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U.S. Supreme Court declines to hear online retailers tax case

A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. To match
A zoomed illustration image of a man looking at a computer monitor showing the logo of Amazon is seen in Vienna November 26, 2012. To match

By Lawrence Hurley and Patrick Temple-West

WASHINGTON (Reuters) - Amazon.com Inc and other online retailers with no physical presence in New York State must go on collecting sales tax after the U.S. Supreme Court on Monday declined to hear a legal challenge to the law that requires it.

The court order means the New York law remains intact and the high court will not, at least for now, definitively rule on the heavily contested question of whether states have the power to pass such laws.

According to the Tax Foundation, a conservative-leaning think tank in Washington, 11 other states have recently passed laws seeking to expand their tax authority over out-of-state retailers.

Amazon and Overstock.com Inc both had challenged the New York state law. Though dealt a legal blow, the companies will see little, if any, adverse earnings effects, analysts said on Monday.

"It's not positive, obviously. How negative remains to be seen," said Colin Gillis, an analyst at BGC Partners.

Although the Supreme Court does not have to explain why it declines to hear cases, it may have been swayed by New York Attorney General Eric Schneiderman, who argued in defense of the law that recent developments favored delaying consideration of the issue. He cited the possibility of congressional action and pending challenges to other state laws as reasons why it would be better to wait.

He also noted that developments in the retail industry that would make it easier for companies to collect state taxes could also render the dispute moot in the near future because the burden on businesses would not be so great.

With Congress not taking action on the issue, courts have been intervening case by case in a long-running struggle between state governments and major online retailers.

COURT BATTLES TO COME

As a result of the high court's inaction, the nationwide patchwork of online sales tax collection will remain and more court fights may arise, tax lawyers said on Monday.

"Taxpayers and tax administrators will keep fighting it out one state at a time," said Stephen Kranz, a partner at law firm McDermott Will & Emery.

"We will likely see other cases developing around the country," he said.

In a March ruling for the state government, the New York State Court of Appeals said Amazon and Overstock could be compelled by the state to collect tax from online sales. Both companies sought the high court's review of the ruling, citing the Commerce Clause of the Constitution, which limits the power of states to regulate interstate commerce.

In October, the companies won and the state lost in a similar tax case in the Illinois state supreme court, presenting split decisions among two of the most populous states.

The state's revenue agency has until mid-January to decide whether or not to appeal this ruling to the Supreme Court, a spokeswoman said on Friday.

ONE-ON-ONE BATTLES

Seattle-based Amazon has been fighting one-on-one battles with the 50 states and the District of Columbia for years over sales tax. It now collects sales taxes in 16 states, adding Connecticut, Massachusetts and Wisconsin since October, according to the company's website.

The U.S. government has no national sales tax. Proposed legislation in Congress would give all states the power to enforce their sales tax laws on Internet retailers. In May, the Senate approved a bill, but it has stalled in the House of Representatives.

Amazon supports federal legislation for nationwide state sales tax enforcement, but other online retailers, including eBay Inc and Overstock, have fought it.

"Congress can and should act," Amazon said in a statement on Monday.

Overstock's executive vice chairman, Jonathan Johnson, said it would be a mistake for more states to enact online sales tax laws.

"Any state that passes a law like this, we terminate our relationship with affiliate marketers in those states," Johnson said on Monday.

Under a 1992 Supreme Court decision, retailers without a physical presence in a state do not need to collect and remit taxes in that state on each sale. Consumers are supposed to pay the tax on their own, but few do.

In states where Amazon has no physical presence, the company does not generally collect the tax, giving it a pricing edge over traditional brick-and-mortar merchants.

The cases are Overstock.com v. New York State Department of Taxation and Finance and Amazon.com v. New York State Department of Taxation and Finance, U.S. Supreme Court, Nos. 13-252 and 13-259.

(Additional reporting by Bill Rigby in Seattle; Editing by Howard Goller, Jeffrey Benkoe and Leslie Gevirtz)

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