The price you pay for items bought on the Internet could be heading up, after the U.S. Supreme Court decided on Monday to stay out of a fight over adding Internet sales taxes to consumer purchases.
Supporters of the tax measures believe they create an even playing field for brick-and-mortar business and online businesses, by making sure each pays the same local and state tax rates. They also point to an estimated $23 billion in state taxes that go uncollected from online sales.
Opponents believe the task of collecting taxes from all local towns and states would prove difficult to bear, especially for small businesses. And still others oppose any new tax measures on the principle that they represent a tax increase.
The Supreme Court, by turning down the cases, effectively wants Congress to work out the problems.
The issue of who decides the Internet sales tax question goes back to 1992, when the Supreme Court told Congress to work out the problem in a ruling that predated the modern commercial Internet.
In Quill Corp. v. Heitkamp, 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 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.
Amazon and another online retailer, Overstock.com, wanted the question resolved by the highest court in the land. Amazon and Overstock have been complying with New York’s law, even though they were challenging it in court.
The first case, Amazon.com, LLC v. New York State Department of Taxation and Finance, asked 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.
The other case, Overstock.com, Inc. v. New York State Department of Taxation and Finance, posed 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.
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.
So for now, the Internet sales tax issue heads to the back of the line of issues in the queue in Congress, and consumers face the prospect of seeing more state and local taxes added directly to online purchases.
Scott Bomboy is the editor in chief of the National Constitution Center.
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