Under the U.S. Supreme Court: 'Amazon tax' headed for the justices?

By MICHAEL KIRKLAND, UPI Senior Legal Affairs Writer
Amazon CEO Jeff Bezos talks about the new Kindle Paperwhite and Kindle Fire HD during a news conference held at the Barker Hangar in Santa Monica, California on September 6, 2012. UPI/Phil McCarten | <a href="/News_Photos/lp/84a8730d08ef133458fd8e9c1cd5597e/" target="_blank">License Photo</a>
Amazon CEO Jeff Bezos talks about the new Kindle Paperwhite and Kindle Fire HD during a news conference held at the Barker Hangar in Santa Monica, California on September 6, 2012. UPI/Phil McCarten | License Photo

WASHINGTON, Nov. 10 (UPI) -- Will the U.S. Supreme Court, with its big legal feet, step into the debate over whether states may collect taxes on out-of-state Internet sales -- popularly known as the "Amazon tax" -- now that two lower courts have reached different conclusions?

If the Supreme Court takes on such a case, and if the states are triumphant, it would be a rude awakening for millions of computer users.


Lots of online voices say the dispute is headed for the high court. A split among the lower courts is a criterion for Supreme Court review.

But the justices may want the lower courts to thrash out issue more, and get more facts and decisions on the record, before they hear argument on it. The last time the Supreme Court ruled generally on the issue, in 1992's, Quill vs. North Dakota long before Internet sales were a fact of life, the justices said a state sales tax on an out-of-state company placed "an unconstitutional burden on interstate commerce." The decision didn't rule out Congress delegating its authority to the states to implement such a tax. There was only one partial dissent.


On the modern Supreme Court, the justices may view the dispute as purely a political problem for the legislative branch, rather than the judicial branch.

The proposed Marketplace Fairness Act, which would allow the states desperate for new revenue to collect sales tax and consumption tax from online and other out-of-state retailers, passed the Democrat-controlled U.S. Senate in May. Even online sales giant supports the proposal.

But few expect a new tax to be approved in the Republican-controlled U.S. House.

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In Congress-speak, the proposed act would allow states "to collect and remit sales and use taxes with respect to remote sales sourced to that state, but only if the state adopts and implements the minimum simplification requirements. ... Such authority shall commence beginning no earlier than the first day of the calendar quarter that is at least 6 months after the date that the state" enacts legislation to exercise the authority granted by the act.

Sen. Dick Durbin, D-Ill., one of the principal sponsors of the act, said it involves "basic economic fairness."

"Small businesses in Illinois and across the country don't want special treatment," Durbin said in March 2012. "They don't want a handout -- all they want is a level playing field. The Marketplace Fairness Act gives them that while helping states avoid raising taxes or making painful cuts that will slow our economic recovery.


"This is a matter of basic economic fairness, and for some small businesses it's a matter of economic survival," he added. Small local businesses "create jobs for local workers; they are our neighbors and they deserve a fair shake. But local businesses will never be able to compete if we continue this unfair advantage for huge online retailers."

Not everyone is so enthusiastic.

Writing in the Huffington Post, John Conway, chief executive officer of the Astonish Media Group, said the proposed act "is supposed to level the playing field between the traditional brick-and-mortar storefronts of the old economy and the online and catalog sales of the new economy. It takes a simple and possibly non-existent problem, and attempts to solve it in the most obtuse and damaging way it could, and then tries justifying itself with a terrible misnomer."

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Those small local businesses might like to conduct online sales on their own, he said, but if they violate some state law they could be liable, or they could be forced to file some kind of tax forms in any number of states.

In many states, consumers are supposed to pay the sales tax on their own -- almost impossible to enforce -- though the Marketplace Fairness Act would place the burden on sellers.


"Even for those who come no closer to a secret Swiss bank account than a box of Swiss Miss cocoa mix, there's a good chance they're shielding some dealings from the taxman," business columnist Phil Rosenthal wrote last month in the Chicago Tribune. "You know that 'no sales tax' discount on online commerce? Well, um, technically, the consumer is still supposed to pay the state even if the appropriate percentage isn't collected at the time of sale.

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"Now you and I know this, fill out the appropriate paperwork and fork over the cash because we're just those kinds of upstanding citizens. Right? But apparently there are some people out there who -- gasp -- don't report the transactions and include the amount when they file their state tax returns," Rosenthal said. "And this has been a source of great resentment both among local governments scrounging for spare change and brick-and-mortar retailers who feel put at a competitive disadvantage."

There already is a federal law on the books, the 1998 Internet Tax Freedom Act, that keeps states from collecting "Internet only" taxes. But it does not exempt online sales from even-handed taxation.

Back to the courts.

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Earlier this year, New York's highest court, in a 4-1 ruling, upheld that state's "Amazon tax" designed to collect taxes for online sales from out-of-state companies that have in-state affiliates. Amazon and have asked the Supreme Court to step in, saying if each state enacts an "Amazon tax" it will lead to chaos.


But in October, in contrast, the Illinois Supreme Court struck down that state's similar law.

Though it did not rule on whether the state law violated the Constitution's commerce clause -- which among other things gives Congress the sole power to regulate interstate commerce -- the 6-1 Illinois ruling did strike down the state law because it was pre-empted by the Internet Tax Freedom Act.

"Because we agree with the [Cook County] Circuit Court's conclusion that the relevant portions of [the state Amazon tax] are pre-empted by federal law, we affirm the judgment of the circuit court" striking down the law, the Illinois Supreme Court said.

"Now we have a split between [the New York and Illinois] state supreme courts, but they're split for a different reason," tax lawyer David Blum told Crain's Chicago Business. "E-commerce is a multibillion-dollar industry. This is an issue that the [U.S. Supreme Court] needs to address."

Writing for, Deborah Sweeney, chief executive officer of, said the Supreme Court "may feel compelled to actually review these cases now that the highest courts in two different states have reached opposite decisions. The Quill decision gave Congress power to enact legislation allowing states to enforce collections. Though the Senate passed a law, the Marketplace Fairness Act, that would allow states to do this, it is very unlikely that any major tax legislation will pass through the House. All of this points to the Supreme Court intervening."


Though it is challenging the New York ruling, Amazon said it is collecting sales tax for the states that require it: Arizona, California, Connecticut, Georgia, Kansas, Kentucky, Massachusetts, New Jersey, New York, North Dakota, Pennsylvania, Texas, Virginia, Washington, West Virginia and Wisconsin.

Amazon's revenue in the last quarter? More than $17 billion.

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