Sales Tax Slice: New York Upholds Amazon Law, Offers Few Insights on Solicitation Activities

 After New York’s trial court upheld the state’s “Amazon” law against constitutional challenges in 2009, several states followed suit by adopting similar laws aimed at imposing nexus on remote online retailers based on the activities of in-state “affiliates.” But since that time, Amazon has negotiated deals with several states in which its duty to collect sales tax will be deferred in exchange for in-state facilities.

Also, the prospects have improved for federal legislation addressing the online sales tax issue. Most proposals would authorize states that simplified their sales tax systems to compel online retailers to collect sales or use tax. Under most proposals, retailers with sales below a certain annual threshold such as $500,000 or $1 million would be exempt from the collection requirement.

New York’s latest Amazon ruling drew mixed reviews from state tax experts. A prominent state tax attorney was glad to see the New York Court of Appeals give deference to the physical presence standard set forth in Quill. But he was disappointed that the court did not attempt to distinguish between passive advertising and those activities that constitute active solicitation.

The court probably side-stepped the issue because the challenge to New York’s statute was a “facial” challenge as opposed to an “as applied” challenge, tax counsel for the Council On State Taxation (COST) explained. To win a facial challenge, the taxpayers would have had to prove that there were no circumstances under which the statute could be constitutionally applied. As a result, the court might have believed it was unnecessary to analyze the nexus effects of specific activities.

InOverstock.com v. New York  Dept. of Taxn and Fin.,the New York Court of Appeals ruled March 28 that a statute requiring sales or use tax collection by a remote vendor that pays in-state residents to actively solicit business in the state does not violate the Due Process or Commerce Clauses of the U.S. Constitution.

In doing so, the court rejected Overstock's and Amazon's facial constitutional challenges to the state's “Amazon” law. The online retailers’ use of affiliation agreements with New York residents amounted to an in-state sales force, the court reasoned.

The court noted the “physical presence” standard set forth in Quill v. North Dakota, 504 U.S. 298 (1992) is still applicable even though “ world has changed dramatically in the last two decades.” But the court said that changing that standard to account for the emergence of the Internet “would be something for the United States Supreme Court to consider.”

Reacting to the ruling, Arthur Rosen with McDermott Will & Emery told BNA March 28 that it was “gratifying to see the New York Court of Appeals recognize that physical presence remains the law of the land that can be changed only by the U.S. Supreme Court or, of course, Congress.”

Overstock and Amazon also argued that the state’s presumption that they were using affiliates to actively solicit customers in the state was “irrebuttable because it will be extremely difficult, if not impossible, to prove that none of their New York affiliates is soliciting customers on the retailers’ behalf.”

Rejecting this argument, the court noted that the New York Department of Taxation and Finance had issued a memorandum that “set forth a method (contractual prohibition and annual certification) through which the retailers will be deemed to have rebutted the presumption.”

But the court did not address the legal effect of the agency’s memorandum. “I was surprised that the Tax Department's administrative announcement - that has no legal force or effect - was the basis for the court's finding that the presumption is, in reality, rebuttable,” said Rosen.

Unlike the lower court’s decision in this case, the court also did not attempt to specify the activities that constitute active solicitation and those that are passive advertising.

“I was disappointed that the majority didn't spend more effort carefully addressing the distinction between the "in your face" marketing activity in Tyler Pipe and Scripto on the one hand and mere advertising on the other hand, said Rosen.

Such an analysis would have been more likely if Overstock and Amazon had challenged the constitutionality of the statute on an “as applied” basis, explained Fred Nicely, tax counsel for the Council On State Taxation (COST). In under that standard, the court would have been more likely to address the specific solicitation activities at issue. But because it was a facial challenge, the court could avoid analyzing the effects of specific solicitation activities because the companies needed to show that there was no circumstance under which the statute could be constitutionally applied, he said.

But the dissenting opinion noted that important general distinctions could be made between in-state websites and sales agents. Unlike sales agents, websites “are only media in which Overstock and Amazon advertise their products,” the dissent said.   

The case highlights the need for a federal solution to the online sales tax issue, said Nicely. Instead of just forcing remote retailers to collect tax, we need a solution that will simplify the sales and use tax structure, he said. This would include a simplified registration system, taxability matrix, and uniform procedures for claiming exemptions and filing returns.

By Steven Roll

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