U.S. Supreme Court Denies Certiorari to Review New York's Click-Through Nexus Law

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Matthew Boch, Esq., Stephen P. Kranz, Esq., and
Mary Kay McCalla Martire, Esq.

McDermott Will & Emery, Chicago, IL and Washington, DC

The U.S. Supreme Court has issued an order denying the petitions
for certiorari of Amazon.com, LLC, and Overstock.com,
Inc., appealing the New York State Court of Appeals decision in
Overstock.com, Inc. v. New York State Department of Taxation
and Finance
, 20 N.Y.3d 586 (2013), which upheld New York's
so-called "Amazon" sales and use tax click-through nexus law. The
law presumes that collection of tax is required of out-of-state
retailers that make sales via paid referrals from in-state persons,
whether by the internet or otherwise.  Absent federal
legislation giving states the power to require collection of tax by
out-of-state retailers, states are likely to imitate and expand New
York's approach to try to compel tax collection by out-of-state
retailers. How these laws will apply in practice is unclear and may
create significant uncertainty for online and catalog

U.S. Supreme Court precedent under the Dormant Commerce Clause
holds that states may not impose sales or use tax collection
obligations on retailers that lack physical presence in the state.
Typically, the test looks to the physical presence of the
retailer's own employees and property, but the physical presence of
third parties may be imputed to a retailer if a third party's
physical presence is significantly associated with the retailer's
ability to establish or maintain the in-state market. Such
establishment of tax nexus via the physical presence of other
persons is commonly called attributional nexus.

New York's law applies this attributional nexus concept
expansively by establishing a rebuttable presumption that a
retailer has physical presence nexus and must collect tax if New
York residents, for commission or other consideration, refer
potential customers to the retailer via internet links or other
means, where such referrals result in cumulative sales to customers
in the state in excess of $10,000 over any four-quarter period. The
state's rationale is that commissioned in-state marketers
presumably are acting to establish and maintain the retailer's
in-state market because they have a financial incentive to conduct
in-state solicitation and promotion activities for the retailer and
thereby increase their commissions. The statute targeted the
affiliate referral programs used by many online retailers,
including Amazon.com and Overstock.com. The New York courts upheld
the law based, in large part, on the justification that it was not
an absolute rule but rather a rebuttable evidentiary presumption
that could be overturned by the retailer if it established that the
referral source did not engage in any solicitation in New York on
behalf of the retailer in the preceding four calendar quarters that
would satisfy the nexus requirement of the U.S. Constitution. This
is a heavy evidentiary burden for a retailer to bear.

The New York law stands in contrast to the analogous Illinois
click-through nexus law struck down by the Illinois Supreme Court
earlier this year. See Performance Marketing Ass'n, Inc. v.
, 2013 IL 114496. The Illinois law applied only to online
referrals. It also went further than the New York law by
establishing an absolute determination of nexus, rather than a
rebuttable presumption. The absence of a rebuttal presumption was
found constitutionally impermissible by the trial court, but the
Illinois Supreme Court did not reach the issue. Rather, it found
the law to be a discriminatory tax in violation of the federal
Internet Tax Freedom Act because it only applied to online

With no federal legislation yet enacted, states still must
establish physical presence nexus to compel sales and use tax
collection by out-of-state retailers. At least 13 states already
have adopted laws similar to New York's click-through nexus law;
more are likely to use New York's law as a model, now that it has
been upheld. The Multistate Tax Commission is developing an
Associate Nexus Model Statute that will also likely follow the New
York approach.  Additionally, states are considering
legislation that would assert nexus based on other criteria, such
as shared branding or common control, to further broaden the reach
of their sales and use taxes.

It remains to be seen how such laws will be enforced on
companies making interstate sales. Unless federal legislation is
enacted allowing states to require tax collection by out-of-state
retailers-such as the Marketplace Fairness Act passed by the Senate
this past summer-continuing nexus disputes between states and
out-of-state retailers are likely, as states seek to extend their
taxing authority to the constitutional limits. More litigation,
with fact-sensitive determinations by different state courts
interpreting diverse state statutes, is bound to lead to
unprecedented uncertainty for retailers. Retailers facing sales and
use tax nexus risks should, therefore, carefully consider their
physical presence footprint and potential exposure, in light of
states' increased legislative and administrative focus on
attributional nexus from the in-state activities of third

For more information, in the Tax Management Portfolios, see
Maule, 525 T.M.
, State, Local, and Federal Taxes,
Schaeffer, 559 T.M., Tax Aspects of Franchising, and
Lee, 2220 T.M., New York Sales and Use Taxes.

© 2013 McDermott Will & Emery LLP


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