Supreme Court opens door for Internet sales tax

WASHINGTON — On perhaps the busiest online-shopping day of the year, the Supreme Court refused to wade into a dispute over state sales taxes for purchases on websites such as Amazon.com, an outcome likely to prompt more states, in- cluding Arizona, to attempt to collect taxes on Internet sales.

Monday’s court action means “it might be the last Cyber Monday without sales tax,” said Joseph Henchman of the Washington, D.C.based Tax Foundation.

It’s all part of a furious battle — including legislation in Congress — among Internet sellers, millions of buyers, aggrieved brick-and-mortar stores and states hungry for billions of dollars in extra tax revenue.

The high court, without comment, turned away appeals from Amazon.com LLC and Overstock .com Inc. in their fight against a New York court decision forcing

them to remit sales tax the same way instate businesses do. This could hurt online shopping in that state, because one of the attractions of Internet purchasing is the lack of a state sales tax, which makes some items cheaper than they would be inside a store on the corner.

And the effect could be felt far beyond New York if it encourages other states to act. The National Conference of State Legislatures estimates that states lost $23.3 billion in 2012 as a result of being unable to collect sales taxes on online and catalog purchases.

The court’s refusal “allows states that have passed laws like New York’s to continue doing what they’ve been doing,” said Neal Osten, director of the group’s Washington office.

Arizona does not have a law taxing all online retailers, but it does tax online sales from stores with a physical address in the state. Arizonans began paying taxes on Amazon purchases in February as part of an agreement between the online retailer and the Arizona Department of Revenue. Although Amazon is not based in Arizona, it does have distribution warehouses in the state.

Arizonans are also required to pay a “use tax” on online purchases. State tax law requires them on their annual state tax forms to declare the amount of online purchases made through the year, calculate the 6.6 percent tax and cut a check to the state Department of Revenue’s Use Tax Unit. But the system works essentially on the honor system, and it’s unclear if anyone has ever been prosecuted for failing to declare such purchases. Many don’t even know the tax exists.

“It would be an understatement to say the use tax is not well understood by the average citizen buying online,” said Kevin McCarthy, president of the Arizona Tax Research Association. “It’s not a very efficient way to try to collect that tax.”

McCarthy said Arizona may be losing an estimated $700 million a year in state and local sales taxes by not taxing online sales. He said Congress needs to address the issue and develop a uniform collection system.

The Supreme Court decision came down on Cyber Monday, expected to be the busiest day of the year for online shopping. Huge numbers of people head online on the first working day after the long Thanksgiving weekend in search of Internet deals.

Overall, Internet shopping has become more and more popular, with the National Retail Federation predicting that more than 131 million people would shop online on Monday, up about 2 percent from last year.

Web retailers generally have not had to charge sales taxes in states where they lack a store or some other physical presence. But New York and other states say that a retailer has a physical presence when it uses affiliates — people and businesses that refer customers to the retailer’s website and collect a commission on sales. These affiliates range from one-person blogs promoting the latest gadgets to companies that run coupon and deal sites.

Amazon and Overstock both use affiliate programs. Amazon has been collecting sales tax in New York even as it fights the state over a 2008 law that was the first to consider local affiliates enough of an in-state presence to require sales tax collection.

Overstock ended its affiliate program in New York in 2008 after the law passed and has ended its affiliate programs in other states that have tried to force it to collect sales taxes. Without the affiliate programs, companies still can sell in those states but just won’t partner with local people and businesses that refer customers to their sites.

Both companies collect sales taxes in some states. For example, Overstock .com collects taxes in Utah, where it is based. Amazon says it collects sales tax in 16 states.

“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,” New York Attorney General Eric Schneiderman said.

But each state has its own rules. Although Monday’s result settles the issue for New York, legislatures and courts in other states have come to different conclusions — meaning that some Americans will still get state tax-free Internet purchases from certain websites, while others won’t simply because of where they live.

In October, for example, the Illinois Supreme Court threw out a law that would tax certain Internet sales, saying the “Amazon tax” violated federal rules against discriminatory taxes on digital transactions. State officials are considering whether to appeal their case to the U.S. Supreme Court.

The big Internet sellers are hardly giving ground after Monday’s Supreme Court result. Both Amazon and Overstock said they plan to press their case in Congress in hopes of getting a federal decision on Internet sales taxes that would apply to every state uniformly.

Amazon supports the Marketplace Fairness Act, which passed the Senate in May. That law would require states to simplify their sales-tax laws in exchange for being able to tax Internet sales from companies with more than $1 million in sales annually. The bill is now in the House, where there is no guarantee it will make it to a vote. Supporters say it is needed out of fairness to stores operating at a price disadvantage to online operations that don’t charge sales taxes, while some lawmakers oppose the change as the imposition of a new tax.

Will more states enact laws after the Supreme Court result?

“States might take courage from this non-decision, but they shouldn’t,” said Jonathan Johnson, executive vice chairman of Overstock.com. He said the company pulled its New York affiliate operations in 2008 after that state passed its law and that other companies fled Illinois after that state passed a similar law.

Internet companies will simply operate in states that have laws advantageous to their businesses, Johnson said. “Unless all the states choose to do this, I think, there will be a strong affiliate market” somewhere, he said.

Henchman, vice president of state projects for the Tax Foundation, a national tax-research group, noted that the sales-tax issue may become moot for Amazon if it goes through with its drone program for same-day delivery.

Amazon.com has said it is working on a self-guided drone with a range of 10 miles that could deliver packages to customers in areas remotely.

“In order to do this, they’re going to have to build a lot more warehouses,” Henchman said, giving them in-state presences in those markets and requiring them to collect state sales taxes.