Will the Supreme Court Hear the Online Tax Case?

by Joseph Henchman, US Tax Foundation, December 02, 2013

UPDATE: The Court has declined to hear the case.

Last Tuesday, the justices of the Supreme Court gathered in their conference room to decide which to hear of the many cases appealed to them. Among the cases brought before them is one challenging the constitutionality of New York’s law requiring sales tax collection from some out-of-state online vendors. An announcement of whether they will hear it could come as early as today.

The law is a complicated one, made so in an effort to get around the Supreme Court’s past rulings that states could not require sales tax collection by a company if that company is not physically present in the state. The 2008 New York law expands the definition of physical presence to a seller who (1) is not physically present, (2) but who has an agreement with an in-state affiliate (3) to whom the seller pays commissions for referring potential customers, (4) where such sales exceed $10,000 per year. Those who sell generally and just happen to sell to New Yorkers are treated the same as those who specifically target New York customers. A seller in that situation can “rebut” this presumption by proving that no solicitation occurred, although proving that something didn’thappen on the Internet is obviously difficult.

Call me old-fashioned, but physically present means physically present, not “not physically present but who does these four things.” The $10,000 threshold is tiny for a state like New York (the Supreme Court struck down a $1 million threshold for North Dakota in 1992 as not substantial enough; a proportional threshold for New York today after adjusting for population and inflation would be $51 million). Supporters of the law point to the Tyler Pipe and Scripto cases, but those involve third parties whose work is vital to the taxpayer’s market in the state; no such inquiry is required by the New York law. Finally, the rebuttable presumption is unworkable in practice.

Eleven states have adopted similar “Amazon tax” laws, some loosening the requirements still further:

• North Carolina (2009), Arkansas (2011), Maine (2013), Minnesota (2013) adopted an identical law.
• Rhode Island (2009) adopted a law with a lower sales threshold ($5,000).
• Connecticut (2011) adopted a law with a lower sales threshold ($2,000) and no rebuttability.
• Illinois (2011) adopted a law with the $10,000 threshold but no rebuttability. The law has been struck down by the Illinois Supreme Court.
• Texas (2011) adopted a broader law with no minimum threshold and no rebuttability. The Texas Comptroller, seeking to avoid a court case, is voluntarily not enforcing the broader provisions of the law.
• Vermont (2011) adopted an identical law, with the proviso that it not take effect until it passes in 15 other states.
• California (2012) adopted a similar law with the further requirement that the seller have national sales of at least $1 million.
• Georgia (2012) adopted a law with a higher threshold ($50,000).

The odds are low that the Supreme Court will take the case. They get over 8,000 appeals a year and hear only about 1 percent of them. The common take in the state tax community is that the Court (a) doesn’t like tax cases and (b) feels like they said their piece on it in the Quill case of 1992, and if people want to change it, they can go to Congress. States have exploited this vacuum to pass laws that increasingly challenge what the Court said in 1992.

We submitted a brief asking the Court to consider hearing the case as an opportunity to redirect state action toward constructive action, rather than passing these harmful and disparate laws that have the effect of damaging interstate commerce. Congress is considering bills to standardize online sales tax collection while requiring states to simplify their systems, but many states have declined to simplify their system since they can go the Amazon tax law route. The main bill is the Marketplace Fairness Act, which has passed the Senate and is pending in the House.

If the Court declines to take the case, the status quo will continue. States will continue passing these problematic laws and the congressional bill may or may not pass. The Illinois law may get appealed next to the Supreme Court, and if they let that ruling stand, we’ll have the highest courts of Illinois and New York with opposite holdings. It’s not ideal.

If the Court does take the case, expect a flurry of activity. There’s no real clue how the Court would rule on the case—they could re-affirm Quill and wipe out all these state laws, uphold some but not others, rule narrowly on the New York law, or wash their hands of the whole thing and tell Congress to fix it. States and the business community may slam their heads together to work out a solution before the Court imposes one in its decision.

I’ll update this post when we hear more this morning about what the Court will do. The cases are Overstock.com, Inc. and Amazon.com LLC v. New York State Dep’t of Taxation and Finance, Nos. 13-252 and 13-259.