New York State Court Of Appeals Holds Click-Through Nexus Statute Is Facially Constitutional

The New York State Court of Appeals, the state's highest court, recently held that New York's click-through nexus statute that presumes sales tax nexus for certain online retailers does not facially violate the U.S. Constitution under either the Commerce or the Due Process Clauses.1

Background

In 2008, New York was the first state to enact click-through nexus legislation.2 The definition of "vendor" was amended to include Internet retailers that actively encourage Web site owners residing in New York to advertise for the Internet retailer in return for a commission on sales resulting from the followed link. A presumption of taxability exists if the Internet retailer generated more than $10,000 through these referrals during the last four quarterly sales tax periods. The presumption may be rebutted if the Web site owner did not engage in any solicitation in New York that would result in a finding of nexus under constitutional standards.3

The click-through nexus statute was challenged by two large Internet retailers, Amazon.com and Overstock.com. Amazon operates a retail Internet business and ships items to buyers worldwide, including buyers located in New York. Amazon does not own property in New York, maintain any New York offices or have employees who work or reside in the state. An "associates program" created by Amazon allows associates to maintain links to Amazon.com on their own Web sites and compensates the associates by paying them a percentage of the sales proceeds. Similar to Amazon, Overstock operates a retail Internet business and does not have any stores or employees in New York. Overstock has a program that allows "affiliates" to provide links to Overstock.com in exchange for a commission when the customer purchases merchandise from Overstock (though such program was suspended for those affiliates with New York addresses soon after the click-through nexus statute was enacted).

Two days after the statute was enacted, Amazon filed a complaint seeking declaratory and injunctive relief on the grounds that the statute was unconstitutional because it violated the Commerce, Due Process and Equal Protection Clauses. Overstock filed a complaint alleging that the statute was unconstitutional because it violated the Commerce and Due Process Clauses. The trial court granted the state's motion to dismiss Amazon's complaint in its entirety.4 According to the trial court, Amazon's constitutional arguments were considered to be without merit. The same judge dismissed Overstock's complaint for the same reasons stated in the Amazon decision.5

On appeal, the Appellate Division of the New York Supreme Court affirmed the portions of the orders that dismissed the facial constitutional challenges and declared the statute constitutional on its face.6 However, the Appellate Division reinstated the cases to determine whether the statute violated the Commerce or Due Process Clauses as applied to Amazon and Overstock. Following this decision, Amazon and Overstock entered into "stipulations of discontinuance withdrawing their as-applied constitutional challenges with prejudice, which were deemed the final judgments." Amazon and Overstock appealed their facial constitutional challenges to the New York State Court of Appeals.7

Statute Does Not Facially Violate Commerce Clause

The Court of...