Flipping Through History: Online Retailers Owe Popularity And Tax Treatment To Mail Order Catalogs

If you’re clicking through the internet today hoping to do a little shopping, you likely have Aaron Montgomery Ward to thank.

On August 18, 1872, Aaron Montgomery Ward produced the first Montgomery Ward mail order catalog, largely thought to be the first mail order catalog meant for the general public (Tiffany claimsthat their Blue Book catalogue, first published in 1845, is the first mail order catalog but I think we’d all agree that a collection of “exceedingly rare gems” – as gorgeous as they might be – wasn’t meant for the general public). As a result, each year on August 18 is – believe it or not – National Mail Order Catalog Day.

Ward’s catalog was a single sheet offering 163 items. By 1884, the catalog had grown to 240 pages. And by 1904, 3,000,000 customers were on the catalog mailing list – with a population of 82,000,0000 in 1904, that’s nearly one catalog for every 25 residents.

Of course, Ward didn’t originate the mail order idea, he just made it popular. Benjamin Franklin reportedly issued the first mail order catalog in the United States. His A Catalogue of Choice and Valuable Books, Consisting of Near 600 Volumes, in most Faculties and Sciences offered a variety of scientific and academic books for sale (cash only). He even offered a mail order guarantee, “Those persons who live remote, by sending their orders and money to B. Franklin may depend on the same justice as if present.” (Franklin, of course, knew a little something about the mail since he was ourfirst Postmaster General.)

Ward’s catalog, however, is considered the first of the “modern” mail order catalog system: its popularity didn’t go unnoticed. It was copied by Richard Warren Sears in 1894 when the first Sears, Roebuck and Co. mail order catalog hit the post. The cover touted the catalog as the “Book of Bargains: A Money Saver for Everyone.” The next year, the catalog was chock full of items for sale, including eyeglasses together with a self-test for “old sight, near sight and astigmatism.” It was so popular that the company decided to do two catalogs in 1896, one for spring and one for fall, all up to date with the latest fashions. The catalog was so well known that it featured up and coming models and fashion icons together with established stars. Among the list of celebrities who ended up on the pages of the catalog are Lauren Bacall, Susan Hayward, Gloria Swanson, Susan Dey, Cheryl Tiegs, Stephanie Powers, Roy Rodgers, Ted Williams, Al Unser, and Gene Autry.

Scanned page of Sears, Roebuck and Company catalog, 1918. (Photo credit: Wikipedia)

When it came to taxation, it wasn’t Montgomery Ward or Sears catalogs that attracted the most attention of taxing authorities (though they had their fair share) but those of a competitor: Bloomingdale’s. Bloomingdale’s launched a catalog in 1885 (you can even buy reproductions of their 1886 catalog) and eventually expanded their operations to include Bloomingdale’s By Mail (“By Mail”), then a wholly-owned subsidiary of Federated Department Stores, Inc. By Mail operated from leased facilities in Virginia and an order fulfillment center in Connecticut: orders were shipped directly to customers. By Mail, on its own, didn’t have any retail stores (Bloomingdale’s, however, did) but rather marketed their products to customers across the country using popular mail order catalogs.

In 1986, the Department of Revenue in my own state of Pennsylvania focused on By Mail, questioning why the company did not charge sales tax. The company, of course, took the position that they didn’t conduct business in Pennsylvania and therefore weren’t required to charge sales tax. Revenue, however, came to a different conclusion after they were able to successfully return By Mail items at Bloomingdale’s in King of Prussia and Willow Grove, Pennsylvania – and the matter went to court. In Bloomingdale’s By Mail v. Commissioner, Revenue argued that By Mail did conduct business inside Pennsylvania because the company advertised in the state and because the items for sale were largely the same items available inside Bloomingdale’s stores. The Court disagreed, finding that there wasn’t sufficient nexus to require By Mail to collect sales tax.

Today, printing full color catalogs, Nexus is basically a legal term for a connection; it’s important in the tax world because, under the Constitution, states must establish a connection between a taxpayer and the state in order to impose taxes. When it came to brick and mortar stores, it was pretty easy to figure nexus out: are you physically located in the state or not? But direct mail catalogs changed that view a little bit. Whether a company was physically present in the state was still important but presence didn’t hinge on the existence of an actual store. Other factories such as warehouses, sales agents and call centers factored into the equation.

In 1992, the issue of nexus and taxation made it to the U.S. Supreme Court. In Quill Corp. v. North Dakota, the Court specifically examined the differences between the “minimum contacts” nexus required by the Due Process Clause and the “substantial nexus” required by the Commerce Clause. The Court then ruled, as in By Mail, that only those companies with a physical presence inside a state can be required to collect sales tax, “continuing value of a bright line rule in this area.”together with postage costs, have caused many retailers to scale back or ditch mail order catalogs altogether. But that doesn’t mean that consumers still don’t buy by mail: we just do it a different way – with a click of mouse or a swipe of a smart phone. Online shopping is again changing the way that we look at nexus but for now, more or less the same kinds of principles that ruled in the day of mail order catalogs are still good law. The law remains settled that in states that impose a sales tax, retailers that have established nexus must charge sales tax to customers in that state. That doesn’t mean that retailers like Amazon and eBay EBAY +1.21% won’t argue about exactly what constitutes nexus – they will – but so far, the answers remain just about the same as they did when mail order catalogs were all the rage.