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Supreme Court set to decide if states can tax Internet sales

E-commerce has exploded since the court ruled on the issue 50 years ago and states are now demanding sales tax revenue.

WASHINGTON — President Donald Trump's claim Thursday that Amazon pays "little or no taxes to state and local governments," while short on the facts, touched on an issue that has long been a sore point for the states and that comes before the U.S. Supreme Court next month.

In fact, Amazon has collected taxes since April 1, 2017, on sales to customers in the 45 states that have statewide sales taxes. But it is not legally required to do so.

In 1967, the Supreme Court ruled that states could not force mail-order catalog companies to collect sales taxes unless the purchaser lived in a state where the company had a physical presence — a headquarters, warehouse, or a distribution center, for example.

The court reasoned at that time that mail-order business was minor compared to in-store sales and that catalog retailers would be saddled with too much of a burden in having to figure out the correct sales tax, given that taxes differ among the states and even among cities within a given state.

In 1992 and 2015 the court revisited the issue and declined to let states tax Internet sales.

South Dakota, concluding that the business world had radically changed, decided to force the issue and passed a law in 2016 requiring Internet retailers to collect taxes if they pass a minimum threshold in sales to the state's residents.

"Times have changed," the state says in its Supreme Court filing. "Amazon did not begin selling books out of Jeff Bezos's garage until July 1995."

As for the rule that only companies with physical presence in a state can be required to collect taxes, South Dakota says Internet retailers are far more present in the lives of state residents than many big-box stores.

"The Internet now makes it possible for out-of-state sellers to reach consumers with engaging, interactive virtual storefronts in our homes or on our smart phones at any hour of the day."

Backed by 36 other states, South Dakota says local governments lose nearly $34 billion a year in tax revenue because of the physical presence rule.

South Dakota also says the notion that the nation's roughly 12,000 different state and local tax rates present a burden to Internet retailers is equally outdated. Computer programs can instantly calculate the correct tax rate based simply on a customer's address.

Internet companies that sued to block the South Dakota law, including and Wayfair, argue that while the business world has changed, collecting and distributing sales taxes remains a burden.

"The truth is that sales tax collection has become more complex as the number of tax jurisdictions has more than doubled since 1992. Moreover, the integration of tax collection software is extraordinarily expensive," the companies say in their Supreme Court brief.

NetChoice, a trade association of Internet retailers, says the tax requirement would hurt small Internet companies, forcing them to comply with "overbearing tax compliance burdens."

The Trump administration is siding with South Dakota. None of the Supreme Court's earlier decisions "could have foreseen the rise of modern e-commerce," says Solicitor General Noel Francisco.