NY Court: State’s Sales Tax Fairness Law Is Constitutional

On Thursday, November 4, the New York State appellate court dismissed Amazon.com's and Overstock's claims substantively challenging the constitutionality of New York State’s sales tax fairness law. The decision represents a major victory for proponents of sales tax equity.

"In a very significant decision, the New York State appeals court has upheld what we have long contended -- namely, that online affiliates are sales agents and, as such, represent a physical presence in the state that requires such companies as Amazon.com to collect sales tax," said Oren Teicher, ABA CEO. "The court's ruling clearly and succinctly makes this clear. We fully expect this decision to have significant and positive impact on our efforts in other states. We could not be more pleased with the court's decision."

The court ruling did order that two of Amazon.com and Overstock's claims be reinstated for further proceedings to allow the companies the opportunity to avoid sales tax collection by arguing that their online affiliates are not soliciting business and that the affiliates' activities are not "significantly associated" with the companies' ability to do business in New York. However, the opinion suggests that existing evidence demonstrates it will be difficult for the companies to factually support such contentions in order to avoid sales tax collection. In the interim, Amazon.com currently collects sales tax on New York State sales. Overstock discontinued its affiliate relationships after the sales tax fairness law was enacted.

New York State's Internet Sales Tax provision was signed into law on April 15, 2008, by Gov. David Paterson, and it went into effect on June 1, 2008. The provision requires out-of-state retailers with nexus in the state -- via a warehouse, office, sales agent, or online affiliate -- to comply with New York State sales tax laws and to collect and remit sales tax on sales to state residents. Soon after, both Amazon.com and Overstock.com challenged the provision in New York State Supreme Court in Manhattan.

However, in January 2009, a judge dismissed the lawsuit filed by Amazon.com. A similar lawsuit by Overstock was also dismissed. Both Overstock.com and Amazon.com then challenge the law in the appellate court.

In the ruling, Judge James M. Catterson dismissed the idea that online affiliates are just advertisers. He stressed that Amazon's online affiliate program is not designed for the passive advertiser, "'but seeks growth by reliance upon representatives who will look to solicit business.' The majority concludes that, the statute in question would be valid 'when a New York representative uses some form of proactive solicitation which results in a sale by Amazon, and a commission to the representative; and the representative has an in-state presence sufficient to satisfy the substantial nexus test.'"

New York State's Internet Sales Tax provision recouped $46 million in sales tax revenue from the 30-plus vendors that registered to collect and remit sales tax, and the state collect about $70 million for the fiscal year 2009 - 2010.