Justices won't hear appeal of NY internet taxation

AP Photo/Ross D. Franklin

On perhaps the busiest online shopping day of the year, the Supreme Court refused on Monday to wade into a dispute over New York state's taxes on purchases on websites like Amazon.com. The move likely will prompt more states to attempt to collect taxes on Internet sales — and ignite a furious battle in Congress between Internet sellers, brick-and-mortar stores and states hungry for extra tax revenue.

The high court without comment turned away appeals from Amazon.com LLC and Overstock.com Inc., in their fights against a New York court decision forcing them to remit sales tax the same way in-state businesses do. This could affect online shopping in that state, since for many shoppers one of the attractions of Internet purchasing is the lack of a state sales tax, which makes some items a little cheaper than they would be inside a brick-and-mortar store.

The National Council of State Legislatures estimated that states lost an estimated $23.3 billion in 2012 as a result of being prohibited from collecting sales tax on online and catalog purchases.

Web retailers generally have not had to charge sales taxes in states where they lack a store or some other physical presence. But New York and other states say that a retailer has a physical presence when it uses affiliates — people and businesses that refer customers to the retailer's website and collect a commission on sales. These affiliates range from one-person blogs promoting the latest gadgets to companies that run coupon and deal sites.

Amazon and Overstock both use affiliate programs. Amazon has been collecting sales tax in New York as it fights the state over a 2008 law that was the first to consider local affiliates enough of an in-state presence to require sales tax collection. Overstock ended its affiliate program in 2008 after the law passed.

But each state has its own rules on Internet sales taxes. While this settles the issue for New York state, other states like Illinois have come to different conclusions — meaning that some Americans will still get state-tax free Internet purchases from certain websites, while others won't simply because of where they live.

And the big Internet sellers aren't giving up. After the decision, both Amazon and Overstock said they plan to take their case to Congress in hopes of getting a federal decision on state-level Internet sales taxes that would apply to every state uniformly.

“States might take courage from this non-decision but they shouldn't,” said Jonathan Johnson, executive vice chairman of Overstock.com. Johnson pointed out that they pulled their New York affiliate operations in 2008 after that state passed its law, and that other companies fled Illinois after that state passed a similar law.

Internet companies will simply operate in states that have laws advantageous to their businesses, Johnson said. “Unless all the states choose to do this, I think there will be a strong affiliate market” somewhere, he said.

For example, the Illinois state Supreme Court in October threw out that state's taxes on certain Internet sales, saying the so-called “Amazon tax” violated federal rules against "discriminatory taxes” on digital transactions. State officials are considering whether to appeal their case to the Supreme Court.

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