Earlier this month, the U.S. Supreme Court issued a closely watched decision from the Colorado”Amazon tax” case, Direct Marketing Association v. Huber. Marketing institutions, affiliate marketing classes, online vendors, and officials from several nations have been following this case as it was initially filed. The result may affect whether online stores need to collect sales tax or report sales to countries when they don’t collect the tax.
Revenue Tax History
To understand the situation, one should know how sales tax works. In states with sales tax, the merchant typically collects the tax on all sales and remits it to the nation. This creates a system in which the local or state government doesn’t need to collect sales tax from people but may rely on retailers to be the tax collector, which can help ensure that the nation will actually get the money. In certain states, the merchant can retain some of the sales tax collected for administrative costs.
When retail companies were comprised mainly of brick-and-mortar shops, this system worked well. To have to collect sales tax, a business had to have”nexus” at a country — i.e., workers, a physical location, or a high number of independent contractors in the nation. By having a brick-and-mortar place in the country, nexus was mechanically created.
Enter Catalogues, Phone Orders
However, as technology and retail practices improved, companies offered products through catalogues and afterwards by telephone orders. Through rulings on both state and national levels, sales tax set by the vendor for such purchases was only required if nexus was established. This created a situation where nations saw a small decline in earnings, but not enough to panic.
It’s important to remember that even if a merchant does not collect sales tax from a purchaser, the buyer is still required to remit sales tax to the country — something that rarely happens.
The Growth of Ecommerce
Subsequently, in 1995, Amazon.com and Ebay were launched. With the click of a button, a buyer could buy an item for less than she can in a physical shop and have it delivered within days. People began buying everything from clothing to paper towels on the internet. States began to see a decrease in sales tax revenue and elected officials began to have worried brick-and-mortar merchant in their districts complain that portion of the reduced cost of online products, and consequently their appeal, was no sales tax was paid on these products.
Subsequently, in 1995, Amazon.com and Ebay were launched. With the click of a button, a buyer could buy an item for less than she can in a physical shop and have it delivered within days.
States attempted to institute what would eventually become known as”Amazon taxation” — attempts to discover a way to make nexus between the state and Amazon (along with other online retailers, though Amazon in several cases was the primary goal of such laws ).
At least eight states have passed an Amazon taxation in some form. Some, such as California, reached deals with Amazon to collect sales taxes as Amazon does have a presence in the nation. In others, like Maine and Vermont, Amazon ceased allowing any individuals or companies from those states to take part in the Amazon affiliate program.
Colorado’s Attempt at Sales Tax Collection
All this brings me to the Colorado law, which was passed in 2010. This legislation, HB 10-1193, needs online retailers to collect sales tax from Colorado residents or report the internet sales information to Colorado so it might go after residents who did not remit the sales tax on the nation directly. This legislation is like many other state laws, but is among the first to make it through the court systems and have such a big opposition to it.
One of these opposing groups was the Direct Marketing Association. In 2011, after the execution of this law, the DMA brought suit in federal district court to challenge the validity of this statute. The statute said that retailers who don’t collect Colorado sales tax (primarily from state online retailers like Amazon) need to send a transactional notice to Colorado customers.
Further, such notice had to include a statement that Colorado needs sales tax of 2.9 percentage to be paid on all purchases in which the merchant didn’t collect the tax. Besides sending this information to the customer, the merchant is also needed to send it to the Colorado Department of Revenue when the merchant makes more than $100,000 in sales to Colorado residents.
Multiple Court Cases
Since 2011, many courts have dealt with this situation. Originally, the U.S. District Court granted summary judgment for the DMA and issued a permanent injunction preventing the Colorado Department of Revenue from enforcing the reporting and notice requirements of the statute. This was based on the Court’s judgment that such conditions were unconstitutional under the U.S. Constitution’s commerce clause since it discriminated against out-of-state retailers and caused an undue burden for these retailers. This order was appealed to the 10th Circuit of Appeals.
In 2013, the 10th Circuit Court ruled that the case should have been dismissed by the District Court as the case ought to be heard by state courts, instead of federal. The 10th Circuit Court remanded the case back to the District Court to get it dismissed as well as the permanent injunction eliminated. However, prior to happening, a petition was made to the U.S. Supreme Court to hear the case which was allowed, raising the case to the highest court in the nation.
Unanimous Supreme Court Decision
On March 3, 2015, the Supreme Court, in a unanimous decision, overruled the 10th Circuit Court’s decision and said that the situation could be heard by the District Court and doesn’t have to be heard in state courts. While the Supreme Court didn’t address merits of this case, it did make two major points.
The Supreme Court explained that reporting requirements were not an”assessment, levy, or collection” of taxation under the U.S. Tax Injunction Act, a federal law which requires certain tax cases to be brought in state court rather than federal.
Secondly, it opened the door to finally taking on a case to ascertain exactly where the line could be drawn by online retailers for actually collecting taxes or reporting revenue. Justice Anthony Kennedy, in a concurring optinion, said,”It’s unwise to postpone any longer a reconsideration of the court’s holding in Quill. A case questionable even when determined, Quill now harms states to a level much greater than could have been expected earlier.”
“Quill” is Quill Corp. vs. North Dakota, the 1992 Supreme Court case that established the nexus sales-tax requirement to start with. Stay tuned.
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