The U.S. Supreme Court’s decision not to hear a sales tax case filed by Amazon.com validates laws in Maine and 12 other states that require online, phone and mail-order retailers to collect sales taxes if they have a physical presence in the state.
It also means that consumers could soon be taxed on all purchases, whether made online, by catalog or in person, if other states or Congress pass similar laws.
Mainers pay no sales tax now on purchases they make online from retailers that don’t have a physical presence in Maine. But a law passed this year expanded the state’s definition of a physical presence. The law is intended to help brick-and-mortar retailers, which have to collect the state sales tax, but has had little practical impact since it took effect Oct. 9.
The Supreme Court’s decision Monday not to hear an appeal of a New York court ruling against Amazon could be a sign that all retailers may soon have to collect state sales taxes, regardless of where they are or how they sell their products.
Debate over whether all types of retailers should have to collect the same taxes has raged for decades, with groups such as retailers, consumers and state government leaders lining up on either side of the issue. The question has been complicated by the growth of companies like Amazon and eBay, which sell products in every state but don’t operate stores.
Chris Bowe, co-owner of Longfellow Books in Portland, said it’s ridiculous that online retailers still don’t have to collect sales taxes in most states.
“One of the excuses they like to use is that it’s too complicated,” Bowe said. “This is coming from a guy (Amazon President and CEO Jeff Bezos) who says he’s going to start delivering books with drones.”
Brick-and-mortar retailers have long argued that they are at an unfair disadvantage because they have to collect sales taxes while most online, TV and catalog retailers do not.
They say that requiring all retailers to collect the same taxes would level an uneven playing field that has driven many customers to the Web to buy products tax-free.
CONGRESS WEIGHS BILL TO TAX IT ALL
The controversy, however, predates the rise of e-commerce companies by decades. In 1992, the issue came to a head with a U.S. Supreme Court case called Quill Corp. v. North Dakota.
Quill, an office-supplies seller, sued the state of North Dakota over its attempt to collect a use tax on inventory-management software that some of Quill’s customers in the state were using. Although Quill had licensed the software to companies in North Dakota, it had no physical presence in the state, such as a storefront or a sales force.
The Supreme Court ruled unanimously in favor of Quill and established a legal standard that still stands: that a state can force a retailer to collect a state tax only if the retailer has a physical presence in that state.
However, the court said Congress could overturn the ruling by passing a federal law requiring all retailers to collect state sales taxes regardless of whether they have a physical presence.
In May, the U.S. Senate passed the Marketplace Fairness Act of 2013, which would do exactly that. The bill is now being considered by the House Judiciary Committee.
If the act becomes law, e-commerce companies will lose the price advantage that comes from not collecting sales taxes, and consumers will be taxed on all online, phone and mail-order purchases.
Other groups, including some small businesses, would benefit from the change in various ways. Maine, for instance, would recoup an estimated $20 million a year in sales tax from out-of-state purchases, according to Maine Revenue Services.
MAINE LAW IS LIKE ONE IN NEW YORK
In the case known as Amazon.com LLC v. New York State Department of Taxation and Finance, the online retailer sued New York over its law that forces online retailers to collect the state sales tax if they operate affiliate-marketing programs in the state. Such programs allow individuals and businesses to earn commissions by advertising or linking to the online retailer from their own websites.
The New York law posits that if an online retailer has a marketing affiliate in the state, that meets the Supreme Court’s definition of a physical presence.
Amazon challenged New York’s position on constitutional grounds. Overstock.com, another online retailer that has an affiliate-marketing program, also challenged the law.
After a New York court ruled against the online retailers, they petitioned the Supreme Court to overturn the ruling. On Monday, the Supreme Court decided not to take up the case, thus allowing the law to stand as written.
The law that Maine passed this year is functionally identical to New York’s law. Eleven other states have such laws.
Rather than challenging the Maine law in court, Amazon and Overstock discontinued their affiliate marketing programs in Maine, eliminating the physical presence that would have required sales tax collections. That was a blow to many small businesses that had been earning revenue through the affiliate program.
It also rendered the new law somewhat useless, since Maine still receives no sales tax revenue from the two major e-commerce companies. Bowe, the bookstore owner in Portland, said that uncollected tax represents “millions and millions of dollars, which we need.”
IMPACT ON BUSINESSES, CONSUMERS
Although there is no guarantee it will pass, the federal Marketplace Fairness Act has a broad range of supporters, including brick-and-mortar retailers, Gov. Paul LePage and even Amazon.
The law would require states to simplify their sales tax laws and allow them to tax Internet sales by companies with more than $1 million in annual revenue.
Amazon officials have said repeatedly that their objection to the existing state tax laws is based on the difficulty of setting up systems to properly charge customers in all of the nation’s roughly 9,600 state and local sales tax jurisdictions. The challenge would be so daunting that it likely would put smaller online retailers out of business, they have argued.
Amazon founder Bezos has said he would prefer to have the federal law pass with its requirement for a simpler sales tax structure, rather than have states enact their own e-commerce tax laws one by one.
Company representatives have said that if the federal law passes, they will reinstitute the affiliate marketing program in Maine and other states and start collecting state sales taxes.
Jason Michaud of Portland said Tuesday that an added state sales tax would not alter his buying online. He said he uses e-commerce primarily to buy food and other items for his dog.
“I like the convenience of it,” he said. “I don’t have to leave the house, and it comes right to your door.”
But Fran Houston of Portland, who uses the Internet to buy big items such as computers and other electronics, said a sales tax on online purchases would be a major deterrent for her.
She said the price difference on those items would be significant if Maine’s 5.5 percent sales tax were added.
Houston said she enjoys the convenience of buying online, but that doesn’t stop her from shopping for some items the old-fashioned way.
“There’s times when I want to buy in little shops,” she said.
J. Craig Anderson can be contacted at 791-6390 or at: