A unanimous Supreme Court ruled Tuesday that federal courts can hear a dispute over Colorado's Internet tax law, a decision that could lay the groundwork for future changes in how states can tax retail sales to companies outside their borders.
The ruling is a win for business groups that want to challenge the state's so-called "Amazon tax," which requires extensive reporting by out-of-state retailers that don't collect the state's 2.9 percent sales tax from Colorado customers.
Online retailers claim Colorado is violating protections for companies doing business in other states. A federal court agreed that the law violates the Commerce Clause of the U.S. Constitution.
But a federal appeals court ruled that cases challenging state taxes can only be filed in state court.
The high court reversed, finding that retailers were not challenging the actual collection of taxes, only a law giving state officials information about people who owe taxes.
Writing for the court, Justice Clarence Thomas said the federal law barring state taxes from being challenged in federal court does not cover "notice and reporting requirements" that might improve Colorado's ability to collect sales taxes from consumers. He said the lawsuit is also not seeking to restrain tax collection.
Thomas did not directly address the legality of Colorado's law, but Justice Anthony Kennedy wrote separately to question the half-century-old Supreme Court case that bans states from collecting sales taxes on out-of-state purchases if a business — such as Amazon — does not have a physical presence in the state.
"There is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently substantial nexus to justify imposing some minor tax-collection duty, even if that business is done through mail or Internet," Kennedy said.
Kennedy noted the "startling revenue shortfall" in many states from losing millions of dollars in taxes on Internet sales and the "unfairness to local retailers and their customers who do pay taxes at the register."
Customers are technically required to pay sales tax to the state annually, though few know that or do it. The Colorado law requires larger online retailers to tell customers that they owe sales tax on their purchases. They also have to send an annual list of purchases to customers who spent more than $500.