State Tax Snapshot: U.S. Supreme Court Declines to Hear Click-Through Nexus Case on ‘Cyber Monday’


On the day after Thanksgiving weekend, millions of people flock to their computers and engage in electronic commerce. It’s Cyber Monday and shoppers (almost instinctively and impulsively) scour online retailers’ websites, tracking down and securing the best deals which were traditionally reserved for Black Friday and brick and mortar stores. Thanks to this newly-minted and alluring post-Thanksgiving tradition, shoppers don’t have to waste gas or even leave their homes to take advantage of seemingly irresistible deals. However, despite such convenience, those pesky sales and use taxes that can make a good deal look deflating are often overlooked due to uncertainty and ignorance.

Indeed, for one reason or another, most online shoppers are unaware of their use tax obligations, or less subtly, are ignorant of the existence and function of something called a “use tax.” In addition, with the perpetual uncertainty surrounding the fair and constitutional imposition of online sales taxes, most retailers are similarly in the dark over their collection and remittance responsibilities. Accordingly, a large chunk of Cyber Monday taxes go uncollected.     

Ironically, Cyber Monday 2013 could have marked the end of an era for online shopping and it could have potentially made this Cyber Monday the last of its kind.       

The U.S. Supreme Court denied certiorari today in Overstock .com v. New York Dept. of Taxn. , U.S., No. 13-252 and 13-259 (amicus briefs filed 9/19/13 and 9/23/13). In those closely watched cases, Overstock.com and Amazon.com challenged the New York Court of Appeals decision upholding a click-through nexus statute that creates a rebuttable presumption of nexus when an out-of-state retailer provides consideration to an in-state affiliate that refers customers by a website link to the retailer.     

Overstock and Amazon argued that the decision requires an out-of-state retailer to collect state sales tax, even though the retailer does not actually have a physical presence in the state, as required by the Supreme Court’s ruling in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Specifically, the New York court ruled that such affiliate agreements created an in-state sales force sufficient to establish nexus to allow the state to require them to collect sales tax.     

The challenge would have forced the Court to re-examine the rigid physical presence standard under Quill, a ruling handed down over 20 years ago and long before technology evolved and made electronic commerce into a multibillion-dollar a year industry. Thus, the question of whether Quill remains relevant or outdated will persist for the foreseeable future.

In addition, conflicting court decisions have further confused an already muddled state of sales tax nexus. For example, this past October, the Illinois Supreme Court in Performance Mktg. Ass’n Inc. v. Hammer, No. 114496 (Ill. Oct. 18, 2013) came to a different conclusion than the New York court when presented with a similar issue. The court ruled that, because the Illinois statute targeted out-of-state Internet retailers, and it did not require use tax collection by out-of-state retailers who entered into similar agreements with “offline” Illinois print publishers and over-the-air broadcasters, the tax was a “discriminatory tax” under the federal Internet Tax Freedom Act of 2007 (H.R. 3678) and the state was thus preempted from imposing it.

Further, last August, in Direct Mktg. Ass’n v. Brohl, No. 12-01175 (10th Cir. Aug. 20, 2013), the Tenth Circuit declined to hear a challenge to Colorado’s reporting and notice requirements for electronic commerce vendors and other retailers that do not collect taxes on sales to state purchasers. The court determined that the Tax Injunction Act deprived the district court of jurisdiction to enjoin the state’s tax collection efforts and remanded the case for dismissal.

The U.S. Supreme Court’s cert denial may have been disheartening to taxpayers seeking clarity on the online sales tax collection issue. But Overstock may have proven to be an uphill battlebecause the taxpayers made a “facial” challenge as opposed to an “as applied” challenge to the state’s statute. To win a facial challenge, the taxpayers would have had to prove that there were no circumstances under which the statute could be constitutionally applied, the Council On State Taxation’s Fred Nicely explained this past March after New York issued its ruling. Thus, opponents of click-through nexus may live to fight another day – one in which a more winnable case presents itself. It’s just a matter of when that case will surface.

However, this denial may indicate the U.S. Supreme Court’s reluctance to decide an issue that it believes Congress should address. Indeed, in Quill, Justice Stevens wrote “the underlying issue is not only one that Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve.” While Quill may be outdated to a certain extent, the Supreme Court’s refusal to hear Overstockmay reaffirm their position on the issue and the desire for Congress to step in with legislation.

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