Justice Kennedy Invites Another Lawsuit in Online Tax Case

by | March 4, 2015

By Jay Greene

Supreme Court Justice Anthony Kennedy invited potential litigants to bring a case to the court that challenges a 23-year-old decision that limits the ability of states to collect taxes on Internet sales.

Kennedy's concurring decision, in an otherwise technical ruling about the legal jurisdiction of state sales-tax cases, could set the stage for companies such as Amazon.com to charge taxes on sales to all its U.S. consumers. Amazon doesn't collect taxes on sales to customers in 26 states (though it long has in Washington state).

The court's unanimous decision Tuesday in Direct Marketing Association v. Brohl ruled that federal court, and not a state court, is the proper venue for the case. The trade group is challenging Colorado's efforts to collect taxes on sales from Internet companies based elsewhere.

That decision by itself wouldn't have raised many eyebrows. But Kennedy's concurring decision suggests that the court is keen to take a broad look at Internet sales-tax collection.

Kennedy set his sights on the court's 1992 decision in Quill Corp. v. North Dakota. That ruling came at the dawn of Internet sales, and two years before Amazon was founded. The court held that retailers didn't have to collect sales in states where they don't have a physical presence, a so-called "nexus."

The decision has long been the bane of brick-and-mortar retailers, who have complained that it gives their Web rivals an unfair advantage. And it also stung states that have lost out on significant revenue they would have otherwise collected on those Internet sales.

On Tuesday, those groups found an ally in Kennedy.

"There is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently 'substantial nexus' to justify imposing some minor tax-collection duty, even if that business is done through mail or the Internet," Kennedy wrote.

He noted that mail-order sales in 1982 totaled $180 billion. In 2008, Kennedy said that e-commerce sales totaled $3.16 trillion.

"A case questionable even when decided, Quill now harms states to a degree greater than could have been anticipated earlier," Kennedy wrote.

The Colorado case didn't "raise this issue in a manner appropriate for the Court to address it," Kennedy wrote. But, he added, the "legal system should find an appropriate case for this court to reexamine" its past decision's regarding tax nexus.

That invitation might seem like a setback for Amazon. For most of its corporate life, Amazon had sought to avoid state taxes by placing its warehouses in states with sparse populations.

In the past few years, however, Amazon switched tack. The company decided that potential harm from collecting taxes would be offset by placing warehouses closer to customers, often in more densely populated states, to speed delivery. As it ramped up development of warehouses, it worked to win various tax breaks from those states.

At the same, Amazon has backed a bill that would create the Marketplace Fairness Act, a federal law that would require online retailers with sales of more than $1 million to collect taxes for states in which they sold to customers.

Amazon declined to comment on Tuesday's ruling or Kennedy' concurrence.

(c)2015 The Seattle Times