photo by Carl Malamud
“Cyber Monday” has lately given “Black Friday” a run for its money in the arena of post-Thanksgiving shopping binges. For many Americans, the allure of online holiday shopping is hard to resist.
Buying online lets you skip the hassle of getting dressed, driving to a store and finding parking. It offers a wider selection, and the odds that a given item will be out of stock are lower. And many online purchases come without sales tax.
But this last advantage, unlike the others, may not continue for much longer.
The Monday after Thanksgiving, the U.S. Supreme Court declined to weigh in on a dispute between New York state and online retailers. Amazon.com and Overstock.com had both appealed a New York court decision requiring them to collect and remit sales tax despite having no physical presence in the state. New York, like several other states, claims that the use of affiliates qualifies as a tie to the state that is sufficient to impose tax collection responsibilities on out-of-state retailers under Supreme Court precedents that predate the Internet era.
Affiliates are businesses or individuals that refer customers to the retailer’s website and collect a commission on any resulting sales. Amazon and Overstock have both used them, as do many other online retailers. (Amazon still uses affiliates and collected sales tax in New York as it fought the law; Overstock ended its affiliate program in New York when the state’s law passed in 2008.)
Residents of states that have sales tax are required to send in tax payments for online purchases directly, in the form of “use tax,” but hardly any taxpayers do so. The Marketplace Fairness Act, which passed in the Senate and is currently under consideration by a House subcommittee, would eliminate the ambiguity about physical presence at the cost of a variety of new complications.
In the meantime, the legal fight about New York’s approach continues. Amazon and Overstock have been embroiled in this dispute for years. A 1992 case, Quill Corp. v. North Dakota, established that sending a catalog to a state’s residents was not enough to require a business to collect tax. Counting affiliates as proof of presence in a state was the way around Quill for New York and other states that wanted to capture the tax from online sales. New York’s Court of Appeals held New York’s law constitutional earlier this year.
Deeming remote sellers to be physically present wherever they have sales affiliates is, however, quite a stretch. It is predicated on the idea that affiliates are not independent businesses or, alternately, that affiliates and the sites they work for are so close that the affiliates are practically agents of the retailer. Given that affiliates range from one-person blogs up through sizeable companies that run deal sites, dealing with affiliates this way will often produce absurd results.
Consider a different context: Federal Express and UPS are paid by out-of-state sellers to deliver goods, but the courier services are not treated by the states as though they were the retailers’ own delivery workers, and they do not create a local presence for remote sellers. Why would similarly independent sales sites satisfy the requirement for a physical presence before a remote seller can be forced to collect sales tax?
The Supreme Court’s prior case generally requires that before a state can impose such collection obligations, the out-of-state business must either have employees or property within that state’s jurisdiction. An agent is not an employee, but is not independent of the business either, making it an intermediate construction not clearly addressed by prior decisions. Until and unless the federal courts stop them, states will take advantage of this ambiguity by defining affiliates as agents and using them as the basis for pursuing retailers for tax.
Why did the Supreme Court choose not to address this issue for Amazon and Overstock.com? I can only guess. But a few reasons come to mind.
First, the Court might want more than one circuit court to consider the matter before it weighs in. If the lower courts reach a consensus, the Supreme Court may not need to handle the question at all. If the lower courts disagree, the Supreme Court may then decide to resolve the conflict. This is often the point at which the high court decides to address an issue.
Or perhaps the Court doesn’t want to wade into an ambiguous situation that may depend on the individual facts of these particular retailers. The decision would inevitably be read as a blanket rule to govern all sorts of similar cases; this might lead to a chain of lawsuits in which states or retailers argue that their circumstances set them apart from the particulars of this litigation. Such disputes could end up right back in the Supreme Court’s lap.
The Court also may not want to take on this big of an issue while congressional action is pending that would confer on states exactly the power they are already asserting. If it seems likely that the law will simply make the Court’s decision moot, the Court may prefer to wait and see what Congress does.
A final possibility is that the justices, like most people, find tax law boring and would rather not deal with it.
Given the changes in the commercial landscape and the increasing prevalence of independent contractors who may or may not be agents of companies that hire them, this issue won’t go away. Sooner or later, the Court will probably need to consider the point at which virtual commerce creates virtual jurisdiction. But that day has not yet arrived.