On March 28, 2013, a strong blow was delivered against the online retailers by New York’s highest court in Overstock & Amazon v. New York State Department of Taxation and Finance. The court ruled that section 1101, New York’s Tax Law, is constitutional. Specifically, the court ruled that the so-called “Amazon Laws” do not violate the Commerce Clause or the Due Process Clause of the United States Constitution. In a nutshell, the case discussed whether Amazon and Overstock had nexus with New York due to its affiliate programs. The ruling gave the state a powerful and expansive ruling in the world of Internet retailer nexus cases, and one can easily infer that other states will follow and enact similar laws that generate tax revenue from internet retailers making sales within their respective states.
By way of background, New York amended its tax law to include internet retailers, such as Overstock.com and Amazon.com, as “vendors.” The designation as a “vendor” is critical in most states’ tax regimes because a vendor must charge, collect, and remit sales and use tax to a state for sales made in the state. New York broadly drafted its “vendor” definition that created a presumption for out-of-state vendors that solicit business through a representative in which the vendor pays a commission for referrals exceeding $10,000. Thus, if a remote vendor uses the websites of others, generates at least $10,000 in sales, and pays the representative a commission, then the New York law applies, and a presumption of an independent contractor or agent soliciting sales in New York is raised. This concept enacted by New York and many other jurisdictions is referred to as “Affiliate Nexus.”
In 2008, Amazon.com and Overstock.com challenged the Tax Law arguing that the law was unconstitutional. Essentially the online retailers argued that the law violated the famous ruling in Quill v. North Dakota. Quill states that nexus arises if a company has “physical presence” in the taxing state. While it seems like a clear bright-line rule, whether an activity constitutes “physical presence” has proved to be a perplexing inquiry. The most recent guidance from the Supreme Court has taught us that mere solicitation through advertising does not create nexus while an independent contractor soliciting sales on a vendor’s behalf does. Everything in between is open for debate. Both the trial court and the appellate court (2010) found that New York’s Amazon Law is constitutional on its face. It was these rulings that were appealed to New York’s highest court.
The Court began its analysis by describing how the “as-applied” challenge was set aside, and how the online retailers only moved forward with its appeal on facial challenge grounds. Like almost every court does in a constitutional challenge to a nexus statute, the court in the instant case started with the Complete Auto, four prong test. And, like most nexus cases, the court hedged its discussion to only whether the “substantial nexus” prong of Complete Auto was violated.
The Court acknowledged the controlling decision in Quill and agreed that absent physical presence, an out-of-state retailer does not have nexus. Starting to distinguish from Quill, the court then stated that the slightest presence in a state would suffice and such a presence need not be substantial—even though the Complete Auto test says “substantial” presence. The court argued that the requisite “slightest presence” was met because Amazon and Overstock use affiliates as its in state sales force. In short, the online retailer’s payment to use another’s website to direct traffic (and ultimately sales) to its website is a physical presence. How a website has “physical” presence anywhere is beyond me. The court plainly stated:
The bottom line is that if a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden.
While one can see New York’s motivation for attempting to capture tax revenue through online retailers such as Amazon and Overstock, the logic is abundant with gaping holes and numerous problems. Does this rule say, if I allow a company to use my personal Twitter, Facebook, or Instagram page for a commission, then that company now has nexus in the state in which I am resident? This notion seems to run greatly afoul of Quill in that the online-retailer may have no idea as to where I am located. How does the online retailer even figure out where the affiliate’s website is physically present? What happens if the affiliate is deemed to be physically present in one state but its ISP server is in another state? One can easily see the myriad of issues that this ruling may unintentionally create.
Unfortunately, until Congress intervenes with federal legislation or until the Supreme Court hears an online retailer nexus case, states have no reason to put the brakes on. Further, there is no reason that other states will not enact similar legislation to that of New York in order to collect significant tax revenues. The problem remains, however, that the Supreme Court of the United States was hesitant to even take Quill over 20 years ago because it is bound by prior rulings. The prior rulings demand physical presence. Likewise, Congress has no incentive to act because resolving the problem provides clarity to the states but no real benefit for the federal government. Moreover, if Congress were to require the online retailers to collect and remit tax, it would be viewed as a new tax. As our marketplace shifts to the online arena it will be interesting to see developments to come as companies continue to challenge “Amazon Laws” enacted in the last 5-10 years.
I am curious to hear your feedback as to whether you think this ruling is consistent with Quill? What other issues can you think of that are raised by this reach of a ruling?
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful
- Can Deliveries Create Sales Tax Nexus?