On December 2, the Supreme Court of the United States declined to grant writ of certiorari filed by two online retail giants, Amazon.com LLC and Overstock.com, Inc.    The broad issue at hand, is whether online retailers must charge, collect and remit state sales tax in states where their customers are located, but where the online retailer has no physical presence.  The issue, although not new, could have quite an impact on online retailers worldwide.

In 1992, the Supreme Court held that a physical presence, in the state where the customer is located, is necessary to establish a nexus between a company and the state for the purposes of sales tax.  The State of New York, concluded, more recently, that sellers who sign up for the Amazon affiliate program create that nexus.  This is a tenuous conclusion since the sellers are, in fact, simply another Amazon.com customer; the product purchased is access to Amazon retail customers through a link on a website.  Amazon.com has no control over the website, does not employ the seller or have any trappings of a typical office in that state.  The Supreme Court’s refusal to hear the appeal could be taken as a broad expansion of the state’s power to tax.  This could have a ripple effect for online retailers located in other countries.  The cost of having to charge, collect and remit sales tax to each of the 52 states will create a significant hardship for small to medium sized companies.

The physical presence/nexus concept is not different from the treaty concept of permanent establishment.  U.S. online retailers selling into other countries have not had the burden of charging, collecting and remitting VAT or other tax on sales, if they had no permanent establishment in that country.  The question will now be whether the physical presence of a sales affiliate program similar to the Amazon.com will trigger a permanent establishment, not simply for the purposes of VAT, but also income tax.