Amazon Rejected by U.S. High Court on New York Sales Tax

The U.S. Supreme Court stayed out of the multibillion-dollar fight over Internet sales taxes, leaving intact a New York law that forces Amazon.com Inc. (AMZN) to collect money from customers in that state.

The justices, without comment, today rejected appeals by Amazon and another Internet retailer, Overstock.com Inc. (OSTK), which said New York is violating the Constitution by demanding tax collection from companies that don't have facilities in the state. New York's top court upheld the state law.

States lose an estimated $23 billion a year in uncollected sales taxes from web retailers. Although Amazon has agreed to collect taxes in some states as it sets up distribution centers around the country, it has resisted efforts by others to impose sales taxes unilaterally. New York's measure is among a handful that have been dubbed 'Amazon laws' because they affect only the largest online sellers.

The New York law 'subjects Internet retailers to significant burdens on pain of serious civil and criminal penalties,' Seattle-based Amazon argued in its appeal.

Amazon, the world's biggest online retailer, now collects taxes in 16 states. The company supports federal legislation that would explicitly give states authority to require tax collections by all online retailers above a certain size.

'Physical Presence'

In 1992, the Supreme Court said in the case of a mail-order company that retailers can be forced to collect a tax only in states where they have a 'physical presence.'

The rise of the Internet has increased the stakes since then, putting tens of billions of dollars at issue. New York alone lost $1.8 billion in 2012 on Internet and catalog sales, according to the National Conference of State Legislatures. Although consumers are supposed to pay the taxes themselves, few do unless the seller collects the money.

New York has a 4 percent statewide sales tax, and local jurisdictions impose additional levies. In New York City, the total tax rate is 8.875 percent.

New York said in court papers that its 2008 tax law 'seeks to restore a level playing field between in-state brick-and-mortar stores and their out-of-state Internet-only counterparts.'

Under the New York law, retailers without a physical presence in the state must collect tax if they use a local resident to solicit business online. Amazon is subject to the law because it gets business through New York-based affiliates, paying them commissions for hosting online links to the retailer.

Sales Force

The New York Court of Appeals, the state's highest court, said affiliation agreements had the effect of creating an 'in-state sales force.'

Amazon fell $1.73 to $391.89 at 11:08 a.m. in Nasdaq trading in New York.

Overstock said in its appeal that the New York court ruling 'functionally abrogates the physical-presence requirement.'

Overstock suspended its own affiliates program in New York when the law was enacted, sparing the Salt Lake City-based discount Internet retailer from having to collect taxes. Overstock was seeking to re-establish that program so it could generate more business in New York and potentially other states.

Commerce Clause

Amazon and Overstock sued to challenge the New York law soon after it was enacted. They argued that the measure violates the Constitution's commerce clause, which the Supreme Court interprets to limit state taxing power. The court has said taxes must bear a 'substantial nexus' to activity within the taxing state.

Amazon has struck tax deals with some states as it adds distribution centers that will let the company get products to customers more quickly.

Those states include California, where the company agreed to collect sales taxes after a one-year reprieve and dropped efforts to repeal the tax measure through a referendum. Amazon has since opened three distribution centers in California. Nationwide, it has spent $14 billion and added 50 new facilities since 2010.

At the same time, the company supports proposed federal legislation, which would let states collect taxes from online retailers with at least $1 million in annual out-of-state sales.

'Amazon is in favor of having to deal with a single bureaucracy rather than 50,' said Michael Pachter, an analyst at Wedbush Securities in Los Angeles.

Senate Vote

The Senate passed the Amazon-backed legislation May 6 on a bipartisan 69-27 vote, and opponents vowed to fight in the House. Other supporters include Wal-Mart Stores Inc. and Best Buy Co. The House Judiciary Committee, led by Republican Representative Bob Goodlatte of Virginia, hasn't held a hearing or released a schedule for considering the measure.

Goodlatte said he wants changes to the Senate bill and he released a set of principles in September. At the time, he said he wanted the legislation to be so simple that it wouldn't require a small-business exemption.

EBay Inc. (EBAY), operator of the largest online marketplace, opposes the legislation. The company didn't take a position on the Supreme Court appeals. Newegg Inc., which sells electronic products, backed the Amazon and Overstock appeals.

The cases are Overstock.com v. New York State Department of Taxation, 13-252, and Amazon.com v. New York State Department of Taxation, 12-259.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net