Jane M. Smith
Legislative Attorney
TheJenkins Act requires out-of-state sellers of cigarettes to register and file areport with the states in which they sell cigarettes listing the name,address, and quantity of cigarettes sold to state residents. In the past,the states would use this information to collect taxes from the buyers directly.However, with the rise of Internet sales of cigarettes, compliance with theJenkins Act was very low, and it was estimated that billions of dollars ofstate and local taxes went unpaid. In 2010, Congress passed the PreventAll Cigarette Trafficking Act (PACT Act), which amends the Jenkins Act, toaddress this problem. The PACT Act requires remote retailers of cigarettes and smokelesstobacco—that is, retailers who sell without an in-person transaction with thebuyer—to pay the state and local taxes of the jurisdiction in which thebuyer receives the goods.
Three remote retailers have challenged the PACT Act in federal courts seekingto enjoin enforcement of the act, claiming that forcing remote sellers topay state and local taxes violates due process. The Supreme Court held in QuillCorp. v. North Dakota that the Due Process Clause of the FourteenthAmendment “requires some definite link, some minimum connection, between astate and the person, property, or transaction it seeks to tax and that theincome attributed to the State for tax purposes must be rationally relatedto values connected with the taxing State.” In Red Earth LLC v. UnitedStates and Gordon v. Holder, the federal district courts for theWestern District of New York and the District of Columbia, respectively,issued preliminary injunctions, concluding that the plaintiffs were likelyto succeed in demonstrating that the PACT Act violates due process becauseit subjects the retailers to the taxing authority of foreign states regardlessof whether they have the required minimum contacts with the taxingjurisdictions. The Court of Appeals for the Second Circuit upheld the RedEarth preliminary injunction, and the United States has appealed thepreliminary injunction issued in Gordon to the U.S. Court of Appeals for theD.C. Circuit. In Musser’s Inc. v. United States, the federal districtcourt for the Eastern District of Pennsylvania rejected the due processargument, concluding that because the PACT Act is federal legislation, thedue process requirements of the Fourteenth Amendment, which applies to states,do not apply. The PACT Act, the Musser’s court determined, is notdifferent in principle from other federal statutes that incorporate statelaws. In any event, the court determined, because the plaintiff tookorders over the Internet, it had minimum contacts in the jurisdictions intowhich it shipped tobacco products.
The Supreme Court stated in Quill: “While Congress has plenary power toregulate commerce among the states and may thus authorize state actionsthat burden interstate commerce, it does not similarly have the power toauthorize violations of the Due Process Clause.” In Gordon, the districtcourt for the District of Columbia characterized the issue as whether one saleinto a taxing jurisdiction satisfied the due process requirement forminimum contacts, and concluded it did not. The U.S. Court of Appeals forthe Second Circuit, in upholding the preliminary injunction in Red Earth,described the issue as a “close question.”
Date of Report: December 7, 2012
Number of Pages: 13
Order Number: R42851
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