Vanderbilt Law Review


Paul J. Hartman

First Page



The states' inability to collect taxes on out-of-state mail-order sales constitutes a major fiscal problem. The federal government's Advisory Commission on Intergovernmental Relations estimates that states are losing as much as 1.5 billion dollars each year in unpaid out-of-state mail-order purchase taxes.'

In addition to raising revenue, the compensating use tax serves two purposes: (1) The use tax helps local sellers to compete with retail dealers in other states who are subject to a lesser tax burden;and (2) the use tax avoids the likelihood of draining the taxing state's revenue by removing buyers' incentive or temptation to go bargain hunting by mail orders or through other means to escape payment of the tax on in-state sales.

The legislatures of states with sales taxes could not plug these economic leaks by extending the reach of the sales tax. One reason was the idea that a state could not, consistently with the due process clause, tax extraterritorial sales. Prior to the Supreme Court's 1940 decision in McGoldrick v. Berwind-White Coal Mining Co.,it was assumed that an interstate sale was immune from state or local taxation.' Later, McLeod v. J.E. Dilworth Co. placed severe constitutional constraints on a destination state's ability to tax a sale consummated in another state. These restrictions on the states' taxing power enabled residents of states with sales taxes to make their purchases either tax free or at a lower tax rate beyond the territorial limits of the taxing jurisdiction. Purchasers either could travel beyond the borders of their state, use the telephone,mail orders, or buy from solicitors.

Included in

Tax Law Commons