Amazon Files Suit Against New York Tax on Out-of-State Businesses

May 2, 2008

Amazon has filed suit in New York state court seeking to invalidate the recently passed “Amazon tax”, which requires any out-of-state online retailer collect sales tax on purchases if the business does at least $10,000 worth of business with in-state affiliates, even if it has no property or employees in the state.

In its lawsuit, Amazon argues the law violates the Commerce Clause, Due Process Clause, and Equal Protection Clause of the U.S. Constitution. They have a good case, as we previously discussed:

New York’s move is just the latest in a string of state efforts to abandon the physical presence rule of taxing out-of-state businesses. In 1992, the U.S. Supreme Court reaffirmed the rule in the Quill v. North Dakota case, holding that a state could not impose sales tax collection obligations on a company, unless the company has either property or employees in the state. Amazon has neither in New York.

Far from creating a level playing field, New York’s new law and other efforts to abandon the physical presence rule (California has a pending bill, A.B. 1840) actually move away from a level playing field. If every state did what New York did, online retailers would have to keep track of the different rates and bases of the 7,400+ sales taxing jurisdictions in the United States and all the income tax systems. We here at the Tax Foundation have a lot of researchers and subscriptions trying to do that, and it’d be quite burdensome for small online retailers to tackle that task. Meanwhile, brick-and-mortar retailers need only keep track of one sales tax rate and base.

Many states are hoping that the Streamlined Sales Tax Project, by simplifying state sales taxes, will paper over this fundamental inequity by making compliance easy. (Hard to believe since their stretch goal is to limit the 7,400+ sales tax jurisdictions by nine-digit zip codes, of which there are 38,547,080.)

Amazon’s filing papers elaborate on how it impacts them:

The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates–from big publishers to tiny blogs–that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses. The state law says that if even one of those affiliates is in New York, Amazon must collect sales tax on everything sold in the state, even if it is not sold through the affiliate.

Yours truly made a push for neutral tax systems that don’t discriminate against online retailers in a comprehensive Internet News article by Kenneth Corbin:

“Brick-and-mortar retailers will have to keep track of just one tax law at a time, while online retailers will have to keep up with 7,400,” he said. “A neutral tax system would have all retailers collect tax on one standard or the other.”

We’ll continue to monitor this case as it develops. More on the physical presence rule here, here, and here.


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