Supreme Court Declines Case on Making Online Retailers Collect Sales Taxes

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On Monday, December 2, 2013, the Supreme Court declined involvement in state efforts to require online retailers, like amazon, to collect customer’s sales tax in locations where companies do not have a physical presence.

The issue of ending many American’s tax-free online shopping is most important in modern retail. Traditional businesses say that online retailers gain an unfair advantage by not collecting sales tax in certain areas.

Sales taxes are imposed in all but five states and an increased number have passed legislation forcing online retailers like Ebay and Overstock to collect taxes from shoppers.

Many online retailers have 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.”

The Court gave no explanation for declining the petitions from Amazon and Overstock to review a decision by New York’s highest court to uphold the state’s 2008 law requiring the collection of sales tax.

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

20 years have passed since the Supreme court ruled that state’s efforts to demand the collection of taxes from out-of-state companies violated the Commerce Clause of the Constitution in Quill v. North Dakota. The ruling  stated the “necessary ‘substantial nexus’ exists when the out-of-state retailer has a ‘physical presence’ in the state.”

The Quill decision came before the online shopping evolution, and New York says that old test may be outdated now. The Quill decision also said that Congress was in a better position than the court to provide uniformity in requiring state tax collection. But little progress has been made, seeing as how the federal government does not enforce sales tax.

“An entity may no have a profound impact on foreign jurisdiction solely through its virtual protection via the internet,” the court ruled.

Illinois, to underscore the judicial conflict over this issue and for different legal reasoning, struck down its sate law modeled after New York’s.

“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.”

“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.”

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