Amazon.com Inc and other out-of-state online retailers must collect state tax on New York state customers, the state's highest court ruled on Thursday, a decision at odds with other courts that could set the stage for a showdown in the U.S. Supreme Court.
The case, combining two brought by Amazon and Overstock.com Inc, was decided by the New York State Court of Appeals by a vote of 4-1.
This particular court case has been going on since 2008, when Amazon filed suit to block a new sales tax law that had been passed as part of the NY state budget. That law required Amazon and other online retailers to collect sales and use taxes on any orders shipped to customers in the state of NY.
It's important to note here that Amazon's customers in NY have always been required to pay the taxes, but until that law passed Amazon had no legal requirement to collect the taxes because Amazon did not have a physical presence in the state.
That changed in NY in 2008 when the state decided that Amazon's NY-based marketing affiliates, some of whom were independent websites like myself, counted as a physical presence in the state of NY (or nexus, to use the proper legal term as defined by the USSC). It is that new definition that was upheld today by the NY State Court of Appeals.
New York was the first state to come up with a new reason for online retailers to collect sales and use taxes, and when they tried this trick in 2008 their actions verged on the ridiculous and were based on a questionable definition of nexus.
But now it is 5 years later and that is no longer the case. Eight states have passed similar laws, and more are considering doing so. There is strength in numbers, so the legal concept of affiliate partners meeting the definition of a nexus in the state isn't as ridiculous as it was 5 years ago. As much as Amazon and other retailers may not like it, they can't duck the collection of sales tax any more.
That's going to be a shame for online retailers; not collecting sales and use tax gave them a 5% to 15% price advantage over brick-and-mortar competition. I would be loath to give that up.
But perhaps it is time they did.
It was never anyone's intention that the taxes shouldn't be paid. Online retailers were avoiding collecting sales tax because of a loophole said they didn't have to collect - even though the taxes still had to be paid. All that the NY law and the laws in the other states did was to close the loophole.
There is a good chance that Amazon may appeal this case to the US Supreme Court, and I have no guesses on whether the Court will hear the case. But if the USSC doesn't hear the case then this law will stand as legal and constitutional, paving the way for other states to pass similar laws.
On a related note, there's a law before Congress that would settle the matter by requiring online retailers to collect sales taxes for all US states and territories. It is expected to be voted on this year and possibly signed into law.