In February 2011, we wrote about a case (Gordon v. Holder), in which the federal Court of Appeals for the District of Columbia Circuit vacated the denial of preliminary injunction against the enforcement of the federal Prevent All Cigarette Trafficking Act (PACT Act), P.L. 111-154 (2010). The PACT Act mandates state sales/use tax compliance by “delivery sellers” of tobacco products, regardless of whether the seller has a physical presence in the state. In vacating the denial of the preliminary injunction, the D.C. Circuit also advised the lower court to address on remand the issue of whether the PACT Act’s imposition of “potentially disparate burdens on ecommerce” violates the Due Process Clause of the United States Constitution (even though Congress has the authority to impose such burdens under the Commerce Clause). It appears that the Gordon case remains on remand before the district court as of this writing.
The Second Circuit Court of Appeals has now also ruled that a federal law must satisfy a minimum standard under the Due Process Clause before it may purport to authorize the imposition of state use tax collection by remote sellers. Red Earth LLC v. Holder, __ F.3d __, 2011 WL 4359919 (September 20, 2011). In Red Earth, the Second Circuit upheld the granting of a preliminary injunction against the PACT Act’s state tax collection provisions as they apply to certain Native American “delivery sellers” of tobacco products, on the grounds that the Act may be in violation of basic Due Process standards. Although, as the Court noted, the Due Process Clause does not require that a retailer have a “physical presence” in a state before a use tax obligation may be imposed, the Court found that the district court did not err in ruling that PACT Act likely violates the Due Process Clause because it “requires a seller to collect based on its making of [only] one delivery” in the state.
Both the DC Circuit’s February remand order and Second Circuit’s September 20 ruling confirm that a federal law that purports to impose (or allow) state use tax collection obligations on remote sellers must be consistent with the dictates of the Due Process Clause. This mandate includes ensuring that such obligations do not run afoul of the requirement that a retailer must “purposefully avail itself of the benefits of an economic market in the state” before it may be subjected to the state’s taxing power. See Quill Corp. v. North Dakota, 504 U.S. at 307-08. Although the Supreme Court in Quill held that the retailer in that case had sufficiently targeted the North Dakota market to eliminate any Due Process concerns, the Supreme Court has recently had reason (in the context of challenges to personal jurisdiction over a defendant in a tort case), to re-evaluate Due Process standards as they apply to companies with no physical presence in the state. See, e.g. J. McIntyre Machinery, Ltd. v. Nicastro, 131 S.Ct 2780, 2792 (2011). It remains to be seen how constitutional Due Process standards may impact federal laws that purport to authorize the imposition of state use tax collection obligations on remote sellers. Stay tuned.