Justices Sit Out Internet Retailers' Sales Tax Dispute

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Intentionally or not, the U.S. Supreme Court chose Cyber Monday to announce it would not slow down the march of states seeking to impose sales taxes on Internet retail purchases.

Without comment, the justices on Monday denied review in a pair of cases, Overstock.com v. New York and Amazon.com v. New York, which challenged New York state's 2008 law imposing a sales tax on Internet retailers, even those without a brick-and-mortar physical presence in that state.

The New York Court of Appeals upheld the law in part because the companies had "affiliates" in that state that receive fees for maintaining sites that promote online sales for Amazon and Overstock. Fourteen other states impose similar sales taxes on similar "click-through" theories. Overstock has since ended its affiliate program in New York because of the tax dispute.

The U.S. Supreme Court's action appears to halt, at least for now, Amazon's aggressive legal campaign against state taxation, which it waged even as it paid the taxes in many of the states. It hired former Solicitor General Theodore Olson of Gibson, Dunn & Crutcher to take the company's case to the high court, but even Olson's powers of persuasion did not work this time.

Olson and David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, who represented Overstock, argued in their petition to the court, that the New York law "abrogates the physical-presence requirement" the Supreme Court established in the Quill Corp. v. North Dakota case in 1992.

"The decision below leaves in place a state law that will significantly and unduly burden interstate commerce, provides a road map for other jurisdictions to inflict similar burdens on interstate commerce, and threatens to sow widespread confusion," Olson wrote. He could not be reached for comment.

New York, represented by Solicitor General Barbara Underwood, defended its tax in part as a way to "restore a level playing field between in-state brick-and-mortar stores and their out-of-state Internet-only counterparts." States complain they lose billions of dollars in taxes on unreported online sales.

In urging the court not to take up the cases, Underwood also said "in-state solicitation, even by only a handful of sales representatives (let alone the thousands that petitioners have here), has always satisfied the dormant commerce clause's requirement of physical presence." As a result, she said, the New York court's ruling was unremarkable and did not need review.

The Supreme Court's reluctance to become involved, in spite of a burgeoning split among state courts and a range of different rules state by state, may 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 Wm. Gregory Turner of the Council on State Taxation, a trade group of multistate businesses. "You've got to look at what the court has done and think that the court is not going to step into this and is waiting for Congress to act."

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