New York’s Ambitious Sales Tax Law — Broader than Amazon and the Internet?

by on May 12, 2008 · 38 comments

Amazon says it is advertising when it compensates New York-based websites for posting links that refer customers to Amazon.com. New York says it’s soliciting business. The distinction means all the difference in the world for sales taxes, for Amazon, and possibly even print media, television and radio.

Amazon.com sued New York State earlier this month, 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 of the way it broadens the sales tax law to apply to Amazon’s Associates Program, thereby achieving the necessary legal nexus for New York to force Amazon (and other Internet retailers) to collect and remit taxes on all sales to NY residents.

A little bit of history helps put this law into context. The Supreme Court has held that a state can only impose sales or use tax-collection obligations on an out-of-state retailer if the retailers has a “substantial nexus” with the state (the Quill decision). Nexus occurs from a sufficient physical presence, which can be 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” (Tyler Pipe).

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 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 hosts its ads.

Under the new law, New York has changed the presumption of what it means to be “soliciting business” in the state. A seller

shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident refers potential customers, whether by a link on an Internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in this state who are referred to the seller…is in excess of $10,000 [per year].

In its complaint, Amazon says that NY’s law is unconstitutional because it violates:

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

2. Due Process.  It’s vague and overbroad–what’s an “indirect” referral? Would this capture NY 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.

The law is also effectively an irrebuttable presumption, because Amazon is forced to disprove a negative — that each and every one of its Associates aren’t “soliciting business” directly or indirectly — particularly because Amazon doesn’t control the timing, format and placement of Amazon’s ads on its Associates websites.

3. Equal Protection. Amazon feels unfairly singled-out by this tax.

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

The gist is this:  New York’s law is a clever broadening of the definition of what it means to do business in a state. Madison Avenue, watch out! You may unwittingly be creating a physical presence for your out-of-state advertisers. And if other states adopt New York’s approach, Michigan Avenue and other traditional media outlets could be in the same position.

  • http://enigmafoundry.wordpress.com enigma_foundry

    Today, there are plenty of ways that corporations use the internet to enclose their company, and seal it off from democratic institutions which might tax them. Of course, the anti-democratic reality of this enclosure is obscured by the language of freedom that is used to make the case for a “tax free” internet.

    But there is one simple question that we can ask the libertarians that exposes the bankruptcy and anti-freedom agenda of the tax free world that they are trying to create. It is a question that libertarians cannot acknowledge, let alone answer.

    The question is this: What democratically constituted assembly should have the authority to tax internet businesses?

    Don’t think libertarians are incapable of answering this question?

    Just look here:

    http://techliberation.com/2008/02/25/internet-sales-taxes-and-fairness/#comments

    The question, in fact, is a straight-forward corollary of the famous quote from the American Revolution : “No taxation with Representation.”

    For if taxation is only legitimate if it originates from representative bodies, then representative bodies are the only bodies that have the power to exact a legitimate tax. The problem, of course, is that the libertarians want to deny society the power to legitimately tax, exposing their anti-freedom and anti-social philosophy for what it is: self-contradictory and denying any value to society other than economic.

  • Adam Thierer

    Enema_foundry… There is nothing contradictory or “anti-freedom” in anything we have said here regarding this issue. This debate comes down a question of what gives a legislative body the legitimacy and authority to levy taxes on subjects or entities and whether they should ever have the authority to impose taxes on entities OUTSIDE OF THEIR JURISDICTION.

    Now, in our modern economy, there are times when messy disputes develop regarding what constitutes a sufficient “nexus” between the state and the entities they are seeking to tax. You could have tried to respond to Braden’s argument above by making the case for the State of New York and arguing that a sufficient nexus is present in this case such that they should be allowed to tax Amazon and other online retailers. Instead, you have engaged in a typically asinine diatribe about how libertarians are “anti-freedom” and “anti-social,” which is such an utterly preposterous claim that I have to give you credit for having the chutzpah to continuously say more outlandishly stupid things with each new comment you make to the TLF.

    Regardless–and just so that I may clarify the point for those who are reading this and care to engage in more reasoned debate on the issue–The principle of the matter, as raised by Amazon’s complaint, is sound: If sufficient physical presence is not found, then the taxing authority in question has no right to levy taxes. To do so would be the very essence of tyranny and constitutes a rather straightforward example of ‘taxation without representation.’ Stated differently, if you really care about representative government, then you would want to make sure that the governed are actually represented by those who are imposing taxes upon them. There isn’t anything “anti-freedom” about that principle.

  • http://enigmafoundry.wordpress.com eee_eff

    Today, there are plenty of ways that corporations use the internet to enclose their company, and seal it off from democratic institutions which might tax them. Of course, the anti-democratic reality of this enclosure is obscured by the language of freedom that is used to make the case for a “tax free” internet.

    But there is one simple question that we can ask the libertarians that exposes the bankruptcy and anti-freedom agenda of the tax free world that they are trying to create. It is a question that libertarians cannot acknowledge, let alone answer.

    The question is this: What democratically constituted assembly should have the authority to tax internet businesses?

    Don’t think libertarians are incapable of answering this question?

    Just look here:

    http://techliberation.com/2008/02/25/internet-s

    The question, in fact, is a straight-forward corollary of the famous quote from the American Revolution : “No taxation with Representation.”

    For if taxation is only legitimate if it originates from representative bodies, then representative bodies are the only bodies that have the power to exact a legitimate tax. The problem, of course, is that the libertarians want to deny society the power to legitimately tax, exposing their anti-freedom and anti-social philosophy for what it is: self-contradictory and denying any value to society other than economic.

  • http://enigmafoundry.wordpress.com enigma_foundry

    we have said here regarding this issue. This debate comes down a question of what gives a legislative body the legitimacy and authority to levy taxes on subjects or entities and whether they should ever have the authority to impose taxes on entities OUTSIDE OF THEIR JURISDICTION.

    Well number one:
    I don’t use profanity or name calling, so I would ask that who don’t either. Civilty, please.

    Number two:

    Then just answer the question I have asked: What jurisdiction has authority? Just answer that question!

  • http://enigmafoundry.wordpress.com enigma_foundry

    Obviously you folks at TLF seem to think that abusive comments are OK, well they arenot but they reflect badly on you not me.

    The question that raise is important, and libertaarians are trying to build an enclosure around the internet that no one, apparently has the jurisdiction to tax. that’s fundamentally anti-social.

  • http://enigmafoundry.wordpress.com enigma_foundry

    Instead, you have engaged in a typically asinine diatribe about how libertarians are “anti-freedom” and “anti-social,” which is such an utterly preposterous claim that I have to give you credit for having the chutzpah to continuously say more outlandishly stupid things with each new comment you make to the TLF.

    Well I woulod just refer you to Amartya Sen’s wonderful book Development as Freedom (Amertya Sen won the Nobel prize, BTW) and he talks about libertarians limited conception of freedoms, which include only procedural freedoms, while excluding substabtive freedoms.

    I post here because I am concerned about human freedom and therefore oppose oppression of all kinds, whether it comes from a government or a corporation.

  • http://www.techliberation.com Adam Thierer

    Enema_foundry… There is nothing contradictory or “anti-freedom” in anything we have said here regarding this issue. This debate comes down a question of what gives a legislative body the legitimacy and authority to levy taxes on subjects or entities and whether they should ever have the authority to impose taxes on entities OUTSIDE OF THEIR JURISDICTION.

    Now, in our modern economy, there are times when messy disputes develop regarding what constitutes a sufficient “nexus” between the state and the entities they are seeking to tax. You could have tried to respond to Braden’s argument above by making the case for the State of New York and arguing that a sufficient nexus is present in this case such that they should be allowed to tax Amazon and other online retailers. Instead, you have engaged in a typically asinine diatribe about how libertarians are “anti-freedom” and “anti-social,” which is such an utterly preposterous claim that I have to give you credit for having the chutzpah to continuously say more outlandishly stupid things with each new comment you make to the TLF.

    Regardless–and just so that I may clarify the point for those who are reading this and care to engage in more reasoned debate on the issue–The principle of the matter, as raised by Amazon’s complaint, is sound: If sufficient physical presence is not found, then the taxing authority in question has no right to levy taxes. To do so would be the very essence of tyranny and constitutes a rather straightforward example of ‘taxation without representation.’ Stated differently, if you really care about representative government, then you would want to make sure that the governed are actually represented by those who are imposing taxes upon them. There isn’t anything “anti-freedom” about that principle.

  • http://enigmafoundry.wordpress.com eee_eff

    we have said here regarding this issue. This debate comes down a question of what gives a legislative body the legitimacy and authority to levy taxes on subjects or entities and whether they should ever have the authority to impose taxes on entities OUTSIDE OF THEIR JURISDICTION.

    Well number one:
    I don’t use profanity or name calling, so I would ask that who don’t either. Civilty, please.

    Number two:

    Then just answer the question I have asked: What jurisdiction has authority? Just answer that question!

  • http://enigmafoundry.wordpress.com eee_eff

    Obviously you folks at TLF seem to think that abusive comments are OK, well they arenot but they reflect badly on you not me.

    The question that raise is important, and libertaarians are trying to build an enclosure around the internet that no one, apparently has the jurisdiction to tax. that’s fundamentally anti-social.

  • http://enigmafoundry.wordpress.com eee_eff

    Instead, you have engaged in a typically asinine diatribe about how libertarians are “anti-freedom” and “anti-social,” which is such an utterly preposterous claim that I have to give you credit for having the chutzpah to continuously say more outlandishly stupid things with each new comment you make to the TLF.

    Well I woulod just refer you to Amartya Sen’s wonderful book Development as Freedom (Amertya Sen won the Nobel prize, BTW) and he talks about libertarians limited conception of freedoms, which include only procedural freedoms, while excluding substabtive freedoms.

    I post here because I am concerned about human freedom and therefore oppose oppression of all kinds, whether it comes from a government or a corporation.

  • http://www.codemonkeyramblings.com MikeT

    Then just answer the question I have asked: What jurisdiction has authority? Just answer that question!

    The federal government, for one, but you obviously realized that and were just speaking rhetorically, right?

    I, for one, cannot really take someone seriously if their views on freedom include that claptrap that democracy and freedom are intertwined, since modern democratic states are frequently far more invasive into the lives of their people than anything in the ancien regime.

  • http://www.codemonkeyramblings.com MikeT

    Then just answer the question I have asked: What jurisdiction has authority? Just answer that question!

    The federal government, for one, but you obviously realized that and were just speaking rhetorically, right?

    I, for one, cannot really take someone seriously if their views on freedom include that claptrap that democracy and freedom are intertwined, since modern democratic states are frequently far more invasive into the lives of their people than anything in the ancien regime.

  • Ryan Radia

    Great summary of Amazon’s case, Braden. The Constitutional arguments against the New York Internet Sales Tax provision seem pretty compelling, but who knows what will happen considering the way the courts have been interpreting Quill.

    enigma, what about origin-based taxation? Assuming an online business has a physical presence somewhere, why shouldn’t the jurisdiction in which the business is located be able to tax all sales? maybe that would be a better solution than letting New York tax all firms with NY-based affiliates.

  • Ryan Radia

    Great summary of Amazon’s case, Braden. The Constitutional arguments against the New York Internet Sales Tax provision seem pretty compelling, but who knows what will happen considering the way the courts have been interpreting Quill.

    enigma, what about origin-based taxation? Assuming an online business has a physical presence somewhere, why shouldn’t the jurisdiction in which the business is located be able to tax all sales? maybe that would be a better solution than letting New York tax all firms with NY-based affiliates.

  • http://enigmafoundry.wordpress.com enigma_foundry

    @MikeT

    No I was spaeking to the author of the post. And I am quite happy that:

    - a libertartian has finally answered this imporrtant question and

    - thereby exposed the libertarian dislike for democratic institutions, as that, more than anything else belies the abject moral failure of libertarianism

    But note that I still don’t have an answer from Tim Lee, to whom I had originally asked this very simple question.

    @Ryan:

    For interstate Commerce, I think the sales should be taxed based on the location where the good is delivered.

    This would:

    - provide a level playing field for internet and non-internet businesses, so that way a firm on the internet does not get an advantage over a non-internet one. That way the government is not playing favorites, and market forces can play out. If and only if a good is more efficiently delivered by an internet firm, will it have a cost advantage over its competitor(s).

    - local control over tax rates will be maintained as much as possible.

    One could argue that this will be complex for an on line store to administer, but in reality, we are just talking about a database of tax rates, information which could easily be made available over internet, and really shouldn’t be to bad.

    An alternative could be a flate rate which would average out the sales tax rates across every state, and get applied to any internet purchase.

    Non-starter is the succession of internet businesses from the rest of society, which is what is being proposed by libertarians, apparently. Little things like that is why I make the comment that libertarians are anti-social. Apparently this truth hurts, and therefore Adam keeps losing his temper. But just because Adam’s mother didn’t raise him to watch his language, does not mean that I will change my views. He should provide an argument or some kind of rebuttal.

    Just read Karl Polanyi’s The Great Transformation or Amartya Sen’s Development as Freedom, and your opinion of Libertarianism (or Liberalism, meaning very much the same thing in Karl Polanyi’s book) will change, I think. In particular, Amartya Sen’s critique is whithering. (Sorry Adam!)

  • http://enigmafoundry.wordpress.com eee_eff

    @MikeT

    No I was spaeking to the author of the post. And I am quite happy that:

    - a libertartian has finally answered this imporrtant question and

    - thereby exposed the libertarian dislike for democratic institutions, as that, more than anything else belies the abject moral failure of libertarianism

    But note that I still don’t have an answer from Tim Lee, to whom I had originally asked this very simple question.

    @Ryan:

    For interstate Commerce, I think the sales should be taxed based on the location where the good is delivered.

    This would:

    - provide a level playing field for internet and non-internet businesses, so that way a firm on the internet does not get an advantage over a non-internet one. That way the government is not playing favorites, and market forces can play out. If and only if a good is more efficiently delivered by an internet firm, will it have a cost advantage over its competitor(s).

    - local control over tax rates will be maintained as much as possible.

    One could argue that this will be complex for an on line store to administer, but in reality, we are just talking about a database of tax rates, information which could easily be made available over internet, and really shouldn’t be to bad.

    An alternative could be a flate rate which would average out the sales tax rates across every state, and get applied to any internet purchase.

    Non-starter is the succession of internet businesses from the rest of society, which is what is being proposed by libertarians, apparently. Little things like that is why I make the comment that libertarians are anti-social. Apparently this truth hurts, and therefore Adam keeps losing his temper. But just because Adam’s mother didn’t raise him to watch his language, does not mean that I will change my views. He should provide an argument or some kind of rebuttal.

    Just read Karl Polanyi’s The Great Transformation or Amartya Sen’s Development as Freedom, and your opinion of Libertarianism (or Liberalism, meaning very much the same thing in Karl Polanyi’s book) will change, I think. In particular, Amartya Sen’s critique is whithering. (Sorry Adam!)

  • http://72kilowatts.com Kevin

    Thanks for posting this article. It adds some sanity to this debate. A couple of comments:

    There’s no doubt that NY needs to get revenue back from what they are losing on online sales. It’s safe to say most New Yorkers aren’t accurately filing their “use tax” every year. (I do, of course……)

    I like enigmas concept of purchase location based taxation across the board. It is, by far, the fairest of the tax models I can think of.

    In New York, the counties set the rate, with a certain percentage going to the county, and the rest going to the State. So merchants have to tax by zip code. So we are talking about a large database.

    What I haven’t seen mentioned though: Are the counties going to benefit from this as well, or are we simply talking about collecting the actual State percentage?

  • http://72kilowatts.com Kevin

    Thanks for posting this article. It adds some sanity to this debate. A couple of comments:

    There’s no doubt that NY needs to get revenue back from what they are losing on online sales. It’s safe to say most New Yorkers aren’t accurately filing their “use tax” every year. (I do, of course……)

    I like enigmas concept of purchase location based taxation across the board. It is, by far, the fairest of the tax models I can think of.

    In New York, the counties set the rate, with a certain percentage going to the county, and the rest going to the State. So merchants have to tax by zip code. So we are talking about a large database.

    What I haven’t seen mentioned though: Are the counties going to benefit from this as well, or are we simply talking about collecting the actual State percentage?

  • http://enigmafoundry.wordpress.com/2007/10/04/the-riaa-loses-but-doesnt-realize-it-or-boycotting-the-riaa-has-never-made-more-sense-or-been-easier/ enigma_foundry

    In New York, the counties set the rate, with a certain percentage going to the county, and the rest going to the State. So merchants have to tax by zip code. So we are talking about a large database.

    Not really. even if every county in the country had its own rate, the database would just be a few k. The database should be kept by a central site, and made availabe for all.

  • http://enigmafoundry.wordpress.com eee_eff

    In New York, the counties set the rate, with a certain percentage going to the county, and the rest going to the State. So merchants have to tax by zip code. So we are talking about a large database.

    Not really. even if every county in the country had its own rate, the database would just be a few k. The database should be kept by a central site, and made availabe for all.

  • anti-enema

    Enigma foundry is full of leftist drivel. People like him are an anathema to democracy itself. The real enigma of democracy is that his voice and ideas however warped and baseless must be aired. He probably pracices Wicca too.

  • Thomas Barr

    New York has no authority to control what its citizens buy or do in any other location. A sale is made where the sale is made. If it is made outside of NY then what sane or logical person could decide that NY had any part or parcel in the sale. Funny how when it comes to sales on sovereign Indian lands that New York takes the same approach. They have even proposed in the NY State assembly, taxing purchases made in Canada, another country. NY is a money grubbing state that especially robs its own citizens in upstate NY and snivels and whines for Federal funds. It is already a fiscal disaster of its own making.
    The NY State Assembly has no respect for the law or the courts. They have already said that if this is overturned, they will still pursue the collection of these taxes.
    On the NY State Income Tax return forms, The last part is “a requirement” to pay taxes on all your out of state purchases, including those made on the internet.” Hardly legal, as they have repeatedly lost this in court, yet they still pursue it.

  • Enigma Foundering

    Enigma Foundry is hardly a libertarian as he seems to purport. Click on his name. He is a new age wack and a socialist that Mao would be proud of.

  • anti-enema

    Enigma foundry is full of leftist drivel. People like him are an anathema to democracy itself. The real enigma of democracy is that his voice and ideas however warped and baseless must be aired. He probably pracices Wicca too.

  • Thomas Barr

    New York has no authority to control what its citizens buy or do in any other location. A sale is made where the sale is made. If it is made outside of NY then what sane or logical person could decide that NY had any part or parcel in the sale. Funny how when it comes to sales on sovereign Indian lands that New York takes the same approach. They have even proposed in the NY State assembly, taxing purchases made in Canada, another country. NY is a money grubbing state that especially robs its own citizens in upstate NY and snivels and whines for Federal funds. It is already a fiscal disaster of its own making.
    The NY State Assembly has no respect for the law or the courts. They have already said that if this is overturned, they will still pursue the collection of these taxes.
    On the NY State Income Tax return forms, The last part is “a requirement” to pay taxes on all your out of state purchases, including those made on the internet.” Hardly legal, as they have repeatedly lost this in court, yet they still pursue it.

  • Enigma Foundering

    Enigma Foundry is hardly a libertarian as he seems to purport. Click on his name. He is a new age wack and a socialist that Mao would be proud of.

  • http://enigmafoundry.wordpress.com/2008/05/25/ministry-of-truth-at-the-tlf/ e_f

    Enigma Foundry is hardly a libertarian as he seems to purport. Click on his name. He is a new age wack and a socialist that Mao would be proud of.

    Hmmm…exactly where did I ever claim to be a libertarian?? Never did and never will.

    Simply put I am concerned primarily about loss of freedom of natural people, as opposed to corporations or governments. both of which are equally able to take freedom away.

  • http://enigmafoundry.wordpress.com eee_eff

    Enigma Foundry is hardly a libertarian as he seems to purport. Click on his name. He is a new age wack and a socialist that Mao would be proud of.

    Hmmm…exactly where did I ever claim to be a libertarian?? Never did and never will.

    Simply put I am concerned primarily about loss of freedom of natural people, as opposed to corporations or governments. both of which are equally able to take freedom away.

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