Supreme Court declines case on making online retailers collect sales taxes

On one of the busiest online-shopping days of the year, the Supreme Court declined Monday to get involved in state efforts to force Web retailers such as Amazon.com to collect sales tax from customers even in places where the companies do not have a physical presence.

The multibillion-dollar issue — which could end tax-free online shopping for many Americans — is one of the most important in modern retailing. Traditional bricks-and-mortar businesses say the online retailers receive an unfair advantage by not having to collect sales taxes in some areas.

All but five states impose sales taxes on purchases, whether online or not, and an increasing number have passed legislation to force online retailers such as Overstock.com and eBay to begin collecting those taxes from customers.

The court’s decision to stay out of the issue for now may put more pressure on Congress to come up with a national solution, as both online and traditional retailers complain about a patchwork of state laws and conflicting lower-court decisions.

“The failure of the court to take and decide this case will create an additional burden on interstate commerce since the line between a physical and virtual presence will only continue to blur,” said David C. Blum, a Chicago tax lawyer who represents online retailers and traditional businesses. “We can only hope that the court will take other similar cases in the near future” to settle the issue.

In an interview aired Sunday on CBS's "60 Minutes," Amazon.com founder Jeffrey Bezos outlined his latest plan for using drones to deliver packages in as little as 30 minutes. This video, produced by Amazon, shows a prototype in action. (Disclosure: Bezos owns The Washington Post.) (Natalie Jennings/The Washington Post)

Customers in states with sales taxes are supposed to remit the tax on purchases they make from online retailers. But few do. The National Conference of State Legislatures estimated in 2012 that states lost $23 billion in uncollected taxes of all types and that about half were from online sales.

As is its custom, the court gave no explanation for turning down petitions from Amazon and Overstock 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 the company’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.)

Overstock Executive Vice President Jonathan Johnson said that he was disappointed by the court’s action and that his company thinks it has “no obligation to be the tax collector for the state of New York.” Overstock suspended its relationship with affiliates in the state that would have made it subject to the New York law.

State Attorney General Eric T. Schneiderman (D) had urged the court to stay out of the fight while elected officials continue to address it.

“Today’s Supreme Court decision validates New York’s efforts to treat both online and brick-and-mortar retailers equally and fairly, by requiring all retailers with a presence in our state to collect sales taxes,” he said in a statement.

It has been more than 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 Constitution’s commerce clause. 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 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 reasons. A spokeswoman for the Illinois attorney general said no decision has been made about whether to appeal.

The ability to make sales without collecting sales tax has benefited Amazon and other online retailers, and the company has been fighting the state efforts one at a time. But as Amazon has been building distribution centers nationwide to deliver goods more quickly, it has more often met the physical presence requirement.

According to its Web site, Amazon now collects sales taxes in 16 states, including Virginia and the country’s two most populous: California and Texas.

The Supreme Court’s Quill decision said Congress was in a better position than the court to provide uniformity in state tax collection requirements, but little progress has been made. The federal government does not impose sales taxes.

As Amazon has been collecting the tax in more states, the company has split with other online retailers to advocate for a uniform federal law.

The Senate in the spring passed the Marketplace Fairness Act of 2013, which would require companies that exceed $1 million in Internet sales outside the states where they are located to collect every state’s sales tax.

But the future of the bill is uncertain in the House. Some House Republicans 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.”

Robert Barnes has been a Washington Post reporter and editor since 1987. He has covered the Supreme Court since November 2006.
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