On Tuesday, the Supreme Court will debate, behind closed doors, if Americans should be forced to pay a sales tax on almost all items they buy on the Internet.
Two cases are in front of the Justices for consideration during a private conference. If they are deemed worthy of a full review, the cases could he heard next year by the Justices, and a clear ruling could emerge about a rather “taxing” issue for retailers and consumers.
In reality, many Americans are already paying taxes for items bought on the Internet, especially from the giant retailer Amazon.com.
But Amazon and another online retailer, Overstock.com, want the question resolved by the highest court in the land.
The first case, Amazon.com, LLC v. New York State Department of Taxation and Finance, asks if New York state’s tax law violates the Constitution’s Commerce Clause, because it requires out-of-state online retailers without a physical presence in New York to collect taxes from purchases made by New Yorkers.
In other words, if you are living in New York City and buy $200 worth of shoes online, you would need to pay local taxes of 8.5 percent – even though the online retailer (and the shoes) were in California.
The other case, Overstock.com, Inc. v. New York State Department of Taxation and Finance, poses a related question: Is a business with no employees or operations in a state subject to the state’s taxing power because it has entered into a contractual relationship with a resident of the state who is not its legal agent.
This pertains to the use of Internet third-party affiliates who market products offered by retailers such as Overstock and Amazon.
For now, Amazon and Overstock are complying with New York’s law, even though they are challenging it in court.
But in a twist, the Illinois Supreme Court ruled in October that state laws requiring the so-called Amazon tax were unconstitutional.
In Performance Marketing Association, Inc. v. Hamer, the Illinois court ruled against a statute that required out-of-state retailers engaged in “performance marketing” to collect local taxes and pay them to the state. (Performance marketing is where third-parties get payments made from sales they refer to a national online retailer.)
The Illinois court said the state violated the Internet Tax Freedom Act, so it didn’t consider the Commerce Clause in its ruling.
The issue of who decides the Internet sales tax question goes back to 1992, when the Supreme Court put the ball in the lap of Congress in a ruling that predated the modern commercial Internet.
During the past 20 years, many online businesses have cited that 1992 Supreme Court ruling, Quill Corp. v. Heitkamp, as proof that online retailers don’t have to charge—and collect—sales taxes in states where they don’t have a physical business.
Quill was an out-of-state mail-order house that sold products without having a store or sales staff in North Dakota.
The Supreme Court found that states had a right under the Due Process Clause of the Constitution to collect sales taxes, but the burden placed on out-of-state businesses to collect the taxes ran afoul of the Commerce Clause.
“The State’s enforcement of the use tax against Quill places an unconstitutional burden on interstate commerce,” said Justice John Paul Stevens.
The court then said that the “underlying issue here is one that Congress may be better qualified to resolve, and one that it has the ultimate power to resolve.”
Since then, Congress has been unable to agree on the issue. Its most-recent effort, the Marketplace Fairness Act of 2013, was passed by the Senate in May 2013 with President Barack Obama’s support.
The law would let states collect sales taxes from residents who buy online from out-of-state retailers. The retailers would collect the tax at the point of purchase, and remit the taxes to the eligible states and local municipalities.
But the GOP-controlled House hasn’t acted on the legislation, which is viewed by some as a tax increase.
Making the situation murkier is the fact that Amazon supported the Marketplace Fairness Act, while Overstock opposed it.
Amazon has also started collecting taxes in 16 states, including New York and California, where it also has built warehouses. Currently, some states have similar agreements with retailers like Amazon. Others require people to report an annual use tax to estimate how much they spend online each year.
For now, there’s not a consensus among court watchers about the Supreme Court taking the Amazon and Overstock cases, given that the last ruling on the subject was in 1992.
But since the Illinois supreme court decision didn’t touch questions about the Commerce Clause, there may need to be more activity in the legal system – and more inactivity in Congress, before the cases are accepted by the Justices.
Scott Bomboy is the editor in chief of the National Constitution Center.
Recent Constitution Daily Stories