Supreme Court of the United States Punts on Sales Tax Yet Again
On Monday, December 2, 2013, the US Supreme Court issued its case denial list which is formally described as certiorari denied. By way of brief background, the majority of cases that make their way to the United States' highest court is through the certiorari process. Generally "cert" can be granted for compelling reasons to resolve a conflict of the interpretation of the United States Constitution, to correct an "egregious" departure from the accepted and usual course of judicial proceedings, or resolve a question of federal law in which two states or two federal districts disagree. Apparently, this case was not compelling enough for the SCOTUS to take on. This denial all but solidifies another year in passing without the Supreme Court taking a single case involving state sales tax. A sales tax case has not been taken by SOCTUS since Quill in 1992.
The most recent sales tax cert denial were the cases brought by Amazon and Overstock.com, which is appropriate to discuss on Cyber-Monday. At issue was a New York law that effectively required the online retail powerhouses to collect and remit New York sales tax to its New York customers. The online retailers believe this law was unconstitutional because it ran afoul to the Commerce Clause of the United States Constitution.
With cyber-Monday in mind, many people believe, that if they purchase an item online, then sales and use tax does not apply. Contrary to popular belief, in most states, items bought online at Amazon or any other online retailer are subject to sales or use tax. The issue comes down to whether the customer should remit the tax directly to the state or if Amazon/Overstock should be required to collect and remit the tax. As history has shown us, the state will collect more tax if the online retailer collects and remit the tax. Further, if there is a problem, it is much easier for a state to audit one online retailer than millions of individual customers. Therefore, it is easy to see why states have pushed the envelope on the issue.
In the background, is a 1992 case called Quill. In Quill, North Dakota was trying to force the office supply company to charge, collect, and remit tax to North Dakota. Quill did not have anything in North Dakota such as employees, offices, or property. All Quill did was send its mail order catalogs into North Dakota to solicit customers. Sounds strangely similar to Amazon or Overstock, its new-age cousin doesn't it? With that in mind SCOTUS said that in order for a state to force a company to collect tax it must have some "physical presence" in the state. SCOTUS said mail order catalogs did not satisfy the physical presence requirement and the law was held to be unconstitutional.
The year of 1992 marked the last case taken by SCOTUS on the sales tax issue. Since Quill, states have been trying to push the limits of this physical presence requirement to generate the maximum tax revenues possible. Some states believe a computer server, whether or not the company is even aware of it, is enough to create nexus—creating an obligation to collect. Other states simply ignore the physical presence requirement and say advertising is enough.
In New York's version of creative lawmaking, it drafted a law that said if an online retailer generates a certain sales level from New York websites there is a presumption of nexus. Commentators refer to this as "click-through-nexus." It is creative to hear how states view this as some physical presence, but the gist of it is that the New York website is no different than an in-state salesman. The companies fought and lost this issue all the way up the ladder in New York. New York ultimately ruled the law was legal and the retailers appealed to SCOTUS in August, 2013.
Following the fling, there were several groups that were extremely interested in trying to get SCOTUS to hear this important case. One such group was the American Association of Attorney Certified Public Accountants (AAA-CPA). Authored by our partner, James Sutton, the AAA-CPA filed a well drafted and thorough Amicus Brief on September 23, 2013. Among other things the brief pointed the extreme burdens such a law imposes on interstate commerce. Unfortunately the SCOTUS did not find it important enough to lend an ear to.
Each year we hear of another company petitioning to the SCOTUS. Each year, SCOTUS continues to ignore the issue. In Quill SCOTUS all but begged Congress, who has the power to regulate this issue, to pass a federal law on this issue? Again, Quill came down in 1992 and nothing has happened.
This denial comes as a let down to the State and Local Tax ("SALT") community. I mean who bigger to set the law then Amazon and Overstock? What more influential state can also be used as the poster child to set the law than New York? If ever a case had a shot it was this one. Perhaps, the denial is a reflection of SCOTUS' confidence in passing the Marketplace Fairness Act. While the law did not pass last year, many commentators believe it is close and will be passed soon. Even if that is true, why not hear the case and let Congress endorse the law or effectively overturn the decision? While it sounds like a broken record, at some point a case will be heard. We look forward to that day to finally put some certainty on a gray and troublesome area of the law. On behalf of myself, James Sutton, and our firm, I would like commend everyone involved and job well done.
ABOUT THE AUTHOR: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law the Law Offices of Moffa, Sutton, & Donnini, P.A. based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. You can read more about Mr. Donnini in his firm BIO.