Online retailers suffered a setback in their battle over the collection of sales taxes recently when the Supreme Court declined to hear an appeal of a New York law from Amazon.com and Overstock.com. The Court announced its decision to reject the appeal on Dec. 2, 2013, which ironically fell on Cyber Monday. The court’s refusal to hear the case gives states the authority to require online retailers to collect sales taxes.
The issue at the center of the battle is whether states can require out-of-state retailers to collect sales taxes from in-state customers. Tens of billions of dollars of uncollected sales taxes are at stake. Online retailers, like Amazon, argue that a 1992 case, Quill v. North Dakota, exempts them from collecting those sales taxes. The case ruled that a state could not require mail order companies to collect sales tax from customers unless they had a substantial physical presence in that state, citing the complexity of complying with the varying tax rules in multiple states. The case defined a physical presence as a having a factory, warehouse, or sales office in the state where delivery took place.
Brick-and-mortar businesses have long claimed this gave online retailers an unfair advantage by being able to offer products to consumers “tax free.” Although consumers in states with a sales tax, which includes all but five states, are supposed to pay sales tax for purchases made from online retailers in the form of a use tax, very few actually pay it. Many consumers are not even aware of the use tax. Brick-and-mortar retailers argue that requiring all retailers to collect sales tax would level the playing field.
In 2008, New York enacted a law that changed the definition of what qualifies as a physical presence. Under the new law, any retailer that accepts affiliate sales leads from in-state residents is considered to have a physical presence, making them subject to the requirement to collect sales tax. Amazon and Overstock sued to overturn the law, calling it unconstitutional.
In declining to get involved in the case, the Supreme Court puts the responsibility on Congress to settle the issue and create a nationwide approach to the issue. The Market Fairness Act, which is currently pending before Congress, would protect the states’ rights to institute their own revenue policy choices and collect sales taxes and use taxes from online and out-of-state retailers with no physical presence in their state. Businesses with sales of less than $1 million would be exempt. The Senate passed the bill in May but the House of Representatives has yet to act on it.