On February 6, 2013, the New York Court of Appeals heard oral argument in the appeal by Amazon.com and Overstock.com challenging the constitutionality of the New York “Amazon tax.” Overstock.com, Inc. v. N.Y.S. Dep’t of Taxation and Fin. (Case No. 33); Amazon.com LLC v. N.Y.S. Dep’t of Taxation and Fin. (Case No. 34).


The so-called “Amazon tax,” enacted in 2008, is actually a statutory presumption of nexus under the New York sales tax law. It provides that an out-of-state seller of goods is presumed to be engaged in in-State solicitation through others and must collect sales tax on its New York sales, when under a contract with a New York resident the retailer pays a commission or other consideration to the resident for referring potential customers, whether by link on an Internet website or otherwise. The law also provides that the presumption can be rebutted by proof that the in-State resident did not engage in solicitation on behalf of the seller that would satisfy constitutional nexus requirements.

Shortly after the law was enacted in 2008, Amazon and Overstock, both Internet retailers that operate “affiliate” marketing programs, brought declaratory judgment actions challenging the constitutionality of the law. They argued that the presumption was facially unconstitutional under the Commerce, Due Process, and Equal Protection Clauses of the U.S. Constitution and that it was also unconstitutional “as applied.” In 2009, a New York County Supreme Court judge dismissed the complaints in their entirety. On appeal, the Appellate Division, First Department, upheld the dismissal of the companies’ facial challenge, rejecting both the Commerce Clause and Due Process Clause challenges. Amazon.com LLC v. N.Y.S. Dep’t of Taxation & Fin., et al., 81 A.D.3d 183 (1st Dep’t, Nov. 4, 2010). The Appellate Division remanded the case to the lower court on the “as applied” challenge, but Amazon and Overstock eventually dropped that argument. Thus, the question before the Court of Appeals was whether the rebuttable presumption was unconstitutional on its face.

Oral Argument

At the February 6, 2013 oral argument in Albany, Amazon and Overstock, each represented by their own counsel, faced a “hot” bench that had clearly read the briefs and was cognizant of the significance of the decision (not just in New York, but in the many states that have enacted “Amazon tax” laws modeled after New York’s law). The thrust of the companies’ Commerce Clause challenge was that the presumption reached out-of-state vendors who were merely “advertising” in New York on the Internet, and did not satisfy the “substantial nexus” requirement. They also argued that the law violated the Due Process Clause because the presumption was irrational and effectively irrebuttable by large retailers like Amazon and Overstock.

Chief Judge Lippman asked why the provision in the law allowing sellers to rebut the presumption doesn’t cure any potential facial unconstitutionality. Counsel for Overstock responded that it was still a burden on interstate commerce, with thousands of state and local taxing jurisdictions potentially able to impose their own nexus presumptions. Overstock analogized the commissions paid to its affiliates to an advertiser paying the New York Times to run an advertisement, which would not result in nexus.

Counsel for Amazon focused on the Due Process challenge, arguing that the test for the constitutionality of the rebuttable presumption is whether there is a high degree of likelihood that the factors that trigger the presumption will lead to the fact presumed — that is, that in-State solicitation is conducted by the affiliate. Chief Judge Lippman asked whether there is any activity short of “knocking on doors” that would result in nexus. Counsel responded that the line the presumption draws is based on “mere advertising,” with the manner of paying for that advertising merely reflecting modern age technology. Judge Pigott asked whether nexus can result through solicitation via computer. Amazon’s counsel responded that while it was “theoretically possible,” it was no different than Quill sending thousands of catalogs into North Dakota, which the U.S. Supreme Court held did not result in nexus.

Counsel for the Department argued that the presumption in the law was not triggered by “advertising,” but was based on the reasonable inference that an in-State affiliate that is paid a commission for referring business is engaged in some form of solicitation, that the seller has the ability to rebut the presumption, and whether that is unconstitutionally burdensome is a factual question, not a legal one. Counsel claimed that it is acceptable to place the burden of rebutting the presumption on the retailer, calling the presumption an “evidentiary rule” that the legislature may reasonably set. Judge Pigott suggested that if every state imposed a presumption like New York’s, there could be a detrimental impact on interstate commerce. The Department’s counsel responded that there is no risk of multiple taxation and that Amazon deliberately entered into these business relationships.

Chief Judge Lippman asked the Department’s counsel why a presumption is needed. Counsel responded that without the presumption, retailers could claim that they had no burden to come forward with evidence regarding their business arrangements, information they are in the best position to produce. Counsel for the Department said that based on “common experience,” commissions have always been associated with an incentive for solicitation. Judge Smith, who appeared to be skeptical of the Department’s position, said he had trouble getting common experience to tell him that the placement of an advertisement on a website converts the website owner into a sales agent.

The oral argument lasted nearly an hour. There is no fixed timetable for the Court of Appeals to issue its decision, although the Court will likely render a decision this Spring.