Earlier this week, I applauded a recent “test” vote in the U.S. Senate that signaled overwhelming and bipartisan support for pending legislation that would require large Internet merchants to collect state and local sales taxes. Yesterday, New York’s high court upheld the constitutionality of a 2008 state law designed to achieve the same goal.
First, some background: the U.S. Supreme Court ruled in 1992 that out-of-state sellers cannot be required to charge sales taxes on sales to residents of states in which the merchant lacks a “physical presence.” (Buyers are obligated to pay the sales taxes directly to their states when the seller doesn’t charge them but, of course, very few do.) But an earlier Supreme Court decision held that in-state independent sales representatives who solicit sales on behalf of out-of-state merchants can satisfy this physical presence requirement.
The New York law at issue asserts that online companies like Amazon and Overstock have that “physical presence” — that is, the cyberspace equivalent of door-to-door salesmen in the state — when they have marketing partners known as “affiliates” in New York; thus, they must charge sales tax on all sales in New York. Affiliates are businesses and nonprofits that link to an Internet retailer from their own site and receive a commission when readers click on the link and then make a purchase at the retailer’s online store.
I’ve urged states with sales taxes to enact laws modeled on New York’s. Eight states have done so (Arkansas, California, Connecticut, Georgia, Illinois, North Carolina, Rhode Island, and Vermont), and a ninth, Pennsylvania, is enforcing the same policy with respect to Internet retailers with in-state affiliates under its existing sales tax law. Amazon or Overstock may appeal to the U.S. Supreme Court, but we hope that the final decision in the New York court system will encourage additional states to act. The Supreme Court has declined to review several state court decisions on the obligations of out-of-state merchants to charge sales taxes since its 1992 decision; it’s likely to deny this case as well.
The New York law only partially solves the problem of interstate sales that escape taxation, because some Internet retailers don’t operate affiliate programs and because others have responded to these laws by terminating their programs in some states rather than collect sales taxes. The federal legislation that the Senate endorsed in its recent vote is still needed to solve the problem comprehensively. Policymakers should enact that legislation soon. In the meantime, the remaining states should emulate New York’s law, and its court victory should be celebrated.