On Monday, December 2, the U.S. Supreme Court denied petitions for certiorari by Amazon.com and Overstock.com in their cases against the New York State Department of Taxation and Finance. Both appeals challenged the constitutionality of New York Tax Law Section 1101(b)(8)(vi), the 2008 “Internet tax law” sometimes referred to as an “Amazon law” or a “click-through nexus” law, because it affects only the largest internet retailers. The section at issue requires out-of-state Internet retailers that employ in-state web marketing affiliates, such as Amazon.com, to collect state taxes on all sales to New Yorkers, even if the company has no physical presence in the state.
The legal dispute has revolved around a 1992 Supreme Court case, Quill Corporation v. North Dakota, which held that states may not collect taxes from out-of-state companies without some physical presence in the state. In Quill, the Court held that Quill Corporation, a mail-order business, could be forced to collect sales taxes only in states where it has a “physical presence.” Justice Stevens, delivering the opinion for the Court, noted a sharp distinction between vendors with a physical presence in the taxing state and those who communicate with customers in the state by mail or common carrier; the contacts of the latter group lacked the “substantial nexus” required by the Commerce Clause.
Amazon now collects taxes in 16 states, including those in which it has set up distribution centers, i.e., has a physical presence, but has resisted unilateral impositions to collect sales taxes based on online affiliates. Web marketing affiliates range from one-person blog promotions to sites that run coupon deals. In New York, Amazon has no in-state customer service representatives or distribution centers, and all of its technical support is handled out-of-state; however, it has an affiliate program that uses “Associates,” many of whom have provided Amazon with New York addresses. Associates advertise for Amazon on their own sites and receive commission when a visitor clicks through an Amazon link and makes a purchase. While fighting New York’s “Amazon Law,” Amazon has been collecting taxes in New York, but like Overstock, which ended its affiliate program in 2008 to avoid collecting sales taxes, challenged the law in the state’s courts, arguing, among other things, that the law was unconstitutional on its face for violating the Commerce Clause and the “physical presence” test set forth in Quill.
Chief Judge Lippman, writing for the New York Court of Appeals in Amazon.com v. New York State Department of Taxation and Finance, held that Amazon and similar online retailers had a sufficient presence in the state because in-state affiliated sites linked to the online retailers received commissions. “If a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden.” He further contended, Quill’s “physical presence test” may be outdated since out-of-state entities can have a profound impact on other jurisdictions through their activities over the Internet. He held that the Internet tax did not violate the Commerce Clause because it satisfied the “substantial nexus” text set out in Quill. Amazon and Overstock appealed to the U.S. Supreme Court to reverse the decision. However, the New York statute stands in light of the Court’s decision to not hear the appeals.
It is unclear moving forward, how different states will approach the matter of Internet taxes and whether Congress will take timely action to resolve confusion around this issue. Controversy has clouded New York’s Internet tax law and more than a dozen similar statutes passed by state legislatures against the backdrop of an inconsistent medley of cases and regulations across the country. For example, months after the New York Court of Appeals held Amazon should shoulder the appropriate tax burden under Section 1101(b)(8)(vi), the Illinois Supreme Court shot down its own 2011 “Amazon law,” the Illinois Affiliate Nexus Tax law, modeled after its New York counterpart.
The rise of Internet commerce in recent years has put billions of dollars of uncollected taxes at stake. According to the National Conference of State Legislatures, states lost an estimated $23.3 billion in 2012 from out-of-state sales, with over $11.3 billion from online sales; New York alone lost $1.8 billion in out-of-state sales. In states with “use tax” laws, consumers are supposed to pay the taxes themselves, but few do unless the vendor collects the money. Furthermore, brick and mortar companies complain of a competitive disadvantage when they are required to collect sales taxes and online companies without an in-state “physical presence” are not.
With so much at stake, both traditional brick and mortar companies and online retailers have urged Congress to impose a national solution. Justice Stevens in Quill, alluded to a legislative solution at the end of his opinion as well, reiterating that Congress has Constitutional authority and “power to protect interstate commerce from intolerable or even undesirable burdens.”
This past May, by a bipartisan 69-26 vote, the U.S. Senate passed Marketplace Fairness Act, providing a standard for the collection of states’ sales taxes by internet retailers with $1 million or more in sales outside their home states, but the bill faces stiff opposition in the House. The U.S. Supreme Court’s decision to reject appeals by Amazon and Overstock on Monday may place more pressure on Congress to provide clarity on Internet tax laws through federal legislation.