Supreme Court declines case on making online retailers collect sales tax

Robert Barnes

The Washington Post

WASHINGTON — The Supreme Court on Monday declined to get involved in state efforts to force online retailers such as to collect sales tax from customers even in places where the companies do not have a physical presence.

The issue — ending what for many Americans is tax-free online shopping — is one of the most important in modern retailing. Traditional brick-and-mortar businesses say the online retailers receive an unfair advantage by not collecting sales tax in some areas.

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All but five states impose sales taxes, and an increasing number have passed legislation to force online retailers such as Overstock and eBay to begin collecting those taxes from customers.

Online retailers complained that a patchwork of state laws and conflicting lower court decisions needed the Supreme Court’s attention.

“There are billions of dollars of commerce for which we need guidance that we can rely upon,” said David C. Blum, a Chicago tax lawyer who represents both online retailers and traditional businesses. He added: “We have evolved into an Internet world, and we need to know what’s taxable and what’s not.”

As is its custom, the court gave no explanation for turning down petitions from Amazon and to review a decision by New York’s highest court to uphold that state’s 2008 law requiring sales tax collections.

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Seattle-based Amazon has no offices, distribution centers or workforce in New York. But the New York Court of Appeals said Amazon’s relationship with third-party affiliates in the state that receive commissions for sending Web traffic its way satisfied the “substantial nexus” necessary to force the company to collect taxes. (Amazon founder Jeffrey P. Bezos also owns The Washington Post.)

It has been 20 years since the Supreme Court ruled in Quill v. North Dakota that a state’s efforts to require tax collections from out-of-state companies violated the Commerce Clause of the Constitution. It said the necessary “substantial nexus” exists when the out-of-state retailer has a “physical presence” in the state.

But that decision came before a revolution in online shopping, and the New York court said the old test may now be outdated.

“An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet,” the court ruled.

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To underscore the judicial conflict over the issue, Illinois’ top court last month struck down its state law, which was modeled after New York’s, but for different legal reasoning.

The ability to make sales without collecting sales tax has been key to the success of Amazon and other online retailers, and the company has been fighting the state efforts one at a time. But as Amazon has embarked on building distribution centers around the country to deliver goods more quickly — establishing the physical presence requirement — it has become subject to more state laws.

According to its website, Amazon now collects taxes on sales in 16 states, including Virginia and the country’s two most populous: California and Texas.

The Supreme Court’s Quill decision said Congress was in a better position than the court to provide uniformity in state tax collection requirements, but there has been little progress. The federal government does not impose sales tax.

Amazon has split with other online retailers to advocate for such a federal law.

The Senate in the spring passed the Marketplace Fairness Act of 2013, which requires companies that surpass $1 million in Internet sales outside the states where they are located to collect every state’s sales tax.

But the future of the bill is uncertain in the House. Technically, consumers are supposed to pay their applicable tax to their home states, but most never do. So some Republicans in the House said agreeing with the Senate bill would result in tax increases for constituents.

In response to Monday’s development, Amazon said in a statement: “The Supreme Court already has addressed the sales tax issue, saying in Quill that Congress can and should act to resolve it. The Marketplace Fairness Act now pending before Congress would protect states’ rights to make their own revenue policy choices while allowing them to collect more than a fraction of the revenue that’s already owed.”