Supreme Court Declines to Enter Internet Sales Tax Battle

By Mark Walsh — December 02, 2013 3 min read
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In a case with implications for state budgets and spending on education, the U.S. Supreme Court on Monday declined to step into a major battle over collecting sales taxes on products sold on the Internet.

The justices refused to hear a challenge by major Web retailers and to a 2008 New York state law that made it more difficult for the retailers to avoid collecting taxes on sales in that state.

Under the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota, states may not require out-of-state retailers to collect sales or use taxes for residents of a given state unless they have a physical presence in that state.

But in upholding New York state’s so-called Amazon law earlier this year, the state’s highest court took note of the explosion of Internet commerce and said, “The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated.”

States and local governments are losing at least $20 billion annually in uncollected sales taxes that are due on Internet sales but that aren’t required to be collected under the Quill test. The Center on Budget and Policy Priorities, a Washington think tank, says that states need to update their “antiquated” sales tax systems to be able to invest in their education systems and other public services.

Some states have been more aggressive in recent years in trying to subject Internet companies to collecting taxes, with eight other states adopting laws similar to New York’s. Amazon has reached agreements with some states to collect sales taxes as it expands its number of distribution centers. Meanwhile, the U.S. Senate in May passed a bill that would allow states to require tax collection by Internet retailers with at least $1 million in U.S. “remote” sales annually (i.e.,total out-of-state sales across the country).

The New York Court of Appeals upheld the state’s Internet sales tax law by concluding that Amazon, based in Seattle, and Overstock, based in Salt Lake City, while having not physical facilities in the Empire State, did have a presence through their “associates” or “affiliates” programs and thus were subject to collecting sales taxes.

Under such programs, third parties place a link on their own Web sites to, say, Amazon’s site for a particular product, and then they collect a small commission from sales made via that avenue. The state high court noted that schools were active participants in Amazon’s associates program.

“Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force,” the New York Court of Appeals said. “It is not unreasonable to presume that affiliated website owners residing in New York State will reach out to their New York friends, relatives, and other local individuals in order to accomplish this purpose. ... [T]he record contains examples of this type of solicitation by schools and certain other organizations.”

In its appeal to the U.S. Supreme Court, Amazon said its associates program is merely a form of advertising and that Amazon does not control the content of such third-party Web sites. Amazon said the New York high court’s decision will provide a “road map for other state legislatures to enact similarly burdensome legislation” and that “many other states will jump at the opportunity to tax out-of-state Internet retailers.”

Amazon agreed to start collecting New York state sales taxes pending the outcome of its suit.

Overstock, which dropped its affiliates program in the state, noted in its appeal Arkansas and Michigan court rulings that out-of-state educational publishers such as Scholastic Inc. were not required to collect sales taxes on classroom book sales, even when teachers were enlisted to facilitate sales. (However, Overstock also noted a contrary ruling by a Connecticut court that went against Scholastic.)

New York state said in a brief that its law “seeks to restore a level playing field between in-state brick-and-mortar stores and their out-of-state Internet-only counterparts.” The statute does not impose tax-collection obligations based merely on advertising by Internet retailers, but on solicitation, such as when the retailers offer commissions to encourage sales referrals.

The Supreme Court declined without comment to hear the appeals in Inc. v. New York State Department of Taxation and Finance (Case No. 13-252) and LLC v. New York State Department of Taxation and Finance (No. 13-259).

A version of this news article first appeared in The School Law Blog.