident of this State who accepts the privilege extended by the laws of this State to non-residents of acting as a retailer maintaining a place of business in the State within the meaning of Section 2 of this Act, * * * shall be deemed thereby to appoint the Secretary of State of Illinois his agent for the service of process or notice in any judicial or administrative proceeding under this Act. Such process or notice shall be served by the Department on the Secretary of State by leaving, at the office of the Secretary of State at least 15 days before the return day of such process or notice, a true and certified copy thereof, and by sending to the taxpayer by registered or certified mail, postage prepaid, a like and true certified copy, with an endorsement thereon of the service upon said Secretary of State, addressed to such taxpayer at his last known address." (Ill. Rev. Stat. 1961, chap. 120, par. 439.12a.) The section provides that this substituted service of process or notice "shall be of the same force and validity as if served upon the taxpayer personally within this State."

While defendant has raised a number of grounds for reversing the judgment entered against it, its two principle arguments are: (I) that the exercise of in personam jurisdiction by the circuit court in this proceeding constitutes a denial of due process of law under the Federal and Illinois constitutions, (U.S. Const., Amend. XIV, sec. I; Ill. Const. art. II, sec. 2,) and (2) that the Use Tax Act in so far as it requires that defendant collect the use tax from Illinois tax-payers is a denial of due process of law under the Federal and Illinois constitutions and violative of the commerce clause of the Federal constitution. (U.S. Const., art. I, sec. 8, cl. 3.) We consider first the constitutionality of requiring defendant to collect the Illinois use tax.

The Supreme Court has held that a State's power to impose upon a nonresident vendor the burden of collecting its use tax depends upon the amount of activities conducted by the nonresident vendor in the taxing State. (American Oil Company v. Neill, 380 U.S. 451, 14 L.ed.2d 1, 85 S.Ct. 1130; Scripto Inc. v. Carson, 362 U.S. 207, 4 L.ed.2d 660, 80 S.Ct. 619; Miller Bros. Co. v. State of Maryland, 347 U.S. 340, 98 L.ed. 744, 74 S.Ct. 535; General Trading Co. v. State Tax Commission, 322 U.S. 335, 88 L.ed. 1309, 64 S.Ct. 1028.) "There must be * * * `some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'" Scripto Inc. v. Carson, 362 U.S. 207, 210-211, 4 L.ed.2d 660, 80 S.Ct. 619, 621.

Nelson v. Sears Roebuck & Co. 312 U.S. 359, 85 L.ed. 888, 61 S.Ct. 586, involved the constitutionality of the Iowa use tax as applied to Sears mail order business conducted directly between customers in Iowa and Sears mail-order houses located outside Iowa. Sears was authorized to do business in Iowa and had retail stores there. The court upheld Iowa's power to impose this collector's liability against Sears on such mail orders against the attack that the exercise of such power denied Sears of due process of law under the fourteenth amendment and violated the commerce clause of section 8 of article I of the constitution.

Nelson v. Montgomery Ward, 312 U.S. 373, 85 L.ed. 897, 61 S.Ct. 593, a companion case to Sears Roebuck, raised the identical issue on almost the same facts as in Sears Roebuck and the court reached the same result. In the course of this opinion, however, the court stated: "There is a further fact in this record which makes a reversal of this judgment necessary. It was stipulated that `advertisements have been caused to be printed by the retail stores of the petitioner [Montgomery Ward & Co.] in the State of Iowa, advertising not only retail merchandise, but the ability to complete service through the use of the catalog.' This stipulation clearly means that respondent has solicited mail order sales in Iowa. [Emphasis added.] The fact that that solicitation was done through local advertisements rather than directly by local agents * * * is immaterial. Nor is it material that the orders were filled by direct shipments from points outside the state to purchasers within the state." 312 U.S. 373, 376, 85 L.ed. 897, 899, 61 S.Ct. 593, 595.

The same issue was again raised in General Trading Co. v. State Tax Commission, 322 U.S. 335, 88 L.ed. 1309, 64 S.Ct. 1028. That case also involved the Iowa use tax, but this time the vendor had never qualified to do business as a foreign corporation in Iowa nor did it maintain any office, branch or warehouse there. Orders were solicited by traveling salesmen sent into Iowa from their Minnesota headquarters. Again, the court upheld Iowa's jurisdiction to impose liability on the nonresident vendor for collection of the use tax on property shipped by common carrier or the post into Iowa.

The question was again raised in Miller Bros. Co. v. State of Maryland, 347 U.S. 340, 98 L.ed. 744, 74 S.Ct. 535. Miller Bros. Co. only made sales directly to its customers in Wilmington, Delaware, and did not take orders by mail or telephone. Maryland's Court of Appeals held Miller Bros. Co. liable for the Maryland use tax on all goods sold in the Delaware store to Maryland residents whether the goods were delivered into Maryland by common carrier, the vendor's truck or carried by the purchasers themselves. The U.S. Supreme Court held that advertising by Miller Bros. Co. with Delaware newspapers and radio stations which reached Maryland residents, its occasional sales circulars which were mailed to all former customers including customers in Maryland, and the occasional delivery of goods into Maryland did not constitute a jurisdictional basis for imposing the burden of collecting or paying the Maryland use tax on this Delaware vendor. In distinguishing the General Trading case the court said, "That was the case of an out-of-state merchant entering the taxing state through traveling sales agents to conduct continuous local solicitation followed by delivery of ordered goods to the customers * * *. ...


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