Commentary

Justice Kennedy Backs States' Right To Impose 'Amazon Tax'

The Direct Marketing Association won a legal skirmish this week, when the Supreme Court unanimously ruled that the organization could continue with its challenge to Colorado's “Amazon tax.”

But the victory could prove short-lived -- at least if Justice Anthony Kennedy has his way. He suggested in a concurring opinion that state governments should be able to require out-of-state online retailers to collect sales tax.

Specifically, Kennedy made clear that he believes the Supreme Court should overturn a 1992 decision that limits states' ability to force e-commerce companies to collect sales tax. That 23-year-old ruling provides that state authorities can only require companies to collect tax if they have a physical presence in the state -- like a brick-and-mortar storefront.

To Kennedy, that requirement no longer makes sense. “The Internet has caused far-reaching systemic and structural changes in the economy, and, indeed, in many other societal dimensions,” he wrote. “Although online businesses may not have a physical presence in some states, the Web has, in many ways, brought the average American closer to most major retailers. A connection to a shopper’s favorite store is a click away -- regardless of how close or far the nearest storefront.”

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Kennedy added that in 2008, e-commerce sales came to $3.16 trillion in the U.S. -- and that states have lost out on the tax revenue that should have been generated by those sales. Even though consumers are supposed to pay taxes themselves on online purchases, only a small proportion of people are thought to do so.

“The result has been a startling revenue shortfall in many states, with concomitant unfairness to local retailers and their customers who do pay taxes at the register,” Kennedy wrote.

Ultimately, he said that the case decided this week wasn't a good vehicle for the Supreme Court to revisit its 1992 ruling. The Colorado matter dealt with whether a separate law, the federal Tax Injunction Act, prohibits the DMA from challenging Colorado's tax authorities in federal court; the Supreme Court ruled that the DMA could continue to pursue its challenge in federal court.

But Kennedy left little doubt that he believes states should be able to insist that online retailers collect sales tax from consumers.

“The instant case does not raise this issue in a manner appropriate for the court to address it,” he wrote. “It does provide, however, the means to note the importance of reconsidering doubtful authority.”

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