Supreme Court Opens Door for Online Sales Tax Loophole

States may seek new online sales tax laws after Supreme Court denial.

A man looks at a Cyber Monday advertisement on his laptop computer in Los Angeles, Calif., on Nov. 30, 2009.
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Lawmakers in many states will convene their legislatures in January, but it is unclear whether they will move to collect sales tax from Web retailers doing business in their states in both a politically sensitive election year and a period of economic recovery.

[READ: Supreme Court Rejects Amazon, Overstock Online Sales Tax Cases

The U.S. Supreme Court's move on Dec. 2 rejecting challenges by Amazon and Overstock to a New York state law may give legislatures greater ability to collect existing sales tax from Web retailers operating in their states. 

Supreme Court precedent holds that states may not collect sales tax from retailers that lack physical presence in the state, but the New York law creates an exemption called a "click-through nexus" if a Web retailer has an online sales link built into the website of a company based in that state. At least 13 states already have adopted laws similar to New York's exemption and more could use that legislation as a model, says Dan Effron, a tax partner at Marcum LLP, a national accounting firm based in New York City.

If more legislatures broaden the scope of how Web retailers can be counted as having a business presence in the state, companies may raise prices to account for sales tax or to hire accountants to comply with the different state laws, Effron predicts.

"It would be a windfall for the state treasurers in the hundreds of millions of dollars," Effron says. It's unclear whether there would be a broad impact on the e-commerce industry through the passage of laws similar to the New York legislation, Effron says, but "thousands of small and medium-sized businesses doing sales on the Internet would clearly face a burden," he explains.

These state laws do not allow blanket collection of online sales tax because of limits set by the Constitution, Effron explains. That power would be provided to states by the Marketplace Fairness Act, which passed the Senate in May but has since stalled in the House of Representatives. The proposed legislation would affect retailers doing $1 million or more of their annual sales online.

[DEBATE CLUB: Should the Senate Have Passed an Online Sales Tax]

The National Council of State Legislatures estimated states could have gained $23.3 billion in revenue during 2012 by collecting sales tax from online purchases, reflecting how in recent years states have explored the possibility of imposing sales tax collection on Web retailers. The National Retail Federation argues e-commerce sites have an unfair advantage against brick-and-mortar stores because they do not have to collect sales tax, and that the Marketplace Fairness Act would help level the playing field.

While states likely will debate Internet sales tax laws similar to the New York legislation, 2014 might not be the best year to enact those laws, says Scott Pattison, director of the National Association of State Budget Officers. The recovering economy makes state budget officers less desperate to collect new taxes, Pattison explains, and the general fund budgets of 43 states for the 2014 fiscal year are higher compared with 2013, according to a report published on Tuesday by the NASBO.

Fiscal 2014 budgets are projected to increase by 3.8 percent during fiscal 2013 -- which is lower than the historical average of 5.6 percent -- but the report shows that growth is stable.

"It's a transition year for the economy so it is more difficult to predict what states will do," Pattison says. "States may be interested in reconfiguring existing taxes."

[ALSO: What an Online Sales Tax Will Teach Retailers]

Imposing sales tax collection onto Web retailers also may be politically difficult, since it potentially could discourage companies from doing business in a state, Pattison says. To appear more attractive to business development, 14 states decreased their corporate income tax for the 2014 fiscal year, while only four states increased it, Pattison says.

"There are a number of states with a Republican foothold where taxes are off the table," Pattison explains. "You are going to see some significant debate on whether to change taxes. But there is always the question of, 'Does this make our states attractive to business development?'"