The New York Court of Appeals recently upheld the constitutionality of New York’s Amazon law, which requires out-of-state (or remote) sellers to collect sales tax on taxable sales to New York customers based only on the sellers’ referral agreements with New York residents and remit those taxes to the state.
New York’s Amazon Law creates a rebuttable presumption that a remote seller is soliciting business in New York and is required to collect sales tax on all of its taxable sales to New York customers if (1) the seller enters into agreements with New York residents under which the residents, for a commission or other consideration, directly or indirectly refer potential customers to the seller, whether by link on an Internet website or otherwise; and (2) the seller has cumulative gross receipts of more than $10,000 during the preceding four quarters from sales to New York customers from such referrals. The New York State Department of Taxation and Finance released guidance explaining that advertising alone does not invoke the statutory presumption and that taxpayers can rebut the presumption if the contract with the New York resident prohibits the resident from engaging in any solicitation activities in New York on behalf of the seller and each resident submits an annual signed certification stating that the resident had not engaged in any such solicitation.
Amazon.com and Overstock.com, online retailers that did not have any offices, property, or employees in New York, each operated programs that paid commissions to New York residents when Amazon and Overstock made sales through links placed on the residents’ websites. Amazon and Overstock argued that New York’s Amazon Law is unconstitutional on its face because it violates the U.S. Constitution’s Commerce Clause and Due Process Clause.
The Commerce Clause requires a substantial nexus with the taxing state before a state may require a seller to collect sales tax. The U.S. Supreme Court has interpreted this standard to mean that a seller must have a physical presence in a state before the state may require the seller to collect sales tax. The New York Court of Appeals suggested that the physical presence standard may be outdated because the Internet may allow an entity to have an impact on a foreign jurisdiction but submitted that this question would be for the U.S. Supreme Court to consider. The New York Court of Appeals noted that an in-state physical presence is necessary, but this presence need not be substantial, and that the presence requirement will be satisfied if economic activities are performed in New York by the seller’s employees or on its behalf.
The court reasoned that Amazon’s and Overstock’s affiliation agreements with New York residents essentially allow Amazon and Overstock to establish an in-state sales force, and this relationship satisfies the substantial nexus requirement. The Due Process Clause focuses on whether a party has purposefully directed its activities toward a state and whether, based on the party’s contacts with the state and benefits derived from those contacts, requiring it to collect taxes for that state is reasonable. For the statutory presumption to be constitutionally valid, a rational connection between the facts presumed and a fair opportunity for the taxpayer to rebut the presumption must exist. The court found that it is rational to presume that, given the direct correlation between referrals and compensation, New York residents likely will seek to increase their referrals by soliciting customers in New York, and that the New York State Department of Taxation and Finance has provided a mechanism by which retailers will be deemed to have successfully rebutted the presumption.
The New York Court of Appeals’ opinion likely provides comfort to other states that have adopted or are considering similar Amazon Laws. Amazon and Overstock may appeal the case to the U.S. Supreme Court, but Congress may resolve the issue first. Congress is considering legislation, the Marketplace Fairness Act of 2013, that would allow states to require remote sellers to collect and remit sales and use taxes on remote sales if the states simplify their sales tax systems and provide software to allow sellers to calculate sales taxes and file sales and use tax returns easily. The legislation exempts from these collection responsibilities remote sellers that generate less than $1 million in gross annual receipts in the preceding year from remote sales in the United States.