The U.S. Supreme Court on Monday refused to weigh in on the question of online sales tax. In an announcement Monday, December 2, 2013, the justices declined to determine whether businesses must collect taxes in states in which they have no physical presence.
The cases in question (Overstock.com v. New York State Department of Taxation and Finance and Amazon.com v. New York State Department of Taxation and Finance, U.S. Supreme Court, Nos. 13-252 and 13-259, respectively) involve suits by Amazon and Overstock.com that questioned the constitutional validity of a New York state law requiring them to collect sales taxes from New York customers. The State of Illinois, in a similar case this year, determined that internet entities were not obligated to collect state taxes under similar situations.
According to the Small Business Administration, “If you do not have a presence in a particular state, you are not required to collect sales taxes.” That determination stems from a 1992 Supreme Court ruling specifying that “a state cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state.” Legally, this physical presence – a warehouse, store or office – is termed a nexus. The catch is that each state defines nexus differently.
The lack of ruling by the Supreme Court means that online retailers face a patchwork of 50 sets of state regulations. In the face of challenges, state judges are legislating from the bench. However, in Amazon and Overstock.com, in their suit, cited the Commerce Clause, limiting states’ rights to regulate interstate commerce. The situation is further complicated by Marketplace Fairness Act of 2013, which passed the Senate but stalled in the House of Representatives empowering states to extend taxation to include sales by internet retailers.