High Court Justices Gingerly Debate Internet Sales Taxes

“Now I will have to submit potentially 50 different forms to all of these states reporting that somebody in South Carolina purchased something from me that costs $23.99,” Alito said incredulously. “That's where all this could lead, couldn't it?” Domenico agreed.

The case before the court is not about the merits of Colorado's tax collection law; it focuses on where challenges to such initiatives can be litigated. The Direct Marketing Association (DMA) wants federal courts as the forum to adjudicate its claims, which include the Commerce Clause and the First Amendment. It also acknowledged concerns that a state court, unlike a federal court, might be biased in favor of a law that will bring in revenue from non-residents.

“An out-of-state company may have concerns about the neutrality and fairness of the forum in which its federal constitutional rights are to be determined,” the DMA stated in its brief (See Merit and Amicus Briefs filed in the case at http://bit.ly/1v43Kxj.)

Justice Antonin Scalia appeared to agree during the arguments. “There is a real incentive on the part of the state government which includes the state courts” to support the tax, he said.

Late in the litigation, Colorado invoked the federal Tax Injunction Act as a reason for keeping such tax disputes in state court. The 1937 statute prohibits federal courts from enjoining or restraining the assessment or collection of state taxes. It was intended to prevent state taxpayers from running to federal court to avoid their obligations.

On that basis, the U.S. Court of Appeals for the Tenth Circuit ruled against the DMA and said federal courts had no jurisdiction to halt Colorado's tax.

George Isaacson of Brann & Isaacson in Lewiston, ME, argued on behalf of the marketing group that the act did not apply to his suit because the retailers, not the taxpayers who owe the tax, are challenging the law.

That seemed like hair-splitting to some justices, especially since the injunction law has been interpreted to allow federal suits challenging other kinds of tax reporting requirements.

“Where do you get ' the idea that the plaintiff has to be the taxpayer?” Justice Elena Kagan asked.

The litigation comes amid growing concern from states and localities about the loss of revenue from Internet sales. A coalition of state and local government groups filed a brief with the court warning of a “deepening crisis for states and local governments whose solvency depend in large part on sales and use tax revenues.”

Because of the Supreme Court's 1992 ruling in Quill Corp. v. North Dakota, 504 U.S. 298, out-of-state merchants have not had to pay sales and use taxes except to states where the companies have a physical presence, costing state and local governments an estimated $23 billion in tax revenues from out-of-state retailers every year, the brief stated.

The state Court of Appeals upheld a New York state law last year that requires some larger out-of-state retailers to charge sales tax on purchases by New Yorkers. See, “Ruling Upholds Collecting Sales Tax From Online Retailers,” NYLJ (March 29, 2013).

The court's ruling in Overstock.com v. New York State Department of Taxation and Finance, No. 33 & 34 (Ct. of App., Decided March 28, 2013) and Amazon.com v. New York State Department of Taxation and Finance, 20 NY3d 586, said the Quill prohibition against state taxation of out-of-state retail sales did not bar New York from requiring retailers from remitting taxes on sales to New Yorkers if the companies had a “substantial nexus” with New York.

The Court of Appeals concluded that Overstock.com and Amazon.com had that nexus due to the way they paid websites in New York to promote their over-the-Internet sales to New Yorkers. The court determined that state Tax Law '1101(b)(8)(vi) did not violate constitutional Commerce Clause prohibitions against states unfairly hindering interstate commerce.

Tony Mauro covers the U.S Supreme Court for ALM Media. He can be reached at [email protected] and on Twitter @Tonymauro.

The U.S. Supreme Court on Dec. 8 scratched the surface of the looming battle over state taxation of Internet retailers and seemed troubled by what it saw.

The justices heard arguments in Direct Marketing Association v. Brohl, 13-1302, a jurisdictional dispute over a Colorado law that seeks to capture new revenue by requiring out-of-state companies to report information to the state about their sales to Colorado residents. (See a transcript of the oral argument at http://1.usa.gov/1z3xcaJ.)

So far, Colorado is the only state with such a law, but when Colorado Solicitor General Daniel Domenico acknowledged that other states might follow suit if he wins, Justice Samuel Alito Jr. put himself in the position of a small Internet retailer if all 50 states pass similar laws.

“Now I will have to submit potentially 50 different forms to all of these states reporting that somebody in South Carolina purchased something from me that costs $23.99,” Alito said incredulously. “That's where all this could lead, couldn't it?” Domenico agreed.

The case before the court is not about the merits of Colorado's tax collection law; it focuses on where challenges to such initiatives can be litigated. The Direct Marketing Association (DMA) wants federal courts as the forum to adjudicate its claims, which include the Commerce Clause and the First Amendment. It also acknowledged concerns that a state court, unlike a federal court, might be biased in favor of a law that will bring in revenue from non-residents.

“An out-of-state company may have concerns about the neutrality and fairness of the forum in which its federal constitutional rights are to be determined,” the DMA stated in its brief (See Merit and Amicus Briefs filed in the case at http://bit.ly/1v43Kxj.)

Justice Antonin Scalia appeared to agree during the arguments. “There is a real incentive on the part of the state government which includes the state courts” to support the tax, he said.

Late in the litigation, Colorado invoked the federal Tax Injunction Act as a reason for keeping such tax disputes in state court. The 1937 statute prohibits federal courts from enjoining or restraining the assessment or collection of state taxes. It was intended to prevent state taxpayers from running to federal court to avoid their obligations.

On that basis, the U.S. Court of Appeals for the Tenth Circuit ruled against the DMA and said federal courts had no jurisdiction to halt Colorado's tax.

George Isaacson of Brann & Isaacson in Lewiston, ME, argued on behalf of the marketing group that the act did not apply to his suit because the retailers, not the taxpayers who owe the tax, are challenging the law.

That seemed like hair-splitting to some justices, especially since the injunction law has been interpreted to allow federal suits challenging other kinds of tax reporting requirements.

“Where do you get ' the idea that the plaintiff has to be the taxpayer?” Justice Elena Kagan asked.

The litigation comes amid growing concern from states and localities about the loss of revenue from Internet sales. A coalition of state and local government groups filed a brief with the court warning of a “deepening crisis for states and local governments whose solvency depend in large part on sales and use tax revenues.”

Because of the Supreme Court's 1992 ruling in Quill Corp. v. North Dakota, 504 U.S. 298, out-of-state merchants have not had to pay sales and use taxes except to states where the companies have a physical presence, costing state and local governments an estimated $23 billion in tax revenues from out-of-state retailers every year, the brief stated.

The state Court of Appeals upheld a New York state law last year that requires some larger out-of-state retailers to charge sales tax on purchases by New Yorkers. See, “Ruling Upholds Collecting Sales Tax From Online Retailers,” NYLJ (March 29, 2013).

The court's ruling in Overstock.com v. New York State Department of Taxation and Finance, No. 33 & 34 (Ct. of App., Decided March 28, 2013) and Amazon.com v. New York State Department of Taxation and Finance, 20 NY3d 586, said the Quill prohibition against state taxation of out-of-state retail sales did not bar New York from requiring retailers from remitting taxes on sales to New Yorkers if the companies had a “substantial nexus” with New York.

The Court of Appeals concluded that Overstock.com and Amazon.com had that nexus due to the way they paid websites in New York to promote their over-the-Internet sales to New Yorkers. The court determined that state Tax Law '1101(b)(8)(vi) did not violate constitutional Commerce Clause prohibitions against states unfairly hindering interstate commerce.

Tony Mauro covers the U.S Supreme Court for ALM Media. He can be reached at [email protected] and on Twitter @Tonymauro.