Online Retail Tax Rules Could Reach Supreme Court

Amazon, Overstock Appealing N.Y. Case

Supreme CourtFollowing two opposite lower court decisions, the legality of states taxing Internet retail sales now appears more likely to reach the U.S. Supreme Court, according to analysts. The Illinois Supreme court late last week voided a state law established to collect sales taxes from online purchases, while a recent New York judicial ruling upheld similar legislation in the Empire State. Because two lower courts have disagreed on their rulings, the chances of the U.S. Supreme Court hearing a petition on the case are better.

In the New York case specifically, Amazon and Overstock have appealed to the U.S. Supreme Court. New York has until tomorrow to file its response. The decision in Illinois is much more impactful, though, as it represents the first time a court has invalidated an Internet sales tax law among 18 states that have passed them. The Illinois' tax collector and the Department of Revenue are reportedly considering asking the U.S. Supreme Court to intervene as well.

Writing for the majority, Justice Anne Burke of the Illinois Supreme Court didn't see much difference between out-of-state businesses reaching Illinois consumers by a click-through-approach versus other advertising that is not taxed. "The click-through link makes it easier for the customer to reach the out-of-state retailer," Burke wrote in her opinion. "But the link is not different in kind from advertising using promotional codes in Illinois newspapers or radio broadcasts."

Aside from lower judicial divergence, action by the Supreme Court may also take place because Congress has failed to offer a definitive solution. "Brick-and-mortar businesses, which pay property taxes, and income taxes, and are hiring people, are at a significant competitive disadvantage with their remote-selling counterparts," said David Vite of the Illinois Retail Merchants Association. "It's time for the federal government to clarify and finish putting retailers, who are making payroll and putting people to work, on equal footing."

Despite the issue's high-profile nature, Congress has not passed legislation that would give all states the power to enforce their own online sales tax laws. Amazon backs federal legislation for nationwide state sales tax enforcement, but eBay and Overstock don't. If the Supreme Court does take up the state online tax issue, oral arguments could be heard by April.