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A Sales Tax Puzzle: Amazon and the Supreme Court

  • Aug 29, 2013 | Gail Cole

 Will the fate of online sales tax be determined in the Supreme Court?

Amazon is like a puzzle. Tracking the company's different responses to collecting state sales tax makes a person wonder how all the pieces fit together.

Take New York, where Amazon has been both collecting sales tax and battling its collection obligation since 2008. In March of this year, the New York Court of Appeals upheld the local court's decision that Amazon must collect sales tax because it has "substantial nexus" in the state through its affiliate program. Now Amazon would like to take the case to the Supreme Court. Its filing "seeks to persuade the court to consider the constitutionality of states collecting taxes from companies that don't have such physical operations as warehouses in those states."

New York is one of ten states where Amazon currently collects sales tax. On its website, the company explains that customers located in Colorado, Oklahoma, South Carolina, South Dakota, Tennessee and Vermont "may have additional tax requirements," and it outlines those requirements. The online retailer is on track to start collecting Georgia sales tax on September 1, 2013, when it will also begin sales tax collection in Virginia. Amazon has also agreed to collect sales tax in Indiana, Nevada and Tennessee beginning January 1, 2014.

In other words, although sales tax avoidance has long been a prime strategy for the company, Amazon is sometimes willing to collect sales tax. Furthermore, the giant etailer has been in Washington D.C. lobbying for the Marketplace Fairness Act of 2013 (MFA), which would grant states willing to simplify their sales tax laws the right to impose a sales tax collection obligation on certain remote sellers--remote sellers like Amazon.

Yet when Minnesota and Missouri recently instituted affiliate nexus legislation, Amazon severed ties with their affiliates to avoid collecting sales tax. It has, to date, simply ignored a Georgia law that required it to begin collecting sales tax in January 2013. And to avoid triggering a sales tax obligation, Amazon forbids customers who rent textbooks from taking those textbooks across state lines.

So what's up? How does Amazon really feel about sales tax?

A section of Amazon's 2008 Annual Report is revealing:

"We do not collect sales or other taxes on shipments of most of our goods into most states in the U.S. Under some of our commercial agreements, the other company is the seller of record, and we are obligated to collect sales tax in accordance with that company’s instructions. We may enter into additional agreements requiring similar tax collection obligations. Our fulfillment center and customer service center networks, and any future expansion of them, along with other aspects of our evolving business, may result in additional sales and other tax obligations.

Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales and use taxes with respect to sales made over the Internet. However, a number of states, as well as the U.S. Congress, have been considering or adopted initiatives that could limit or supersede the Supreme Court’s position regarding sales and use taxes on Internet sales. If these initiatives are successful, we could be required to collect sales and use taxes in additional states. The imposition by state and local governments of various taxes upon Internet commerce could create administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on all of our online competitors and decrease our future sales." (Emphasis mine).

If Amazon is seeking to challenge the constitutionality of states' remote sales tax obligations on businesses with no physical presence in the states, perhaps it will push the high court amend its ruling on Quill Corp. v. North Dakota, the pivotal 1992 case which determined that companies must have a substantial physical presence in a state in order to create nexus and trigger a sales tax obligation. Perhaps the company, which has often been accused of having an unfair advantage over brick-and-mortar businesses required to collect sales tax, is simply trying to level the playing field for all remote sellers.

Amazon's true colors may be revealed if the United States Supreme Court agrees to hear Amazon's case.

Do you do business in multiple states? How will your business handle sales tax changes?

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Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Gail Cole
Avalara Author
Gail Cole
Gail Cole
Avalara Author Gail Cole
Gail began researching and writing about sales tax in 2012 and has been fascinated with it ever since. She has a penchant for uncovering unusual tax facts, and endeavors to make complex sales tax laws more digestible for both experts and laypeople.