Supreme Court Declines to Hear Online Sales Tax Appeal

The U.S. Supreme Court on Monday declined an appeal of a Colorado law that helps the state collect sales taxes on out-of-state internet purchases. The law requires online retailers without a physical location in the state to report customers’ names, addresses and purchase amounts to tax authorities. The authorities then use the information to collect use tax, a sales tax on purchases made outside one’s state of residence that has barely been enforced until now.

The Data and Marketing Association, a retail-industry trade group, argued that the law violates part of the Constitution that gives Congress the power to regulate interstate commerce. Colorado asked the court to deny the appeal, but that if the justices took the case, they should reconsider a 24-year-old precedent limiting the ability of states to collect sales taxes. Under the 1992 Supreme Court decision of Quill Corp. v. North Dakota, retailers without a physical presence in a state can’t be forced to collect sales taxes on purchases. Colorado claimed that the ruling has become outdated due to the rise of online retail sales. States lose $23 billion every year in uncollected sales taxes from web and catalog purchases, according to a 2012 estimate by the National Conference of State Legislatures.

South Carolina, South Dakota, Vermont, Oklahoma, Kentucky and Tennessee have all passed laws that require out-of-state sellers to notify their purchasers that use tax may be required on transactions. Colorado has taken it to the next step by forcing sellers to notify tax authorities, a provision that could be duplicated across the country.

Bret Bonnet, president of online distributor Quality Logo Products (asi/302967), says that once every state starts to enact their own laws, the burden to follow each individual law will surely make doing cross-border business time consuming, if not impossible.

“The most annoying part about these laws is that many are retroactive, so we’ve been forced to send letters to customers months after their transaction,” Bonnet told Counselor. “Customers tend to get upset by the contents of the letter and often put the blame on Quality Logo Products instead of their state legislature. Also, some states charge use tax on the supplier total and not the distributor total, so cost-conscious customers can easily reverse engineer the total to figure out the distributor’s actual net cost and profit.”

In 2013, the Senate passed a bill that would have let states tax cross-border purchases, but it stalled in the House due to pressure from anti-tax groups, online retailers and lawmakers from states without sales taxes.