Supreme Court refuses challenge by online retailers to N.Y. tax law

States said they lose more than $23 billion a year in revenue when shoppers buy products online and fail to pay the required sales tax. Above, packages ready to ship move along a conveyor belt at the fulfillment center in Phoenix last year.
(Ross D. Franklin / Associated Press)

WASHINGTON — Inc. and other online retailers suffered a legal setback on Cyber Monday as the Supreme Court turned away their challenge to a New York law that requires Internet companies to collect sales taxes.

Delivered on one of the year’s busiest online shopping days, the court’s decision is expected to accelerate the move by states to try to capture the taxes due on online purchases made by their residents.

The court’s refusal to take up the issue also increases pressure on Congress to settle the long-standing dispute between online and conventional bricks-and-mortar retailers and to enact legislation standardizing online sales tax collection.

“We have a patchwork of out-of-date laws,” said David C. Blum, a Chicago tax attorney uninvolved in the case but who has represented online retailers. “They may have made sense in the era before the Internet, but not now.”


The pioneering New York statute has become a model for efforts by California and other states to capture tax revenue. Today, 34 states by law or administrative process require at least major online retailers to collect sales taxes.

States said they lose more than $23 billion a year in revenue when people buy products online and fail to pay the required sales tax. Conventional retailers complain that they are at a competitive disadvantage because they must collect those taxes on each sale.

Some states have been passing laws that stretch their ability to force online retailers to collect sales taxes. The pressure of those laws helped California and Texas strike deals with major Internet retailers such as Amazon to collect sales taxes so they could locate distribution centers and other facilities there.

New York’s 2008 statute requires out-of-state Internet retailers to collect sales taxes if they used affiliates in the state to direct business to their websites, such as a museum website that directed people to Amazon to buy books.


The law treated these Web affiliates as though they were a sales force within the state. The U.S. Constitution always has allowed states to collect taxes from out-of-state companies if they have employees or offices — a nexus — physically located within a state.

Amazon and Inc. appealed to the Supreme Court, arguing that the New York law was unconstitutional.

The companies cited a 1992 Supreme Court decision involving mail-order catalogs. In that case, the court said states could collect sales taxes from retailers only when they have a physical presence in the state.

Lawyers for Amazon and Overstock had argued that their dealings with other Web affiliates in New York did not constitute having a physical presence there. Citing similar laws in California, Connecticut, Illinois and North Carolina, the companies also said the New York law has “provided a road map for other state legislatures to enact similarly burdensome legislation.”


In Monday’s brief order, the high court turned down the appeals of Amazon and Overstock without comment, a decision that has the effect of upholding New York’s law.

“Bricks-and-mortar [stores] won,” said Bill Dombrowski, president of the California Retailers Assn. “The court has decided that states have the right to pass what New York passed.”

But even if the New York law had been overturned, California’s statute would have remained largely in force, experts said.

Like New York, California established nexus for making out-of-state retailers collect sales taxes. But California also created a basis for sales tax collection if a company had even a minor physical presence in the state.


Amazon, based in Seattle, not only has affiliates in California, but operates a research facility for its Kindle e-reader and has a subsidiary, the Independent Movie Database, located in the Golden State.

Since passage of California’s law in 2011, Amazon’s physical presence in California has ballooned as part of an agreement the company made with Gov. Jerry Brown. Amazon now operates three giant distribution centers — in San Bernardino, Tracy and Patterson — and probably will open more facilities as it moves toward same-day delivery service statewide.

California tax collectors recently reported that the new law generated $263.4 million in new revenue for the state treasury and local governments for the fiscal year ended June 30.

Retailers and state officials now are expected to ramp up efforts to get Congress to adopt a nationwide rule for online sales taxes. The National Conference of State Legislatures said it would send about 200 legislators, in town for an annual forum, to Capitol Hill on Wednesday to lobby for legislation.


Because it has the power to regulate interstate commerce, Congress can pass a law that allows states to force all retailers to collect sales taxes for purchases made by state residents.

“This decision further illustrates why a national solution is needed to level the playing field for local bricks-and-mortar retailers and help them compete more effectively against out-of-state Internet sellers,” said Sen. Dick Durbin (D-Ill.).

Durbin is a leading sponsor of the Marketplace Fairness Act, which gives states the authority to require larger online retailers with no physical presence in those states to collect sales taxes on its residents’ purchases.

The Senate approved the bill on a bipartisan 69-27 vote in May. But the legislation has been stalled in the House, where Judiciary Committee Chairman Bob Goodlatte (R-Va.) wants to make changes.


In September, Goodlatte issued seven principles for such legislation, including that compliance with sales tax laws should be simple and not favor one type of retailer over another.

Some anti-tax groups have opposed the Senate legislation, arguing it was a de facto tax increase because it would cause many people to pay more in taxes. Consumers are required to pay sales taxes to their state for all their online purchases, but only about 1% do so.

Brandon Arnold, vice president of government affairs at the National Taxpayers Union, called the Supreme Court decision “Cyber Monday’s Worst Deal.”

The National Retail Federation, which represents online and conventional retailers, said it was time for a more comprehensive solution.


“As we see the growth in Internet sales every year, there’s more of a need to figure out a way for these taxes to be collected by the retailer, but in a way that’s not too burdensome,” said Rachelle Bernstein, the trade group’s vice president and tax counsel. “I think that’s what Congress is working on and that’s what’s still needed.”

Amazon also supports a national approach and has backed the Senate bill because it “would 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,” said Ty Rogers, an Amazon spokesman.


Times staff writer Marc Lifsher in Sacramento contributed to this report.