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Federal Solution Sought for Disputes Over E-Commerce Law: Taxes

A thicket of state laws imposing sales taxes on electronic commerce is creating pressure for federal intervention to end the squabbles between states and online merchants, a lawyer monitoring the issue said.

The federal action may come on two fronts -- in the U.S. Supreme Court and from Congress, said Kelley C. Miller, an associate with Reed Smith LLP in Washington, Bloomberg BNA reported.

The court is likely to review conflicting legal precedents on the constitutionality of so-called Amazon tax laws -- a reference to the online merchant -- that some states have adopted, Miller said during a Nov. 12 teleconference titled “Clouds, Codes and Crunching Numbers.”

The disputed laws assert that marketing businesses within a state’s boundaries with websites directing online shoppers to retailers represent a sales presence for remote merchants such as Inc. The states say this gives them authority to order the merchants to collect sales tax for purchases made by their residents. The laws are also known as “affiliate nexus” measures.

Examples of the targeted marketing businesses include Roscoe, Illinois-based and Chicago-based

“I think it is very accurate to say online merchants, e-merchants, are certainly watching to see what happens in the aftermath” of state court rulings that sent mixed signals “to see if the Supreme Court will step in and ascertain a direction on what many think is a patchwork of state laws that look at web-based or e-commerce transactions.”

Marketplace Fairness

On Capitol Hill, Miller said Congress is edging closer to granting states the power to require remote sellers to collect sales taxes for them at the time of purchase. A measure known as the Marketplace Fairness Act that passed the Senate in May also would impose a framework for harmonizing state sales tax rules to reduce collection burdens on retailers.

The focus on sales taxes has intensified with the growth of e-commerce, which in the U.S. totaled $64.8 billion during the quarter that ended June 30, according to Census Bureau estimates. That figure represented an 18.4 percent increase from 2012’s second quarter, with e-commerce accounting for 5.8 percent of the roughly $1.13 trillion in all of the period’s retail sales, the bureau reported. E-sales accounted for 5.1 percent of the total in last year’s second quarter.

States lose an estimated $23 billion annually in uncollected sales taxes.

20 States

Miller said 20 states have enacted affiliate nexus tax laws and another 13 are considering such action. The laws have been challenged by retailers, including Amazon and Inc., and organizations such as the Performance Marketing Association Inc.

Miller said conflicting legal rules have emerged from New York and Illinois, setting the stage for the potential Supreme Court review.

In March, the New York Court of Appeals upheld the constitutionality of that state’s affiliate nexus law, finding no conflict with the U.S. Constitution’s commerce clause as argued by lawyers for Overstock and Amazon.

The Illinois Supreme Court came to a different conclusion when it voided the state’s affiliate nexus law, finding that the federal Internet Tax Freedom Act preempts the state from imposing a prohibited, discriminatory tax on e-commerce. The Illinois court didn’t address the commerce clause issue.

Court Review

Miller said Overstock and Amazon have filed petitions seeking Supreme Court review of the New York ruling. While Illinois officials haven’t yet expressed their intentions, Miller said most of those following that case expect the state to seek review as well.

Miller said the Senate-approved measure to permit states to impose a sales tax on e-commerce “has not been moving as quickly as proponents of the bill had wanted it to move.”

“It also has a very strong, centralized opposition to its passage,” including from elected officials in states that don’t have any sort of sales tax, she said.

One strategy for passing the measure, whose backers include Wal-Mart Stores Inc., this year is to tack it onto annual appropriations bills, Miller said. If that doesn’t happen, 2014’s midterm elections could cloud passage next year because the measure would face criticism as a “new tax,” she said.

Still, she predicted it would eventually become law.

“There is still a great groundswell of support for federal sales tax legislation,” she said. “I would agree with the body of observers who say it is not question of ‘if’ this legislation pass, but ‘when’ it will pass.”

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