On March 28, 2013, the New York Court of Appeals rejected challenges by major online retailers and upheld the constitutionality of a New York Internet sales tax statute. See Overstock.com v. NYS Dept. Taxation & Fin., Nos. 33 & 34, NYLJ 1202593915304, at *1 (Ct. of App., Decided March 28, 2013). The case was a consolidation of two lawsuits, one brought by Amazon.com and another by Overstock.com, each of which argued that a New York statute violated the U.S. Constitution's Commerce Clause and Due Process Clause by requiring online retailers to collect sales taxes on purchases made by New York residents if the retailers have agreements with New York based affiliates (i.e., independent sites that link to a retailer in return for a commission or other consideration).
The Court noted that federal case law requires an online retailer to have a "physical presence" in a state before the state may collect sales tax from that retailer. The Court also noted that "active solicitation" of customers that produces a significant amount of revenue has been held to be sufficient to qualify as "physical presence."
The plaintiffs argued that their relationships with affiliates (i.e., participants in Amazon's "Associate's Program" and Overstock's "Affiliate's Program") did not constitute a sufficient "physical presence" in New York. The Court, however, disagreed and found that such relationships effectively established an in-state sales force for the plaintiffs, and therefore qualified as "solicitation" sufficient to qualify as "physical presence". Thus, the Court found that sufficient contact existed with New York to permit state taxation without violating the federal Constitution.
The Court also rejected a challenge to the law under the Constitution's Due Process guarantee.
As of the date of this posting, the plaintiffs were reportedly considering appealing the Court's holding to the U.S. Supreme Court. Meanwhile, momentum has grown in the U.S. Congress for federal legislation to address the issue.
This article first appeared on Cyberlaw Currents, a Frankfurt Kurnit legal blog.
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