Bloomberg Article – US Supreme Court – Amazon/Overstock


Amazon Without Borders in States Seen Drawing High Court: Taxes

By Erin McManus – Nov 1, 2013

Online merchants and brick-and-mortar retailers are watching to see if the Supreme Court steps in to erase a patchwork of state laws governing sales-tax collection from Web-based transactions.

At issue are appeals by Inc. (AMZN), the top Internet store, and Inc. (OSTK) over a New York state law that requires taxes be paid on sales through a New York-based affiliate site, Bloomberg BNA reported. Both had challenged the statute as unconstitutional in 2008 and lost.

Customers who buy from out-of-state retailers generally must pay taxes on the purchases. Few do, and states have made only minimal efforts to collect, instead lobbying Congress for a national solution. States miss out an estimated $23 billion a year because sales levies go uncollected. Some have made deals with Amazon to start charging tax as it adds warehouses.

“Increasing discrepancies in the manner that state courts address laws governing online retailers is likely to influence the Supreme Court to hear arguments on the issue,” said Stephen Kranz, a partner at McDermott Will & Emery LLP in Washington. “As state-level litigation spreads across the country, so does the problem. That should encourage the court to hear one or more of the cases.”

Recent rulings set conflicting precedents in different states. Lawyers cite Performance Marketing Association Inc. v. Hamer, which overturned an Illinois law similar to New York’s, saying it violated the U.S. Internet Tax Freedom Act, which bans “discriminatory taxes on electronic commerce,” according to a New York court brief filed Oct. 23.

Conflicting Rulings

Conflicting state court rulings may prompt the justices in Washington to consider providing a resolution.

“The Illinois decision is clearly and directly contrary to the New York decision,” Michael Semes of EY LLP said.

In rulings on the separate Overstock and Amazon cases, New York judges upheld the law, saying the companies “established an in-state sales force” through affiliates who get commissions for hosting online links to the retailers. Thomas H. Mattox, New York’s taxation and finance commissioner, said in March after the high court ruled that the law was a matter of treating both types of merchants fairly.

Amazon and Overstock argue that the law violates the commerce clause of the U.S. Constitution.

“The Illinois decision raises the stakes,” John Stephenson of the American Legislative Exchange Council said. “We are beginning to see a patchwork quilt — a lot of states are doing different things. We want to know what the rules of the road are.”

Physical Presence

Amazon and Overstock say the New York statute also violates the constitution’s due process clause and is in direct conflict with a 1992 decision, Quill Corp. v. North Dakota ex rel. Heitkamp, by requiring retailers without a physical presence in the state to collect sales tax. In Quill, the high court held that merely advertising in the state didn’t create a sufficient physical presence to require levy collections.

“The New York decision touches on whether the physical-presence test in Quill is outdated, because the world has changed dramatically since that decision,” said Jamie Yesnowitz, a principal at Grant Thornton LLP in Washington.

The physical-presence test still controls the application of the law, Stephenson said.

The issue also is “ripe for congressional action,” Kranz said. Lawmakers are considering a bill to require all Internet merchants and catalog retailers to collect sales taxes on purchases for governments of areas where their customers are. The measure passed the U.S. Senate 69-27 in May and is pending in the House of Representatives.

Divided House

The legislation, supported by the Obama administration, attracted backers including Best Buy Co. (BBY), Amazon and mall owners. Amazon is expanding distribution operations into more states to speed deliveries, and pay taxes to some, such as Texas and California.

The bill would in effect reverse a 1992 Supreme Court ruling that barred states from taxing businesses that lack a physical presence within their borders. Under the measure, states would be required to join an interstate compact with streamlined rules or provide software to retailers. Yet it has divided members of the House, so may not move forward soon.

Which may leave the matter to the high court to decide.

To contact the reporter on this story: Erin McManus at

To contact the editor responsible for this story: Cheryl Saenz at