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Supreme Court Upholds New York Internet Tax

The High Court on Monday refused to hear a case filed by Amazon.com and Overstock.com challenging the state's law on collecting taxes on Internet purchases.

WASHINGTON — Brick-and-mortar retailers, which have long pushed for Internet sales tax fairness, applauded the Supreme Court’s refusal on Monday to hear a case filed by Amazon.com and Overstock.com Inc. challenging New York State’s law on collecting taxes on Internet purchases.

This story first appeared in the December 3, 2013 issue of WWD.  Subscribe Today.

While satisfied with the High Court’s decision, retail trade groups said more needs to be done and stepped up the pressure on Congress to pass legislation to level the playing field between online sellers and traditional retailers.

Amazon and Overstock filed petitions for a writ of certiorari in August, charging that New York’s sales tax law violated the Commerce Clause by imposing tax-collection obligations on out-of-state retailers that have no physical presence in the state. The Internet retailers argued in their Supreme Court petitions that they had no physical presence in New York and should be exempt from collecting taxes on purchases made by New York customers.

The Supreme Court refused to consider their argument, letting stand a ruling by the New York Court of Appeals. The appeals court ruled in March that Amazon and Overstock were subject to the sales tax requirements in New York because the online retailers had contracts with local affiliates, such as blogs that post links to the Amazon and Overstock Web sites.

The debate over taxing Web sales has taken place in Washington and around the country for more than a decade without any resolution, but states have been enacting their own laws to close what they say is a loophole created in 1992 in Quill v. North Dakota, a Supreme Court ruling that stated retailers were required to collect sales tax from out-of-state customers only if they have a “physical presence” in the customer’s state.

E-tailers have relied on that decision to avoid collecting sales tax on online orders. Brick-and-mortar retailers, including those with e-commerce sites, that are typically required to collect sales taxes in states where they have stores, argue that puts them at a competitive price disadvantage.

In the absence of federal legislation, some states began changing the definition of what constitutes a physical presence in order to recoup what state lawmakers argued was billions of dollars in lost revenue in uncollected sales taxes from online sellers.

The New York legislature added a provision to its law in 2008 requiring retailers to collect sales taxes if the merchant solicited business through an independent contractor or third-party representative under two conditions: if the retailer gave commissions to New York State residents for referring customers to the retailer, and if the referrals generated more than $10,000 of sales annually, according to court documents.

“The statute serves an important function in facilitating the collection of millions of tax dollars that would otherwise be lost each year,” attorneys for the New York State Department of Taxation and Finance argued in court documents. “Although both [Amazon and Overstock] allege they have no physical presence in New York, they rely on affiliate programs under which they pay hundreds of thousands of representatives across the country, including thousands in New York, to drum up sales.”

Amazon has agreed to collect sales taxes in a handful of states, including California, Texas and Pennsylvania.

In Amazon’s case in California, for example, under a 2011 bill the physical presence was established by an affiliate company that manufactures the Kindle e-book readers in California’s Silicon Valley. Amazon also has distribution centers in California, which fell under the new definition.

A broad coalition of retailers has been pressing Congress for years to step in and replace the piecemeal state approach with federal legislation because some online retailers are still exempt from the different state-by-state definitions of what constitutes “nexus” or a physical presence and are not obligated to collect and remit sales taxes.

In April, the Senate passed legislation known as the Marketplace Fairness Act that would allow states to collect sales taxes from out-of-state online sellers regardless of whether they have a physical presence in the state. The bill provides for a small seller exemption that prohibits states from requiring remote sellers with less than $1 million in annual nationwide remote sales to collect sales and use taxes.

The legislation stalled in the House. House Judiciary Committee chairman Bob Goodlatte (R., Va.) has released a set of broad, general principles that he will consider in crafting his own legislation, industry groups said. But gridlock in Washington has made passage of legislation difficult and industry groups are now pinning their hopes on the legislation advancing next year.

“States have essentially tweaked nexus [physical presence] laws to require companies like Amazon to collect,” said Jason Brewer, vice president of communications and advocacy at the Retail Industry Leaders Association. “New York changed the definition of physical presence and basically said if you have affiliates, like Web advertisers, in the state, that counts as a physical presence and you must collect sales taxes. New York was the first state law trying to deal with this and other states took a different approach where they went after more physical building definitions, like distribution centers, to constitute a physical presence.”

Brewer noted that not every state has a Amazon warehouse, which has led to a patchwork of state laws on collecting sales taxes from online sellers.

“In order to have a comprehensive solution, you have to have federal legislation,” Brewer said. “That is ultimately what the states want. It is what retailers want. Our goal is to make this the last holiday season where brick-and-mortar retailers compete on an unlevel playing field.”

Rachelle Bernstein, vice president and tax counsel at the National Retail Federation, said, “What we believe is that the same tax should be charged to the same product sold in the same location. Whether you order over your computer or telephone and have it delivered to you at your house or go to a local mall to get it, you are getting the same product and should be subject to the same New York [in this case] sales tax.”

Bernstein said Monday’s Supreme Court decision “clearly shows the need for federal legislation to address this issue because we’ve got all of these different affiliate nexus laws in various states. There is a real need for clarity in this area.”