Shares of Amazon.com slipped 1.99 percent to $384.50, during early morning trading on the NASDAQ on Tuesday, as investors' sentiments turned bearish over news that Amazon, along with several other online retailers, will now have to collect and remit sales taxes for goods that are sold to New York residents. Their appeal, which challenged a New York law, was refused by the U.S. Supreme Court.
The latest decision has dealt a major blow to the e-commerce businesses but has been welcomed by state governments and brick-and-mortar retailers that have long protested against the unfair advantages enjoyed by e-commerce sites that do not collect sales tax. The states say they lose more than $23 billion annually from uncollected sales taxes.
Amazon and other e-commerce startups had filed an appeal that argued that the U.S. Constitution bars taxes on only interstate commerce and earlier court rulings stated that sales tax should be collected by online retailers only in those states where they have physical presence. The companies cited a 1992 U.S. Supreme Court ruling that involved mail order catalogs. In that case, the court said states could collect taxes from retailers only if they have a physical presence in those states.
Lawyers representing Amazon.com and overstock.com said their clients did not have any physical presence - e.g. distribution centers - in New York, but the state argued that its law - a part of a series of legislation passed in several U.S. states to force online retailers such as Amazon to pay sales tax - says that sales tax must be collected if a local resident is used to solicit online sales and online retailers such as Amazon, do use "in-state sales force" by partnering with local businesses to host ads that promote the retailer.
A New York court had ruled in 2008 had ruled that "The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated." The court said "active, in-state solicitation" establishes enough presence in the state for the requirement of collecting sales taxes.
The U.S. Supreme Court turned down the appeal, effectively upholding the New York state court's ruling.
This is not the first time Amazon has been accused of not paying sales tax. The company has already agreed to pay sales tax in 16 states where it has distribution centers and has reached deals in some states to delay collection of the sales taxes in exchange of setting up distribution centers that would create local jobs.
Globally too, Amazon has been under fire. Amazon UK was assailed for paying only $3.9 million in corporate taxes despite generating sales of $6.98 billion in 2012, while in French government had imposed restrictions on the amount of discount Amazon can offer on books and also prohibited free shipping because the online retailer chose to collect sales tax in Luxembourg, where the rates were lower.
Overstock.com said it wouldn't be affected by the ruling because it had suspended its local affiliate program once the laws were passed to collect sales tax.
eBay could not be reached for comments.
"Bricks-and-mortar [stores] won," said Bill Dombrowski, president of the California Retailers Association in a statement. "The court has decided that states have the right to pass what New York passed."
Retailers and state officials now hope the U.S. Congress will soon pass a law that would regulate online sales nationwide.