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High Court Stays Silent on Internet Tax

By William Vogeler, Esq. on December 21, 2016 | Last updated on March 21, 2019

Declining to review a state law on reporting internet sales taxes, the U.S. Supreme Court said nothing about internet taxation itself. But it was close, and perhaps a lucky break for internet businesses in the United States.

The High Court denied a petition to review Colorado's reporting law, which the Tenth Circuit Court of Appeals upheld against a legal challenge earlier this year. The Tenth Circuit said the state law, which requires out-of-state internet retailers to report tax liabilities for its Colorado customers, was constitutional. In its petition to the U.S. Supreme Court, the Data and Marketing Association said the state law discriminated against internet businesses that have only a virtual connection to Colorado

Although the petitioners' lost their battle to overturn the law last week, internet businesses are still winning the war against internet sales taxes in the meantime. The law does not require businesses to collect sales taxes in states where they have no physical presence.

The "Physical Presence" Rule

In opposing the petition that had targeted the discrimination issue, the respondent asked the Court to broaden the issue to consider whether it should overturn its "market-distorting and tax-draining" decision 15 years ago. In Quill Corp. v. North Dakota, the court said that a state may not enforce tax laws against a business that had no physical presence there. Internet businesses, such as Amazon, have thrived under the ruling because they can offer customers lower prices without state taxes.

Brohl, Colorado's executive in charge of revenue, said the court should overrule that decision. She noted that two of the Supreme Court's justices had expressed "grave concerns" about the "physical presence" rule from Quill.

The Court denied the petition, however, leaving its 1992 decision and out-of-state internet taxation as it is for now. Meanwhile, federal and state governments continue to regulate other internet tax issues.

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