When New York's highest court ruled last spring that the state can collect sales taxes from out-of-state online retailers like Amazon.com if they pay New York residents to solicit business for them here, few observers thought the case would end there.
Indeed, it did not take very long for the two companies challenging New York's law-Amazon and Overstock.com Inc.-to ask the U.S. Supreme Court to review the Court of Appeals decision.
The odds that the nation's highest court will hear the case jumped last week when the Illinois Supreme Court threw out a state law requiring companies like Amazon to collect sales taxes on online purchases. The opposite rulings in two different states almost beg the U.S. Supreme Court to take up the matter.
New York's so-called "Amazon tax" was designed to work around a 1992 U.S. Supreme Court ruling that out-of-state retailers with no physical presence in a state cannot be forced to collect sales tax.
Amazon had no stores or other facilities in New York. It did, however, have thousands of in-state "associates"--shorthand for independent website operators.
The appellate court majority agreed with lawmakers' expanded definition of "physical presence," ruling that any vendor paying New York residents to solicit business here should "shoulder the appropriate tax burden."
In the Illinois case, the court held that the state law requiring sellers to collect sales taxes for online purchases ran afoul of the Internet Tax Freedom Act of 2000, which bars states from imposing "discriminatory taxes" on electronic commerce.
No one disputes that consumers should pay taxes on Internet purchases, as they do when buying from bricks-and-mortar sellers. But it is unreasonable to expect online merchants to collect taxes under current laws for the thousands of taxing jurisdictions nationwide.
The proposed federal Marketplace Fairness Act--which Amazon and many traditional retailers support--has provisions that would simplify multistate tax collection. The Senate passed it in May, but the bill's prospects in the House are cloudy.
If Congress continues to do nothing on this issue, the only hope for clarity lies with the nation's top court.
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