Amazon Would Love Caligula’s Sales-Tax-Free Rome

Dec. 5 (Bloomberg) -- The U.S. Supreme Court effectively told Inc. this week to become a tax collector.

The case originated with a New York law that forced the online retail giant to collect sales taxes from customers living in that state. Amazon, which understandably wished to maintain its tax-free competitive advantage, initially challenged the law in the state court. When the New York Court of Appeals ruled against the company in March, it appealed to the Supreme Court. On Monday, the nation’s highest court refused to hear the case, effectively validating the lower court’s decision and signaling that the days of tax-free shopping on the Internet may be coming to a close in New York and beyond.

In declining to meddle in the lower court’s decision, the Supreme Court is steering clear of a mess that it helped create. And no wonder: State sales taxes and interstate commerce -- never mind Internet commerce -- have bedeviled consumers and courts for decades. The legal questions raised by these issues are almost metaphysical in their complexity, with no easy answer -- save, perhaps, getting rid of sales taxes entirely.

These levies have been around in some form for millenniums. In the early years of ancient Rome, general sales taxes helped pay for the costs of military campaigns. They had few defenders, and when Caligula abolished them in 38 A.D., few Romans mourned their demise.

Brothel Revenue

Sadly, the emperor’s zeal for slashing taxes left Rome in dire fiscal straits. Caligula imposed direct taxes on prostitutes and tavern keepers, and even opened a high-end brothel in his villa in Palestine to raise revenue. But the general sales tax wasn’t resurrected.

General sales taxes remained rare until World War I, when European nations desperate for revenue began imposing national levies on consumers. Americans didn’t join the movement until the Great Depression, as strapped states reluctantly imposed such taxes as a temporary measure. When the economy improved, state governments proved reluctant to repeal the taxes, and they have remained on the books in most states since.

Rates vary from state to state. Although Congress flirted with imposing a national sales tax in 1932, and has revived the idea from time to time, the individual states -- and sometimes, municipalities -- impose a staggering variety of levies on consumers shopping within their borders, from zero percent in states such as Delaware, Montana, New Hampshire and Oregon, to more than 9 percent in Arizona, California and Tennessee.

This diversity isn’t a problem where the consumer and the retailer occupy the same jurisdiction. But how much tax should someone pay when they shop in another state, particularly a state with lower sales taxes? State tax collectors understandably wanted them to pay the higher, home state rate, and they instituted what are known as “use taxes,” which are sales levies by another name. In theory, anyone who buys something from a retailer in a state with a lower sales tax than their home state is liable for the difference.

Very few people paid these use taxes. Eventually, state tax officials tried to force out-of-state retailers to do their dirty work and collect taxes for them.

This wasn’t a popular policy, and in 1954, the Supreme Court heard a case -- Miller Brothers Co. v. Maryland. It involved a Delaware furniture retailer that refused to assess taxes on Maryland residents shopping at its store, claiming that it wasn’t responsible for enforcing another state’s use tax. The Supreme Court agreed, arguing that there had to be some “definite link, some minimum connection, between a state and the person, property, or transaction it seeks to tax.” In this case, there wasn’t, according to the high court.

Illinois Case

The next question was whether this ruling extended to mail-order sales across state lines. In 1967, the Supreme Court heard a case involving National Bellas Hess, a mail-order clothing company based in Kansas City, Missouri. Illinois had claimed that the company owed $93,242 in use taxes from sales to its residents.

Much like Amazon today, National Bellas Hess disagreed. After all, it wasn’t incorporated in Illinois, nor did it maintain a physical presence in the form of stores or warehouses, or even a sales force in that state. Its only connection to Illinois was through the mail. This was insufficient to meet the definition of a “minimum connection.”

The Supreme Court agreed, and ruled that the mail-order company had no obligation to serve as tax collector for another state. It also argued that any requirement to do so would impose a huge administrative burden on the retailer. A subsequent decision in 1992, Quill Corp. v. North Dakota, affirmed these protections for corporations that lack a “physical presence” in revenue-hungry states.

Both of these decisions inaugurated an explosive growth in the mail-order business. They may have also helped clear the way for online commerce. Indeed, studies suggest that sales tax arbitrage is a big part of the reason for the growth of Internet shopping. Economist Austan Goolsbee, for example, found that residents of states with high sales taxes were far more likely to embrace online shopping. Based on the data, he estimated that requiring Internet shoppers to pay sales taxes might reduce online commerce by 24 percent.

As traditional retailers lost ground to tax-free retailers such as Amazon, pressure mounted to level the playing field.

Which brings us to this week’s decision or, more accurately, nondecision. In letting the lower court’s ruling stand, the Supreme Court has undercut the competitive advantages that online retailers enjoy. It has also given New York and other states a major victory in their battle to capture an estimated $23 billion in sales taxes lost to online transactions.

‘Physical Presence’

But none of this clears up the bizarre ambiguities as to what constitutes a “physical presence.” In the Amazon case, the New York Court of Appeals ruled that Amazon’s affiliates -- the more specialized retailers that fulfill orders for some items -- constituted an “in-state sales force.”

That’s a bit of a stretch. It also leaves many questions unanswered. What about big online retailers without affiliates? Will they continue to sell items tax-free? Or will the courts ultimately find some way to argue that they, too, have a physical presence in states far away from their warehouses and call centers?

In the end, Congress may need to settle the issue. This year, the Senate passed legislation empowering states to force retailers to collect taxes on their behalf. The House has yet to take up the measure, but with the holiday shopping season under way, and the fresh reminder of the disparities in sales tax collection, the time may be right.

(Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Ticker. Follow him on Twitter at @smihm.)

To contact the writer of this article: Stephen Mihm at

To contact the editor responsible for this article: Max Berley at