Evan Schuman's StorefrontBacktalk

The Supreme Court mostly disagreed. Although the Court agreed that due process permitted one state to tax sales coming from out of state if the retailer had substantial contacts in the state (routinely made sales there, or what the law calls “purposely availed” themselves of the benefits of doing business in the state), the Constitution gives Congress and not the states the power to regulate interstate commerce. Because interstate sales “affected interstate commerce” and because sales taxes impose a burden on these sales, only Congress could regulate that behavior.

The Court also found that order-placing software running on a customer’s own computer didn’t qualify as a strong enough contact to trigger collection of out-of-state sales taxes. But if you were a retailer with an office, store, salespeople or other physical presence in a particular state, all bets were off. Any state where you had a store or office could tax all of your sales in that state.

Needless to say, E-tailers have gone to great lengths to avoid having such a presence in most states. E-tailers like Amazon and Overstock actually do have substantial contacts with states like California. They actively market and sell in the state—with print, Internet, radio and TV ads targeting in-state residents. They directly solicit sales in California, and ship physical products into the state. Amazon offers services, including Cloud computing, to California residents and resident companies. It also sells and delivers intellectual property into California—downloads onto a Kindle, for example.

But these aren’t the only “contacts” these companies have with California. Amazon and Overstock have hundreds of “affiliates” or “associates”—independent and semi-independent individuals who do have a physical presence in the state, and who use their Web sites to solicit and direct sales to the E-tailers. These associates are paid by Amazon or Overstock for these sales, although the contracts expressly provide that the affiliates are independent contractors.

So what it comes down to is this: If Amazon or Overstock or an E-tailer without a presence in a state hires employees to do sales and marketing in that state, bingo! it has a presence in the state and can be taxed on sales in that state. If they rely on third parties to do these activities on commission, voila! no sales taxes are due.

Needless to say, cash-strapped states sought ways to get at this unpaid sales tax. Brick-and-mortar retailers likewise felt “punished” by the loophole, which encouraged consumers to use their stores as showrooms to look at and test products before buying them cheaper (because of the lack of sales taxes) online.

In 2008, New York passed a law pegging the duty of out-of-state retailers (and E-tailers) to pay New York taxes on the activities of the business associates. Essentially, New York treated the affiliates and associates as “agents” of the E-tailer and the links and leads as contacts with the taxing jurisdiction. When Amazon challenged the Constitutionality of the law, a New York State court found, not surprisingly, that New York could tax these sales.