States Split on Legality of Amazon Tax

November 5, 2013

Tuesday, November 5, 2013, by Britton Lewis
It has been said time and time again that the only sure things in life are death and taxes, but I’d stipulate there is a third certainty—online shopping—and it appears that two of those certainties may be on a collision course before the Supreme Court.  Online shopping through outlets like Amazon.com, eBay, and Overstock.com have become renowned for their convenience and reduced prices, but have come at a cost.  Estimates suggest that states lose out on around $23 billion dollars in uncollected tax revenue as a result of consumers’ reliance on internet purchases.  As a result, many states have recently passed legislation that requires online retailers to collect these taxes on their behalf.

Estimates suggest that states lose out on around $23 billion dollars in uncollected tax revenue as a result of consumers’ reliance on internet purchases.

From a tax perspective, online purchases were never exempt from sales taxes, rather consumers were supposed to pay taxes on them independently, it just rarely happened. Thus, states are currently left either penniless or in need of legislation.  For much of this year, tax proponents have pushed for the Marketplace Fairness Act to clear the House and Congress, but it is currently unclear if and when this legislation will be enacted.  Among the key proponents for this bill are mall owners, “Main Street” enthusiasts, small business associations, corporate retail giants like Wal-Mart, and surprisingly Amazon itself (as Amazon expands their distribution centers to more states, they find themselves responsible for collecting more in-state retail taxes than many of their competitors).  In the meantime, 14 states currently collect taxes from online retailers.  Although these state initiatives are gaining popularity they are problematic, and have thus encountered mixed responses in state courts.
The principle concept behind states collecting taxes from out-of-state corporations conducting sales in state was ruled unconstitutional for unduly burdening interstate commerce in Quill Corp. v. North Dakota.  The landmark Supreme Court case predates Amazon and the online shopping phenomenon as the case was passed in 1992.  The ultimate holding is that a state cannot levy taxes (or require collection on the state’s behalf) on an out-of-state corporation that has no physical presence within the state’s borders.
Sales taxes targeting the likes of Amazon have gone to the Supreme Court of two prominent states thus far, and received contradictory results.  In mid-October, the Illinois Supreme Court struck down the Illinois online retail tax provision; although they determined that the “Main Street Fairness Act” was preempted by a federal law that forbids taxing e-commerce.   On the other hand, New York’s e-commerce tax was upheld by the New York Court of Appeals.  These differing high court opinions and New York’s affirmation of the legislation set the stage for Amazon and Overstock.com to appeal to the Supreme Court.  The division in opinions between two large states makes a strong case for the case to be heard so long as the Marketplace Fairness Act is not implemented.