The Supremes Sidestep A Tax Issue

“Cyber Monday” has lately given “Black Friday” a run for its money in the arena of post-Thanksgiving shopping binges. For many Americans, the allure of online holiday shopping is hard to resist.

Buying online lets you skip the hassle of getting dressed, driving to a store and finding parking. It offers a wider selection, and the odds that a given item will be out of stock are lower. And many online purchases come without sales tax.

But this last advantage, unlike the others, may not continue for much longer.

The Monday after Thanksgiving, the U.S. Supreme Court declined to weigh in on a dispute between New York state and online retailers. (AMZN) and (OSTK) had both appealed a New York court decision requiring them to collect and remit sales tax despite having no physical presence in the state. New York, like several other states, claims that the use of affiliates qualifies as a tie to the state that is sufficient to impose tax collection responsibilities on out-of-state retailers under Supreme Court precedents that predate the Internet era.

Affiliates are businesses or individuals that refer customers to the retailer’s website and collect a commission on any resulting sales. Amazon and Overstock have both used them, as do many other online retailers. (Amazon still uses affiliates and collected sales tax in New York as it fought the law; Overstock ended its affiliate program in New York when the state’s law passed in 2008.)

Residents of states that have sales tax are required to send in tax payments for online purchases directly, in the form of “use tax,” but hardly any taxpayers do so. The Marketplace Fairness Act, which passed in the Senate and is currently under consideration by a House subcommittee, would eliminate the ambiguity about physical presence at the cost of a variety of new complications.

In the meantime, the legal fight about New York’s approach continues. Amazon and Overstock have been embroiled in this dispute for years. A 1992 case, Quill Corp. v. North Dakota, established that sending a catalog to a state’s residents was not enough to require a business to collect tax. Counting affiliates as proof of presence in a state was the way around Quill for New York and other states that wanted to capture the tax from online sales. New York’s Court of Appeals held New York’s law constitutional earlier this year.

Deeming remote sellers to be physically present wherever they have sales affiliates is, however, quite a stretch. It is predicated on the idea that affiliates are not independent businesses or, alternately, that affiliates and the sites they work for are so close that the affiliates are practically agents of the retailer. Given that affiliates range from one-person blogs up through sizeable companies that run deal sites, dealing with affiliates this way will often produce absurd results.

Consider a different context: Federal Express and UPS are paid by out-of-state sellers to deliver goods, but the courier services are not treated by the states as though they were the retailers’ own delivery workers, and they do not create a local presence for remote sellers. Why would similarly independent sales sites satisfy the requirement for a physical presence before a remote seller can be forced to collect sales tax?

The Supreme Court’s prior case generally requires that before a state can impose such collection obligations, the out-of-state business must either have employees or property within that state’s jurisdiction. An agent is not an employee, but is not independent of the business either, making it an intermediate construction not clearly addressed by prior decisions. Until and unless the federal courts stop them, states will take advantage of this ambiguity by defining affiliates as agents and using them as the basis for pursuing retailers for tax.

Why did the Supreme Court choose not to address this issue for Amazon and I can only guess. But a few reasons come to mind.

First, the Court might want more than one circuit court to consider the matter before it weighs in. If the lower courts reach a consensus, the Supreme Court may not need to handle the question at all. If the lower courts disagree, the Supreme Court may then decide to resolve the conflict. This is often the point at which the high court decides to address an issue.

Or perhaps the Court doesn’t want to wade into an ambiguous situation that may depend on the individual facts of these particular retailers. The decision would inevitably be read as a blanket rule to govern all sorts of similar cases; this might lead to a chain of lawsuits in which states or retailers argue that their circumstances set them apart from the particulars of this litigation. Such disputes could end up right back in the Supreme Court’s lap.

The Court also may not want to take on this big of an issue while congressional action is pending that would confer on states exactly the power they are already asserting. If it seems likely that the law will simply make the Court’s decision moot, the Court may prefer to wait and see what Congress does.

A final possibility is that the justices, like most people, find tax law boring and would rather not deal with it.

Given the changes in the commercial landscape and the increasing prevalence of independent contractors who may or may not be agents of companies that hire them, this issue won’t go away. Sooner or later, the Court will probably need to consider the point at which virtual commerce creates virtual jurisdiction. But that day has not yet arrived.

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About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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