Online sales-tax money is key part of state budget. Could a lawsuit derail it?

This June 18, 2014, photo shows the app that links to shopping on Amazon.com. Washington lawmakers have proposed charging sales tax on online purchases made from out-of-state retailers. Ted S. Warren AP
This June 18, 2014, photo shows the app that links to shopping on Amazon.com. Washington lawmakers have proposed charging sales tax on online purchases made from out-of-state retailers. Ted S. Warren AP

Top state lawmakers in Washington said Thursday they intend to follow in Colorado’s footsteps with a plan to make more online retailers collect sales tax in order to help bankroll the next two-year budget.

If Washington’s experience reflects Colorado’s, the Evergreen State might have to wait a while to see any of the roughly $1 billion it expects to haul in from the proposal over a four-year span.

Colorado passed its trailblazing online sales tax law in 2010, but the law only is set to go into effect for the first time Saturday. That’s because internet-commerce groups challenged its constitutionality, sending it on a six-year journey through the court system before the 10th Circuit Court of Appeals ultimately ruled it legal.

The new online sales-tax collection was on hold during the process.

In Washington, opposition groups already are gearing up for a similar legal challenge.

Steve DelBianco, the executive director of NetChoice, a trade association focusing on electronic commerce, said he’s developing legal arguments and rounding up money to challenge the plan.

“Washington is not likely to see any new revenue from this law, since a court would bar enforcement while legal challenges are resolved,” DelBianco said in an email. “So nobody in Olympia should be counting on new tax revenue in the near term.”

In Olympia, lawmakers were undeterred.

They pointed to Colorado’s ultimate success in the courts as reason to proceed. The U.S. Supreme Court declined to hear an appeal to the Colorado law brought by the Data and Marketing Association.

Washington’s proposal, part of a budget deal announced this week, is set to go into effect in 2018.

“I think with any legislation we have there’s always a litigation risk,” said state Rep. Kris Lytton, a Democrat from Anacortes who chairs the House Finance Committee. “But I can tell you based on conversations with attorneys, with the Attorney Generals’s office, we’re on good legal ground.”

Washington wants to charge sales tax on purchases made by state residents through online retailers around the country. Washington residents owe the state a “use tax” on many such purchases, but few people pay it.

Stores with a physical presence in the state — such as Amazon — are already required to collect sales tax.

Standing in the way of collecting more online sales tax is a Supreme Court ruling from 1992 known as Quill v. North Dakota. In that case, the nation’s high court decided a state couldn’t force online businesses to be the tax man if the business didn’t have a physical presence inside that state’s borders.

Part of the court’s logic was that requiring tax collection would be too complicated for online businesses selling all over the United States.

Washington is attempting a workaround to avoid the Quill ruling that is similar to one successfully used by Colorado.

Washington’s plan gives retailers a choice: Charge a 6.5 percent sales tax as brick-and-mortar businesses do; or send information about the use tax to consumers and give a report to the Department of Revenue on purchases so the the state can better collect that tax.

The report would include a buyers’ name, how much an item cost, and the billing, mailing and shipping addresses given to the retailer.

Washington’s plan would apply to online businesses grossing more than $10,000 a year in sales to Washington residents.

Lawmakers are betting many online retailers opt to collect sales tax and send it to the state, rather than go through the more onerous reporting process.

Democrats who have championed the tax said it would help brick-and-mortar businesses required to collect sales tax compete with online sellers racking up sales in Washington.

Potential court arguments

Colorado’s court win is not standing in the way of another legal challenge to Washington, DelBianco said.

One reason is Washington falls under the jurisdiction of the 9th Circuit Court of Appeals, which might rule differently than the 10th Circuit and open a potential path for the issue to the U.S. Supreme Court.

There also are some key differences in Washington and Colorado’s law.

Washington’s puts more responsibility on so-called “marketplace facilitators” and “marketplace referrers,” such as eBay — the internet’s middlemen.

Many of those sites don’t sell any products themselves but provide a marketplace for retailers to sell through. Some take a commission.

In Washington, many facilitators and referrers would be on the hook for deciding whether to collect sales tax on behalf of sellers or report information about the use tax to the state and consumers.

Colorado’s law only applies directly to sellers and comes with a far higher threshold of $100,000 in annual sales to the state.

Those differences could sow confusion for small businesses dealing in Washington by forcing them to figure out different state laws and the rules for various marketplaces, argues eBay, on a website dedicated to fighting the proposal.

Those differences also could boost a court challenge on grounds the law is too burdensome.

Privacy concerns

Carl Szabo, NetChoice’s senior policy counsel, said a lawsuit also could contend that Washington’s law violated privacy protections in the U.S. Constitution.

DelBianco said the information retailers send to the state could “reveal preferences that could be very damaging if they were to become public,” such as purchases from vendors specializing in “health issues, clothing, sexual orientation, personal tastes and financial circumstances.”

“The extent to which that vendor reveals the name of something that’s personal — that information will be in the hands of the state tax department,” DelBianco said.

State lawmakers in Washington maintain that wouldn’t be the case.

“That’s a made-up problem,” said state Sen. Reuven Carlyle, a Seattle Democrat who has followed the issue in the Legislature for years. Washington handles lots of sensitive information without issue, he said.

In Colorado, state employees face termination and criminal prosecution for breaking confidentiality rules, according to the state Department of Revenue.

Beverly Crichfield, a spokeswoman for Washington’s Department of Revenue, said the agency is still reviewing Washington’s tax proposal and couldn’t comment on it.

National Trend

Washington might be following Colorado with its tax plan, but it’s not the only state trying to collect more sales tax from online shoppers.

Max Behlke, director of budget and tax policy for the National Conference of State Legislatures, said seven states enacted policies relating to sales taxes for online retailers and more than 30 states debated policies this year.

Behlke has been tracking the topic for NCSL.

“The amount of calls that I’ve taken from states this year to address this is astounding,” he said.

Some states have gone the Colorado route, while others are taking different tactics.

South Dakota passed a law requiring online retailers from out of state to collect sales tax on purchases by its residents — openly challenging the Quill ruling in hopes the Supreme Court changes its mind.

They’re betting on success after a 2015 opinion written by Justice Anthony Kennedy in a case that invited a challenge to the Quill decision.

That case is still in the courts.

Efforts also have been made to create a federal law addressing the issue so as to clear up confusion for online retailers who otherwise would be forced to obey dozens of different laws in each state.

NetChoice generally has favored a federal law on the matter, DelBianco said.

In the meantime, states have not been hesitant to try and write their own online sales-tax laws.

Carlyle said Washington’s plan is “good substantive public policy” and would pass muster in the courts if challenged.

“I think it’s a high probablity of success,” he said.

Walker Orenstein: 360-786-1826, @walkerorenstein