Business Wins in Online Tax Case Decision

The U.S. Supreme Court ruling allows retailers to challenge states’ online sales taxes.

March 04, 2015

WASHINGTON, D.C. – Yesterday, the U.S. Supreme Court ruled that businesses and taxpayers could file suit against states for mandating that out-of-state retailers must provide customer purchase data to state tax departments, Politico reports.

The decision, Direct Marketing Association versus Brohl, reverses a lower court ruling that banned a business trade organization from suing Colorado for its online sales tax. While business groups are happy with the decision, Internet sales tax supporters were not too put out by the ruling, given Justice Anthony Kennedy’s concurring opinion that the court should consider the full sales tax issue.

“The petitioners shouldn’t celebrate too much,” wrote Joseph Henchman, a state tax expert with the Tax Foundation, in a blog post. “Justice Kennedy’s concurrence, despite being a voice of just one justice, strongly signals that the Court will let states collect taxes on Internet purchases if Congress does not.”

The decision will likely trigger more debate on Capitol Hill over taxing online retailers. Even Republicans are not in lock-step on the issue, as some see it as a matter of fairness between online retailers and brick-and-mortar businesses.

Colorado’s state tax code requires residents who buy products via the Internet to pay taxes—even if the online store does not collect such taxes. The state mandated that Internet-based stores that don’t gather such taxes to inform their Colorado customers about their state’s requirement. In addition, virtual businesses must also tell the state about such purchases.

Online stores labeled such mandates as overly burdening them. The Direct Marketing Association’s suit challenged the Colorado law by claiming it violated the Interstate Commerce Clause. Many other states have or will soon have similar online tax rules. Close to two dozen states banded together to write a brief supporting Colorado’s tax requirement.

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