New York’s Highest Court Upholds Imposition of Sales Tax Collection

 Bingel, GaryBackground 

In 2008, New York was the first state to enact so-called “Amazon” legislation targeting online retailers for sales tax collection.  Under New York’s provisions, internet retailers are considered to be vendors required to collect sales tax on their New York sales if they makes sales of taxable property or services and enter 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.1  

Retailers can avoid sales tax collection responsibility if they can show that the resident did not actually engage in any solicitation on their behalf.  In order to accomplish this, the contract between the retailer and New York resident must actually prohibit the resident from engaging in any solicitation activities, and the resident must submit to the retailer, on an annual basis, a signed certification that they did, in fact, not engage in any solicitation.2 Further, under New York’s guidance, mere advertising alone does not suffice to create a collection responsibility.3  

Amazon and Overstock challenged these provisions as facially unconstitutional under the Due Process and Commerce Clauses of the U.S. Constitution.  

Both Amazon and Overstock have associate programs under which in-state residents place links on their websites that direct users to Amazon’s or Overstock’s websites.  These associates are compensated on a commission basis and commissions are a percentage of revenue from sales generated by these “click-through” transactions.  The contracts with these associates set forth that the associates are independent contractors and not employees of Amazon or Overstock.  Neither Amazon nor Overstock has any of its own property or payroll in New York State. 

The Decision 

Commerce Clause Analysis
New York’s Highest Court reiterated that in order to be valid under the Commerce Clause, a tax must (1) be applied to an activity with substantial nexus with the state; (2) be fairly apportioned; (3) not discriminate against interstate commerce; and (4) be fairly related to the services provided by the state.4 The parties agreed that the only question at issue was whether there is substantial nexus with New York. 

While stating that the world has changed dramatically in the past twenty years and that the physical presence test of Quill Corp. v. North Dakota5may be outdated, the 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, the physical presence needn’t be substantial.  Instead, the physical presence required to create substantial nexus need only be more than a “slightest presence.” 

Since many websites are geared toward local audiences, the legislature has attached significance to the physical presence of resident website owners.  The physical presence of these website owners is constitutionally relevant since it is through these residents that internet retailers are deemed to establish their in-state sales forces.  As a result of this in-state sales force, Amazon and Overstock have more than the slightest presence in New York, and therefore there is substantial nexus with New York.  The Court also felt it necessary to point out that the burden imposed on internet retailers is not a direct tax burden, but instead merely a collection responsibility of a tax that is unquestionably due. 

Due Process Clause Analysis
The relevant inquiry from a Due Process standpoint is whether a taxpayer has purposefully directed its activities toward the state in question, and whether it is reasonable, given the extent of those contacts and the benefits derived, to require the taxpayer to collect taxes for the state.  Here, the Court felt that having numerous affiliates in-state that are compensated based on a commission was sufficient to put the taxpayers on notice that they would be subject to a collection responsibility in New York.  Of particular importance was the fact that the affiliates were compensated on a commissioned basis.  The Court hints that had the affiliates been compensated on a basis unrelated to actual sales, that such a situation would be akin to mere advertising, and thus not create the requisite presence.

Accordingly, New York’s “Amazon” tax provisions were upheld as facially valid on March 28, 2013.  Whether such provisions will survive as applied to specific taxpayers and in specific situations remains unresolved. 


Businesses engaged in e-commerce need to continually monitor their nexus positions, especially regarding sales tax where the risks associated with non-compliance are great.  While approximately only ten6 states currently have some sort of “click-through” or “Amazon” nexus legislation, new states are proposing legislation on an almost weekly basis.  Also, taxpayers have been successful in striking down a similar law in Illinois.

Finally, on March 22, 2013, the U.S. Senate voted in favor of the Marketplace Fairness Act of 2013 by a margin of 75 to 24.  While this was a non-binding vote, and thus purely symbolic, it does reflect growing support for the bill.  Under the legislation, states would be allowed to impose collection responsibilities on out-of-state retailers with over $1 million in total sales.  States would also have to simplify their sales tax provisions.  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.

1NY Tax Law § 1101(b)(8)(vi).
2See, NY St. Dept of Taxation & Fin Memorandum No., TSB-M-08(3)S; and NY St. Dept of Taxation & Fin Memorandum No., TSB-M-08(3.1)S.
3NY St. Dept of Taxation & Fin Memorandum No., TSB-M-08(3)S.
4Quoting Complete Auto Transit, Inc. v. Brady, 430 US 274, 279 (1977).
5504 US 298 (1992).
6Including California, Connecticut, Georgia, North Carolina, Pennsylvania, and Rhode Island. 

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