The Supreme Court declining to hear a case seldom makes national news, and usually doesn’t have a huge impact on national politics or the law, but that may turn out to not be the case when it comes to a New York State case that the Justices announced today they would not accept for appeal. The case involves an effort by New York State to subject sales over the Internet subject to state sales tax in situations where the company making the sales has “affiliates” located inside the state that send referrals to the seller, and the primary party challenging the law was none other than Internet behemoth Amazon:
The Supreme Court on Monday declined to get involved in state efforts to force online retailers such as Amazon.com 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.
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 Overstock.com to review a decision by New York’s highest court to uphold that state’s 2008 law requiring sales tax collections.
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.
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.
As noted, the current law is determined by the Supreme Court’s decision in Quill v. North Dakota, where the Court decided that states may not impose sales taxes on businesses that have no physical presence in the state. The Court did say that Congress could grant states authority to impose sales tax to businesses not present in the state via legislation, though, and in recent years there has been an increasing effort in Congress to get such a bill passed. This year, supporters of a bill authorizing states to impose taxes on Internet sales taxes scored their biggest victory when the Senate passed a bill authorizing such taxes on a bipartisan basis, but the bill has largely languished in the House. Ironically enough, that bill is supported by Amazon along with a whole host of bricks and mortar businesses, with Amazon likely joining the pro-reform side largely because it is increasingly becoming required to charge sales taxes on transactions as it expands its network of Distribution Centers in an effort to upgrade its delivery services. For example, recently Amazon began charging sales tax to Virginia customers shortly after it opened a massive warehouse just outside of Richmond to aid in its distribution efforts. Opposing the bill are other Internet retailers such as eBay, which raises fears that each of the small businesses that use its site to sell products around the country would suddenly become required to calculate and collect sales taxes for the states and local authorities that charge taxes on sales. Theoretically, under the New York State law, eBay affiliates would already be required to do this in New York State assuming their sales met the minimum requirements at which they have to do so.
Obviously, the Courts decision not to accept a case has no legal authority and the appeal that it was presented with was a decision by the New York Court of Appeals, the state’s highest Court, and only applies in New York State. Nonetheless, the fact that the New York State law remains standing and that opponents couldn’t even must four votes on the Supreme Court to agree to hear the case could be impetus for other states to attempt to pass similar laws, thus further chipping away at the Quill decision. The Court’s failure to act may also arguably give some political impetus to Congressional action on this issue, especially if it means placing protections in a national law that would relieve the concerns of smaller businesses. For example, right now the bill pending in Congress provides an exemption to businesses who do less than $1,000,000 per year in business with out-of-state customers. As I’ve suggested before, there is likely some political room for Congress to increase that limit so that small businesses aren’t forced to deal with the administrative headaches and potential liabilities of having to worry about continent wide sales tax laws. Given the fact that this is a law where support crosses party lines, such a change may just be enough to get it through the House, especially in the face of such a strong signal from the Supreme Court that the Judicial Branch isn’t necessary going to be a bulwark against what really seems to be the inevitability of taxation of online sales.
