NY Internet Sales Tax Law Faces Amazon Court Challenge

Published July 1, 2008

Amazon.com has sued New York State challenging a newly enacted law that has serious implications for online advertisements.

In April, the New York legislature passed a law designed to increase sales tax revenue from Internet sales. The law is known as the “Amazon tax” because it broadens the sales tax law to apply to Amazon’s Associates Program and thereby achieve the necessary legal nexus for New York to force Amazon (and other Internet retailers) to collect and remit taxes on all sales to the state’s residents.

Redefining a Nexus

The U.S. Supreme Court has ruled a state can impose sales or use tax collection obligations on an out-of-state retailer only if the retailer has a “substantial nexus” with the state. Nexus occurs from a sufficient physical presence such as an office or warehouse, but physical presence can also derive from soliciting a state’s consumers via sales representatives located in the state.

However, it can’t be just any sales rep, according to another Supreme Court case–in-state representatives must be “significantly associated with the taxpayer’s ability to establish and maintain a market in the state.”

Amazon doesn’t have an office, warehouse, or other physical presence in New York, but it has thousands of New York-based members of its Advertising Associates program. Per the Court’s 1992 Quill decision, advertising alone is insufficient to establish a substantial nexus. So New York has changed the definition of what it means to be a sales representative to capture these in-state associates that Amazon says merely host its ads.

Called Unconstitutional

In its complaint, Amazon says New York’s law is unconstitutional because it violates three constitutional principles.

First, Amazon contends it violates the Commerce Clause. The law’s presumption is unconstitutional on its face, Amazon says, because it forces collection on out-of-state retailers that lack in-state entities significantly associated with Amazon’s ability to operate in New York.

Second, Amazon contends the law violates due process because it’s vague and overbroad–what’s an “indirect” referral? Would this capture New York print media, TV stations, and radio outlets? And what does it mean to refer potential customers “whether by a link on an Internet website or otherwise”? New York newspapers and TV networks, by referring potential customers, could be creating a physical presence for their advertisers just by running their ads.

Finally, Amazon contends the law violates the principle of equal protection, arguing it is being unfairly singled out by this tax.

New Taxpayer Burden

Under New York’s plan, it’s important to note there isn’t any new money flowing into the state. Legislators like to speak as if this is newfound money, and that Web retailers are shirking their duties by not collecting it. But the ultimate burden isn’t on the companies, it’s on the taxpayers–the reality is that the money will be collected from New York residents.

Braden Cox ([email protected]) is policy counsel for the Association for Competitive Technology and NetChoice. An earlier version of this article appeared on Technology Liberation Front. Reprinted with permission.

For more information …

Complaint, Amazon.com, LLC and Amazon Services, LLC vs. New York State Dept. of Taxation and Finance: http://www.heartland.org/article.cfm?artId=23295