New York: High Court Upholds ‘Amazon Tax’ Provision for Internet Retailers

Bingel, GaryThis article appears in and is reproduced with the permission of the Journal of Multistate Taxation and Incentives, Vol. 23, No. 4, July 2013. Published by Warren, Gorham & Lamont, an imprint of Thomson Reuters. Copyright (c) 2013 Thomson Reuters/Tax & Accounting. All rights reserved.

In 2008, New York became the first state to enact so-called "Amazon" tax legislation, named after the world's largest Internet retailer and targeting online retailers for sales tax collection responsibility. Under N.Y. Tax Law §1101(b)(8)(vi), an Internet retailer is presumed to be a vendor required to collect sales tax on its New York sales if the retailer makes sales of taxable property or services and:

"enters into an agreement with a resident of [New York] under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in [New York] who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods...."

(For background on this law, see Cristman, "New York: Novel Sales Tax Law Seeks to Reach Internet and Other Out-of-State Vendors," 18 J. Multistate Tax’n 35 (August 2008); and Hecht, Burkard, Melone, Sutton, Yesnowitz, and Jones, "New York: State Clarifies New Affiliate Nexus Standard for Sales Tax Vendors," 19 J. Multistate Tax’n 32 (February 2010).)

Retailers can rebut this presumption, and thus avoid sales tax collection responsibility, if they can show that the resident with whom the retailer has an agreement did not actually engage in any solicitation in New York on the retailer's behalf that would satisfy the nexus requirement of the U.S. Constitution. In order to accomplish this, the contract between the retailer and New York resident must actually provide that the resident is prohibited from engaging in any solicitation activities in New York that refer potential customers to the seller, and the resident must submit to the retailer, on an annual basis, a signed certification stating that the resident, in fact, did not engage in any prohibited solicitation activities in New York during the previous year. Further, under New York's guidance, mere advertising alone, whether on the Internet or otherwise, does not create a tax collection responsibility. (See N.Y.S. Department of Taxation and Finance Memoranda TSB-M-08(3)S, 5/8/08, and TSB-M-08(3.1)S, 6/30/08. These TSB-Ms were discussed in more detail in Vetter, "Conjuring Jurisdiction Through Presumption—Affiliate Nexus Legislation," 21 J. Multistate Tax’n 6 (February 2012).) 

Online vendors challenge the law., LLC, and another large Internet retailer,, Inc., challenged New York's provisions as facially unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution.

Both Amazon and Overstock have "associates programs" under which third parties (who are residents of various states, including New York) place links on their own websites that, when "clicked," direct users to Amazon's or Overstock's websites. These associates are compensated on a commission basis, receiving a percentage of the revenue from sales generated by these "click-through" transactions. The contracts with the associates state that the associates are independent contractors and are not employees of Amazon or Overstock. Neither Amazon nor Overstock has any of their own employees or property in New York.

The court's decision. In, Inc. v. New York State Department of Taxation and Finance, N.Y., Nos. 33 and 34, 3/28/13, 2013 NY Slip Op 2102, 2013 WL 1234823 , aff'g, LLC v. New York State Department of Taxation and Finance, 81 App. Div. 3d 183, 913 N.Y.S.2d 129 (1st Dept., 2010), the New York Court of Appeals (the state's highest court) considered the Internet vendors' claims that New York's "Amazon" tax is unconstitutional on its face because (1) it violates the Commerce Clause by subjecting online retailers, with no physical presence in New York, to the state's sales and use taxes, and (2) it violates the Due Process Clause by creating an irrational, irrebuttable presumption of solicitation of business within the state. 

Commerce Clause analysis. The court, citing Complete Auto Transit, Inc. v. Brady, 430 US 274, 51 L Ed 2d 326 (1977), reiterated that in order to be valid under the Commerce Clause, a state tax must (1) be applied to an activity with a substantial nexus with the taxing state; (2) be fairly apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services provided by the state. The parties agreed that the only question at issue was whether they have "substantial nexus" with New York.

While stating that the world has changed dramatically in the past 20 years and, thus, the physical presence test set forth by the U.S. Supreme Court in Quill Corp. v. North Dakota, 504 US 298, 119 L Ed 2d 91 (1992), may be outdated, the New York court recognized that such a question was for the U.S. Supreme Court to consider.

The court then concluded that while "substantial nexus" is required under the Commerce Clause, as is "physical presence" under Quill, that physical presence need not be substantial. Rather, the physical presence required to create substantial nexus need only be "more than a slightest presence."

With regard to Internet selling, since many websites are geared towards local audiences, the New York legislature has attached significance to the physical presence of resident website owners. That physical presence is constitutionally relevant since it is through these resident website owners that Internet retailers are deemed to have established an in-state sales force. As a result of this sales force in New York, Amazon and Overstock have more than the slightest presence in the state, and therefore have a substantial nexus with New York. The court also felt it necessary to point out that the burden imposed on the Internet retailers is not a direct tax burden but, rather, merely a collection responsibility for a tax that is unquestionably due, that is exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.

Due Process Clause analysis. As explained by the court, the relevant inquiry from a Due Process standpoint is not a bright-line physical presence test but, instead, whether a seller has purposefully directed its activities toward the state in question, and whether it is reasonable, based on the extent of the seller's contacts with the state and the benefits derived, to require the seller to collect taxes for that state. Here, the court found that having numerous affiliates in-state that are compensated via commission was sufficient to put the retailers on notice that they would be subject to a tax collection responsibility in New York. Of particular importance was the fact that the affiliates' compensation was based on referrals that result in sales. According to the court, "given the direct correlation between referrals and compensation, it is likely that residents will seek to increase their referrals by soliciting customers." The court hinted that had the affiliates been compensated on a basis unrelated to actual sales, such an arrangement would be more akin to mere advertising, and thus not support the presumption of solicitation on the part of the resident affiliates.

As for the retailers' claim that the presumption is irrebuttable because it will be extremely difficult, if not impossible, to prove that none of their New York affiliates is soliciting customers on the retailers' behalf, the court noted that New York "has set forth a method (contractual prohibition and annual certification) through which the retailers will be deemed to have rebutted the presumption." And, while obtaining the necessary information may impose a burden on the retailers, inconvenience does not render the presumption irrebuttable.

Accordingly, New York's "Amazon" tax provisions were upheld as facially constitutional. Whether such provisions will survive as applied to specific taxpayers and in specific situations remains unresolved.

Conclusion: What next. Businesses engaged in e-commerce need to continually monitor their nexus positions, especially with regard to sales and use taxes, where the risks associated with noncompliance are great. Besides New York, a few other states (including,e.g., California, Connecticut, Georgia, North Carolina, Pennsylvania, and Rhode Island) currently have some sort of "click-through" nexus or "Amazon" tax legislation. And additional states are proposing such legislation on an almost weekly basis. In Illinois, however, a similar law was struck down by the court (see Performance Marketing Association, Inc. v. Hamer, Ill. Circuit Ct. of Cook County, No. 2011-CH-26333, 5/7/12, as amended 5/11/12, 2012 WL 1986181 (appealed directly to the Illinois Supreme Court) (H.B. 3659, 3/10/11, §§5 and 10, amending, respectively, 35 ILCS §§105/2 and 110/2 to add paragraphs 1.1 and 1.2—"Amazon tax" provisions—to each section, was found to be unconstitutional)).

Federal legislation. Finally, on 4/22/13, the U.S. Senate, in a procedural vote, supported the Marketplace Fairness Act (S.B. 743) by a margin of 74 to 20, thus clearing the measure for a vote later in the week. If the bill passes, it puts pressure on the House to take up identical legislation (H.R. 684) that has been stalled in the House Judiciary Committee. (See Heller, "Internet Sales Tax Bill Clears Hurdle in Senate; Vote on Measure to Follow," BNA DTR, 4/23/13, page G-5.)

Under the legislation, states would be allowed to impose sales and use tax collection responsibilities on online retailers with no physical presence in the taxing state that have more than $1 million in total "remote sales" (that is, sales on which they have no tax collection responsibilities under current law). This bill is supported by the National Retail Federation as well as the Retail Industry Leaders Association, which include large retailers such as Walmart, Best Buy, Home Depot, and Target in their ranks. Amazon itself is also a strong supporter of such legislation, as it would provide uniform and simplified collection responsibilities and avoid what is perceived as excessive overreaching by the states. That is, to benefit from the legislation states would also have to simplify their sales tax provisions in accordance with either the "Streamlined Sales and Use Tax Agreement" (SSUTA) or some minimum simplification requirements. 

The SSUTA. Briefly, the SSUTA, which became effective on 10/1/05 and whose membership now includes about half the states, seeks to promote uniformity among the states by providing for a single uniform rate of tax, conformed operative definitions and exemptions, and unified reporting and filing requirements for each state, solely at the state level. The goal of the SSUTA is to simplify state sales and use taxes, and thereby encourage Congress to enact legislation to allow member states to extend a use tax collection liability to vendors that do not have a physical presence in the taxing state. For background, see Friedman, Kearns, and Houghton, "Streamlined Sales Tax Update: The Long Journey Towards a Simplified Sales Tax System," 16 J. Multistate Tax’n 6 (Mar/Apr 2006). See also the SSUTA website .

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