The supreme court in NY ruled that Internet businesses should be taxed on an equal footing with brick-and-mortar businesses, which likely lead to a US Supreme Court challenge. Accounting Today reported that the NY Court of Appeals, ruled 4-1 on March 28, 2013 that Chief Judge Jonathan Lippman wrote for the majority against Amazon and Overstock’s appeals:

If a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden.

The lone vote in favor of Amazon and Overstock came from Judge Robert Smith who wrote:

The websites are not soliciting customers for Overstock and Amazon in the fashion of a local sales agent,… Of course the website owners solicit business for themselves; they encourage people to visit their websites, just as a newspaper owner would seek to boost circulation. But there is no basis for inferring that they are actively soliciting for the out-of-state retailers.

The New York State Commissioner of Taxation and Finance Thomas H. Mattox issued the following statement:

Today’s Court of Appeals Decision affirms New York State’s approach to ensure fair tax administration for both brick-and-mortar and Internet-based businesses. We commend the Court for recognizing the logical application of existing precedent to the 21st century economy.

Since being implemented, this law has resulted in the collection of roughly $500 million in State and local sales tax. This is equivalent to approximately $6.0 billion of taxable retail sales into New York that were previously made without the sales tax being collected.

Of course local governments are losing tax revenue from the Internet businesses, but the nexus of where the taxable transactions occur are critical. So if a NY resident purchases a book from Amazon where was the taxable transaction? Washington state where Amazon is headquartered? Or where the server is located in Georgia? Or where the book is shipped from in Texas?

There are no easy answer to these Internet tax issues, and it will be interesting to see how the Supreme Court reacts.