Online Sales Tax Court Decision Could Set Stage for Supreme Court Showdown

By Christina Camara

A court ruling last week that upholds a decision to force online retailers to collect New York State sales taxes may force a Supreme Court battle or action by Congress to allow states to claim tax revenues they've lost to online purchases.
 
The New York State Court of Appeals on March 28 decided that Amazon and Overstock.com must collect New York State sales taxes from New York customers. The ruling upheld a previous decision but is at odds with court decisions in other states. 
 
"It's unfortunate and the [US] Supreme Court ought to look at this," Overstock Acting Chief Executive Jonathan Johnson told Reuters. The company may appeal to the highest court. "We have states saying different things," he said. He pointed to an Illinois Supreme Court ruling that a similar tax was not allowable. An Amazon spokesman told Reuters that Congress should pass legislation that would allow any state to require the tax collection.
 
The fight is a long-standing one. Federal court decisions have been consistent in that retailers with a "physical presence" in a state, such as warehouses or offices, must collect sales tax. However, nine states contend that the physical presence definition also includes affiliates, which are independent contractors who earn money by promoting online retailers on their own websites. Amazon and Overstock, in the New York case, argued that affiliates do not constitute a physical presence, but the court disagreed.
 
"The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated. An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet. That question, however, would be for the United States Supreme Court to consider," the court said. 
 
Officials in some states want Congress to pass legislation that would require online retailers to collect state sales tax. "We will continue to urge Congress to make a change in the federal rules to level the playing field," Alex Zaroulis, spokesman for the Massachusetts Executive Office for Administration and Finance, told the Boston Globe.
 
The National Conference of State Legislators estimated that states lost $11.4 billion in sales taxes to online purchases in 2012, the Boston Globe reported.
 
While traditional brick-and-mortar companies complain that the tax rules give online competitors an unfair advantage, and online businesses say collecting state sales tax, not to mention taxes imposed by counties and municipalities, is too complicated. However, in recent years, Amazon has agreed to begin collecting sales taxes in California, Texas, New Jersey, and some other states where it has distribution facilities or plans to build.
 
New York State Commissioner of Taxation and Finance Thomas Mattox applauded the decision to affirm the state's approach to taxing Internet-based businesses. "Since being implemented, this law has resulted in the collection of roughly $500 million in state and local sales tax. This is equivalent to approximately $6 billion of taxable retail sales into New York that were previously made without the sales tax being collected."
 
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