Supreme Court won't rule on state Internet sales taxes
Decision is a setback for online retailers Amazon.com and Overstock.com, which have battled New York State for five years over the collection of state sales taxes
WASHINGTON — The Supreme Court won't referee the fight between states and online retailers over taxing Internet sales, leaving states free to tax remote sellers and increasing pressure on Congress to resolve the long-running dispute.
The high court's decision Monday left intact a New York appeals court ruling that Amazon.com and most other online retailers must collect state sales taxes when they pay affiliates to promote links to their products.
By refusing to hear Amazon's case, the justices sent reverberations to a dozen states with similar laws: Arkansas, California, Colorado, Connecticut, Georgia, Illinois, Maine, Minnesota, North Carolina, Rhode Island, Texas and Vermont. The Illinois and Colorado laws are tied up in court.
In seeking Supreme Court review, Amazon and another online retailer, Overstock.com, had argued that the New York court's ruling "provides a road map for other state legislatures to enact similarly burdensome legislation."
Other states might not follow suit, however, at least not immediately. That's because online and other remote retailers, including those that rely on phones and catalogs, usually cut ties to local affiliates in order to avoid collecting sales taxes.
The issue of Internet sales taxes has vexed lawmakers for nearly two decades. They are caught between serving Main Street "brick-and-mortar" businesses that pay taxes their online rivals sidestep, and their political desire to avoid being seen as raising or creating new taxes.
New York solved that dilemma on the side of taxation. "Today's Supreme Court decision validates New York's efforts to treat both online and brick-and-mortar retailers equally and fairly," said state Attorney General Eric Schneiderman.
Sales taxes are a crucial source of revenue in the 45 states that collect them, particularly in the wake of the 2009 recession. They are even more important in seven of nine states that have no state income tax, including Florida and Texas. (Two states, Alaska and New Hampshire, have neither tax.)
States stood to lose about $23 billion last year because they could not collect sales taxes from most online, phone and catalog purchases, according to the National Conference of State Legislatures. The actual figure may have been lower because Amazon, the nation's leading online retailer, has begun building warehouses and collecting sales taxes in many states.
By turning down the case, the justices served notice that any possible solution to the dispute is likely to come from Congress. The Senate in May passed the Marketplace Fairness Act, which would let states collect sales and use taxes from online retailers without any physlcal presence in their states. The measure, which would apply to retailers with at least $1 million in annual sales in those states, is bottled up in the House.
"At some point, this will be solved by either Congress or court action," says Max Behlke, manager of state-federal relations for the National Conference of State Legislatures. "Sales tax revenue is so vital to states."
The Supreme Court ruled in 1992 that North Dakota could not collect sales taxes from a mail-order business with no physical presence there. As a result of that legal precedent, states have sought only to collect taxes when local businesses are used as conduits. The New York court reasoned that Amazon and Overstock had a presence through their affiliated web sites.
"The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated," the state court ruled in a 4-1 decision. "An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet."