High Court Leaves New York's Online Sales Tax Law in Place

After justices decline retailers' cases, Congress eyed to address online loophole.

, The National Law Journal

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Amazon fulfillment center
States are seeking revenue from Internet sales from companies such as Amazon.

Dec. 2 was an extraordinary day for Amazon.com Inc., the mammoth online retailer: Cyber Monday sales reached new heights, its fanciful plan to use drones to make deliveries was creating buzz — and then the U.S. Supreme Court spoiled it all by turning down Amazon's challenge to online sales taxes.

That perfect storm may explain why the Supreme Court's denial of certiorari in Amazon.com v. New York and the ­parallel case Overstock.com v. New York made such big news, even though the issue of taxing Internet purchases is far from resolved.

Justices often complain that the media make too much of cert denials, when those denials usually have more to do with the configuration of a specific case than the justices' views of the underlying issue. Another case raising the same issue could come along — and on this issue, one probably will — and the justices could grant it, without an ounce of remorse about all the trees that were felled for the briefs in the earlier cases.

But the Amazon and Overstock petitions seemed to have more significance than usual, and not just because they were rejected on Cyber Monday. Both had top Supreme Court advocates making their case — Theodore Olson of Gibson, Dunn & Crutcher for Amazon and David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel for Overstock. And the New York tax law they were challenging has been the model for other states seeking to gain revenue from Internet sales, even from companies with no physical presence in their states.

New York based its tax on the fact that both retailers had affiliate programs through which they paid residents of New York whose websites offered "click through" opportunities to make purchases from Amazon and Overstock (though Overstock ended its affiliate program as part of the tax dispute).

The New York Court of Appeals, the state high court, said those affiliates created enough of a "physical presence" in New York to justify hitting them with a sales tax. That was the test the Supreme Court used in the 1992 ruling Quill v. North Dakota, long before the Internet selling boom. Quill involved a mail-order office supply business.

New York Attorney General Eric Schneiderman said the Supreme Court's action, which had the effect of allowing the New York ruling to stand, "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."

Olson declined comment, but Freder­ick said, "I don't think the court was showing any lack of interest in this issue" by denying cert. Acknowledging that it is difficult to speculate why the court denies review, Frederick said, "The justices may have been concerned that this was a facial challenge, not an as-applied challenge."

New York's brief noted that fact and also said there was not yet a developed split among state courts. In a situation like that, the justices often want to see the issue "percolate" at the state appellate level, developing facts on the ground. The Illinois Supreme Court struck down that state's online sales tax law in October, but on a different statutory basis.

LOOKING TO CONGRESS

The Supreme Court's rejection of the New York cases may also reflect the court's view that Congress, with its power over interstate commerce, should straighten out the situation.

"All eyes are now going to look to Congress," said William Gregory Turner of the Council on State Taxation, a trade group of multistate businesses. "States are all over the place. There's a feeling that, whatever the rule should be, we need to know what it is. It's a much more complex world now."

But Congress is not likely to pick up the ball. The Senate in May approved a bill that would make companies with more than $1 million in sales outside their own states pay sales taxes to other states. In the House of Representatives, however, the bill's fate is uncertain because Republicans view it as a tax increase. Many businesses including Amazon supported the bill, in part for the sake of uniformity.

Amazon spokesman Ty Rogers urged Congress to act to "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." At the same time it has been fighting against state sales taxes, Amazon has been paying them in 16 states.

Bill Hughes of the Retail Industry Leaders Association said, "It's time for Congress to close the sales tax loophole and give all retailers a fair shot in the free market." But Overstock's Frederick was not optimistic about Congress resolving the issue. "In the current environment, waiting for Congress to act does not seem very promising," Frederick said. "People have made that argument for nearly 50 years and Congress hasn't acted, which is why the court occasionally feels the need to review challenges to state taxes that interfere with interstate commerce."

Contact Tony Mauro at tmauro@alm.com.

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