New York Court Of Appeals Rejects Amazon.com.'s And Overstock.com's Constitutional Challenge To The New York Internet Tax

[Editor's Note: While I try to post exclusively on Federal Income Taxation matters, the New York Court of Appeal's Decision on the facial validity of the New York Internet Sales Tax is most noteworthy. The Commerce Clause and Due Process Clause challenges ultimately will have to be resolved by the U.S. Supreme Court.]

On March 28, 2013, the Court of Appeals for New York rejected the arguments made by Amazon.com. and Overstock.com. that New York's sales tax on certain internet transactions, N.Y. Tax Law §1101(b)(8)(vi) was unconstitutional. The argument supporting that the Internet Tax should be struck down was that it violated the Commerce Clause or the Due Process Clause of the U.S. Constitution. Overstock com. v. New York State Department of Taxation and Finance, N.Y. Ct. App. Dkt. No. 33 (3/28/13) and Amazon. Com. V. New York State Department and Finance, N.Y. Ct. App. Dkt. No. 34 (3/28/13).

In a 4-1 decision, the Court of Appeals, in a majority opinion written by Chief Judge Jonathan Lippman, held that the Internet Tax does not violate the Commerce Clause or the Due Process Clause of the U.S. Constitution. The Court accordingly rejected the arguments advanced by the plaintiffs that the Internet Sales (and Use) Taxes imposed a tax on online retailers which did not have a physical presence in New York thereby violating the Commerce Clause or did not violate the Due Process clause by creating an irrational, irrebuttable presumption of solicitation of business within the State.

Background Facts

Amazon.com. is organized as a Delaware limited liability company or LLC. Amazon Services LLC is also an LLC formed in Nevada, which the Court collectively referred to as "Amazon".

Its principal corporate offices are located in the State of Washington. Amazon is strictly an online retailer and sells merchandise solely through the Internet and represents that it does not maintain any offices or property in New York.

Amazon offers an "Associates Program". This program allows third parties to place links on their own websites that, when clicked, become direct users to Amazon's website. The Associates are compensated on a commission basis based on a percentage of revenue when a customer clicks on the Associate's link and completes a purchase from the Amazon site. The operating agreement governing the Associates Program recites that the Associates are independent contractors and that there is no employment relationship between the parties. Thousands of entities that enrolled in the Associates Program provided a New York address in connection with their applications.

The other plaintiff in the proceeding, Overstock.com is a Delaware corporation with its principal place of business in Utah. Overstock likewise sells its merchandise solely through the Internet and does not maintain any office, employees or property in New York. Similar to Amazon, Overstock had an "Affiliates" program through which third parties would place links for Overstock.com on their own websites. When a customer clicked on the link, he was immediately directed to Overstock.com, and if the customer completed a purchase, the Affiliate received a commission. As with the Associates Program conducted by Amazon, the Court also noted that the Affliates were independent contractors without the authority to obligate or bind Overstock.

In April 2008, the New York legislature amended the Tax Law to include the subdivision at issue here. In connection with the statutory definition of "vendor," the Internet tax provides that:

"a person making sales of tangible personal property or services taxable under this article ('seller') shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods". NYS Tax Law §1101[b][8][vi].

The statutory presumption of soliciting business through an independent contractor or other representative in New York may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the...