On Thursday, March 28, the New York State Court of Appeals ruled 4-1 in favor of the state’s sales tax fairness law, dismissing arguments made by Amazon.com and Overstock.com that the law was unconstitutional. New York State’s affiliate nexus law, passed in 2008, requires remote retailers with $10,000 or more per year in affiliate sales in the state to collect and remit sales tax to the state.
“Today’s Court of Appeals Decision affirms New York State’s approach to ensure fair tax administration for both brick-and-mortar and Internet-based businesses,” said New York State Commissioner of Taxation and Finance Thomas H. Mattox in a press statement. “We commend the Court for recognizing the logical application of existing precedent to the 21st century economy.”
Mattox noted that, since being implemented, New York’s law has resulted in the collection of roughly $500 million in state and local sales tax. “This is equivalent to approximately $6 billion of taxable retail sales into New York that were previously made without the sales tax being collected.”
The New York Court of Appeals decision is the second victory for sales tax fairness proponents in less than a week. On Friday, March 22, the U.S. Senate voted overwhelmingly in favor of a budget resolution amendment in support of sales tax fairness.
“This victory in New York State makes even more clear that the tide is turning in favor of sales tax fairness,” said ABA CEO Oren Teicher. “The court’s decision affirms what ABA has been saying for years: that online affiliates constitute nexus in the state. By any definition, the online affiliate business model is a sales agent model, and, as this court and others have ruled, the presence of a sales agent in a state establishes a physical presence in the state for that business – and establishes the requirement that it collect sales tax.”
Regarding the implications of the decision, Teicher said, “In addition to leveling the playing field for New York State retailers, this ruling should make clear to other states the legality and importance of sales tax fairness legislation. We hope, too, it will spur the U.S. Congress to put the Marketplace Fairness Act up for a vote.”
Thursday’s court ruling came more than two years after a New York State appellate court dismissed claims by Amazon.com and Overstock.com that the state’s sales tax fairness law was unconstitutional.
In November 2010, the New York State appellate court concluded that New York’s law was constitutionally sound on its face and is legal and enforceable with respect to the Internet retailers whose business practices bring them within the scope of the new law. The court ruling did order that two of the Amazon and Overstock claims be reinstated for further proceedings to allow the companies the opportunity to avoid sales tax collection by rebutting the presumption that online affiliates solicit business and that the affiliates’ activities are not “significantly associated” with the companies’ ability to do business in New York.
In an early February 2013 hearing before the Court of Appeals, Amazon and Overstock contended that online affiliates were mere advertisers, similar to an advertisement in the New York Times. Steven Wu, special counsel to the Solicitor General for New York, disagreed. He countered that the commission-model, by its very nature, offers incentives for affiliates to solicit business, thereby rendering them sales agents of the remote retailer. Wu argued that the affiliate model is contract-based so it is “reasonable to assume” that affiliates solicit business, and not merely through banner links on websites, but via e-mail solicitations as well.
Wrote Chief Judge Jonathan Lippman in the ruling: “Indeed, physical presence is not typically associated with the Internet in that many websites are designed to reach a national or even a global audience from a single server whose location is of minimal import. However, through this statute, the legislature has attached significance to the physical presence of a resident website owner. The decision to do so recognizes that, even in the Internet world, many websites are geared toward predominantly local audiences — including, for instance, radio stations, religious institutions and schools — such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.”
Overstock.com chief executive Jonathan Johnson told the Washington Post that the ruling means “the court battle will likely continue. It seems like an issue that’s ripe to weigh in on — which of the state courts do it correctly.”