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 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. 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.

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