Internet retailers face looming duty to collect out-of-state tax

Online shopping is hugely popular but not with state governments. For years, states have complained the internet shopping boom is costing them billions in tax revenue thanks to a long-standing law that prevents them from taxing distant retailers.

That’s set to change after a Tuesday Supreme Court decision that opens the door wide for states to expand their tax collection powers, and that will likely affect Amazon as well as smaller internet retailers.

In the ruling, Justice Anthony Kennedy said that the growth of the internet means it’s time for the top court to revisit a 1992 decision called Quill, which held that states can’t force a business to collect tax in a given state unless it has a physical presence there.

The Quill case, which was about mail-order catalogues, ensured that businesses didn’t have to worry about collecting and remitting taxes to dozens of different governments every time they made a distant shipment.

At the time, the decision was uncontroversial, presumably because people didn’t whip out a mail-order catalogue every time they fancied a purchase. That’s not the case today, however, since online purchases are so easy. On Tuesday, Justice Kennedy noted this trend and its impact on state coffers:

When the Court decided Quill, mail-order sales in the United States totaled $180 billion. … But in 1992, the Internet was in its infancy. By 2008, e-commerce sales alone totaled $3.16 trillion per year in the United States … Colorado’s losses in 2012 are estimated to be around $170 million. States’ education systems, healthcare services, and infrastructure are weakened as a result. […]

Given these changes in technology and consumer sophistication, it is unwise to delay any longer a reconsideration of the Court’s holding in Quill. A case questionable even when decided, Quill now harms States to a degree far greater than could have been anticipated earlier

The ruling also comes at a time when main street retailers are increasingly upset at online competitors who, they say, offer lower prices since they don’t have to charge tax. Those retailers have been pushing the Marketplace Fairness Act, a bipartisan bill that would eliminate Quill as an obstacle for out-of-state tax collection, but one that has repeatedly failed to pass Congress.

But now the Supreme Court decision could make the Marketplace Fairness Act unnecessary. Instead, state governments may now be emboldened to simply write new tax collection laws, and then rely on Kennedy’s words if they are challenged in court.

The outcome is hardly a sure thing, of course, especially since Tuesday’s case was about a wonky procedural issue, and not about tax collection directly. (Kennedy’s words will instead lay the table for any state or group that aspires to challenge the Quill ruling head-on).

Meanwhile, those who oppose expanding out-of-state tax collection powers are unlikely to give up the fight. These opponents include the five states (Oregon, Delaware, Alaska, Montana and New Hampshire) that have no sales tax in the first place, and whose political leaders will argue it’s unfair for their businesses to have to carry out tax collection on behalf of others. The business community, led by the Wall Street Journal (paywall), have also opposed expanding out-of-state tax collection on the grounds that it could force retailers to deal with red tape in the forms of hundreds of city, state, country and Native American tax authorities.

(To get a deeper flavor of the legal issues at play, see Adam Liptak in the New York Times or Harvard Law professor Noah Feldman, writing at Bloomberg View)

Senate renews plan to ban internet taxes forever

Do you ever look at your phone bill and wonder, “what the heck are all those fees?” While it’s a natural impulse to blame the mendacity of the phone company, most of those items are there because various governments put them there.

The good news is that federal law bans tax on internet service — meaning that most of us don’t see something like this on our broadband bill:

Screen Shot 2015-02-11 at 11.00.35 AM

Well, for now, at least. Due to a quirk in Congress, the current relief from internet taxes is based on a temporary measure that keeps expiring and getting renewed on a short-term basis.

But as The Hill reported Tuesday, a bipartisan group in the Senate, led by John Thune (R-SD) and Ron Wyden (D-Or), wants to change that by passing a law called the Internet Tax Freedom Forever Act.

Those who follow these things may say we’ve seen this movie before, and that Congress has tried and failed to make the internet tax permanent in the past – most recently last December.

This time is likely to be different, however, as the bill appears to be finally decoupled from a more contentious proposal known as the Marketplace Fairness Act, which would have required online retailers to collect state sales tax.

While both measures are broadly related to taxes and the internet, they are are in fact separate issues: one is about taxing ISP connections, and the other is about how state sales tax should apply to online retailers. But in the past, supporters of the latter have tried to tie the two issues together when it came to voting in Congress.

Now that the Internet Tax Freedom Forever Act appears to be up for debate on its own, however, its chances of success seem high given that it enjoys broad bipartisan support.

The measure could, however, get tangled up in the hot button issue of the FCC’s proposal net neutrality, which Republicans want to portray as tax grab. As I’ve explained in the past, such claims — including a “study” claiming a $17 billion tax hit — appear utterly specious but, well, that won’t stop certain grandstanders from touting them anyways.

Finally, it remains to be seen how a permanent ban on ISP taxes would affect seven states (Hawaii, New Mexico, North Dakota, Ohio, South Dakota, Texas, and Wisconsin) that imposed internet taxes prior to October 1, 1998, and have been allowed to skirt the temporary ban because of a grandfather clause.

US consumers dodge internet tax for another year

Most Americans’ broadband bills will be free of state taxes until October of 2015 or later, thanks to a decision by Congress to use a major budget bill as a means to extend a current moratorium on internet access taxes.

The move reflects an ongoing policy decision by lawmakers to bar states from imposing broadband taxes similar to the ones that consumers see on their phone bill bills. While the tax ban is broadly popular, its future was up in the air for most of 2014 as a result of lawmakers’ attempts to tie it to an unrelated internet tax issue: whether online retailers should have to collect out-of-state sales taxes.

A proposed law to require online sales tax collection, which brick-and-mortar retailers say is necessary to create a level playing field, collapsed in November. As a result, it was for a while unclear if Senate Democrats would agree to extend the internet access tax ban — now, as National Journal and others have reported, the passage of the spending bill makes clear that they will.

While internet tax policy is not the most glamorous tech topic, it’s growing in importance as more and more commerce is conducted online. While outlets like the Wall Street Journal have urged lawmakers not to burden the internet with new taxes and burdensome collection requirements, state governments say they need to make up sales tax revenue as more shoppers migrate to the internet.

The issue is more complicated still since some states have no sales tax at all, while a handful of others benefit from grandfather clauses that let them collect broadband taxes despite the federal ban.

The upshot is that, for now, the issue of internet taxes will be kicked to 2015. It remains to be seen if the Republican Congress will try to make the broadband tax ban permanent, and if the issue will remain tied to the debate over online sales taxes, which is expected to resurface next year.

Behold: How Amazon wins the sales tax wars even when it loses

Amazon has maneuvered to avoid collecting state sales taxes, but that’s only part of the story: This week’s Fortune cover article reveals that even when things don’t go the retailer’s way, it’s been able to turn them to its advantage.