September 23, 2013

Urging the U.S. Supreme Court to Address State Efforts to Tax Internet Sales

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Today the Tax Foundation and the National Taxpayers Union filed a friend-of-the-court brief (PDF) with the U.S. Supreme Court, urging them to hear an appeal involving New York’s Internet sales tax law.

Passed in 2008, the law attempts to get around the constitutional requirement that states can only impose tax collection obligations on taxpayers if those taxpayers are physically present in the state. The law “deems” an out-of-state taxpayer to be present in the state if the taxpayer has agreements with in-state persons to pay for referrals. Taxpayers have the option of proving that their in-state affiliates never solicited sales to New York customers, but barring that, must collect New York’s sales and use tax.

Taken literally, the law reaches anyone who advertises in New York, although New York’s Department of Revenue has voluntarily agreed not to take things that far. The court below sustained the statute, and New York’s highest court also upheld it, over one strong dissent. Eight other states (Arkansas, California, Georgia, Maine, Minnesota, North Carolina, Rhode Island, and Vermont) have adopted similar statutes, and three additional states (Connecticut, Illinois, and Texas) have enacted versions that give no option to the taxpayer to prove that sales solicitation did not take place. Colorado has enacted a statute requiring disclosure of customer purchase information to the state, which is presently being challenged in federal court. The Illinois statute is also currently under review by the Illinois Supreme Court.

Our brief argues that New York’s statute expands their state tax authority beyond what is constitutionally permissible, citing past Supreme Court precedent. We argue that many states are increasingly defying what the Supreme Court said in the Quill case of 1992, and are treating the most expansive reading of state tax authority from the Scripto (1960) and Tyler Pipe (1987) cases as a floor rather than a ceiling. We warn that litigation over these statutes is likely to continue reaching the Court unless they hear the case, and that many of the states pursuing these laws are states that do not participate in multistate efforts to simplify sales taxes. They view such effort as unnecessary because they think the courts will not stop their assertion of expanded tax authority.

Finally, we explain that sales taxes have not gotten simpler since the Quill decision of 1992, where the Court warned that sales tax complexity would burden interstate commerce if limitations on state power were lifted. We note that there are now some 9,646 sales tax jurisdictions in the United States, that sales taxes change an average of 50 times per month, and that defining what is and is not taxable remains hopelessly complicated.

With some states treating the posting of a website link as physical presence in their state, some states treating it as advertising (and not physical presence), and others offering only ambiguity, and with strong evidence that these state laws are harming interstate commerce, we hope the Court will consider the petitions and take the case.

Click here to read our full brief.

The case is, Inc., et al. and LLC and Amazon Services LLC v. New York State Department of Taxation and Finance, et al., Nos. 13-252 & 13-259.

Our amicus brief in this case at the New York lower court level is here.

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