New York’s Highest Court Upholds “Amazon Tax” Against Facial Challenge

March 28, 2013

After five years of litigation and appeals, New York's highest court today upheld the state's "Amazon tax" in a 4 to 1 decision (PDF). The law, nicknamed after its most visible target, deems an out-of-state company to be an in-state taxpayer if the company receives commissioned referrals from in-state resident "affiliates." The out-of-state company then must collect sales tax for the state. Generally, just as state services are only provided within their borders, state tax authority (or "nexus") ends at its border, with it only able to require sales tax collection from in-state companies.

On the central question of whether Amazon.com and other online retailers are "physically present" due to their affiliate contracts, despite not being physically present themselves, the Court of Appeals today found it was so:

[E]ven in the Internet world, many websites are geared toward predominantly local audiences — including, for instance, radio stations, religious institutions and schools -– such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.

Viewed in this manner the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence’” under Orvis. Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out-of-pocket. Rather, they are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation.

(p. 9-10.) In short, physical presence means not just having your property or your employees in a state, but now also targeted advertising through others that resembles an in-state local sales force. The Court quickly notes in its next paragraph that "no one disputes" that "passive" advertising does not create phyiscal presence. (p. 10). Consequently, the line the Court draws is between passive advertising (no nexus with the state) and active advertising (nexus with the state).

Judge Robert Smith dissented, saying that the statute unconstitutionally expands the physical presence rule, and rejecting the majority's apparent constitutional distinction between advertising paid per result (tax nexus) and advertising paid as a flat fee (no tax nexus).

This is obviously not the decision we wanted, having filed briefs in the case urging that the statute be struck down as unconstitutional. The parties may yet appeal the case to the U.S. Supreme Court and we'd say the same thing.

However, three thoughts to keep in mind nevertheless.

  • First, New York's courts remain alone in having upheld these laws; similar ones elsewhere have been struck down (Illinois, North Carolina, Colorado).
  • Second, these state nexus expansion laws remain bad policy, generating far less revenue than expected while failing to solve the overall problem of how to tax Internet commerce in an equitable and non-stifling manner. A federal solution remains the better approach: one that prevents excessive state tax overreaching while establishing a system that allows states to collect taxes owed by their residents in a simplified manner, balancing uniformity of administration with competitiveness in rates.
  • Third, the New York Court of Appeal's decision rejects a facial challenge–the difficult standard of proving that a statute is unconstitutional on its face with no legitimate application. The Court did not address what might be next; an as applied challenge finding the statute's application in a particular context to be unconstitutional. Given how nebulous the line between "passive advertising" and "active advertising" is, the Court might have to rethink that standard when real cases start heading their way.

​Check out everything we've ever done on nexus (including my most recent congressional testimony on the topic) here.


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