Tax Law | Expert Legal Commentary

April 8, 2009

The “Amazon Tax” Upheld in New York, Enabling State Taxation of Web Sales LLC v. New York State Dept. of Taxation and Finance

By H. Jacob Lager of Zuber Lawler & Del Duca

The “Amazon Tax” Upheld in New York, Enabling State Taxation of Web Sales

In a case that has all major online retailers nervous, a Manhattan court upheld a new state tax law that requires many out of state retailers to collect state sales tax on purchases by New York residents in LLC v. New York State Dept. of Taxation and Finance, ___ N.Y.S. 2d ___, 2009 WL 69336 (N.Y. Sup. 2009). Online giant challenged the law on constitutional grounds, but the New York Supreme Court judge found that Amazon did “not come close” to demonstrating unconstitutionality of the law.


In 1992, the U.S. Supreme Court exempted out-of-state retailers from collecting sales tax in out-of-state transactions, i.e. where they sold goods to residents of a state where the retailer had no physical presence such as a store, office, or warehouse. Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Although Quill dealt with a mail order company, the ruling has since been relied upon by a growing number of remote online sellers.

In April 2008, New York sought to overcome the Quill decision when it approved a new tax as part of its 2008-09 state budget. New York Tax Law section 1101(b)(8)(vi) contains a “Commission-Agreement” provision requiring out-of-state online retailers to collect New York state sales tax if the retailer uses independent contractors or other New York residents to solicit sales in excess of $10,000 from New York residents.

The law had an immediate impact on large online retailers like Seattle-based, which previously did not have to collect sales tax in New York because they did not have a physical presence in the state. However, Amazon and many other retailers have affiliate linking programs that enable other websites to maintain a link to the online retailer’s site for incentives. Under Amazon’s affiliate program, which Amazon considers a marketing arrangement, when a customer links to from the affiliate website, that affiliate receives a commission on the customer’s purchases. Amazon has “thousands” of these affiliates in New York, though the program reportedly accounts for less than 1.5% of Amazon’s total New York sales revenue.

New York tax officials contended that’s affiliate program makes it subject to the commission-agreement provision of the new tax law, forcing Amazon to collect sales tax on transactions with New York residents. Indeed, state officials referred to the tax as the “Amazon tax.”

Amazon filedsuit on April 25, 2008, alleging that the Commission-Agreement provision’s inconsistency with Quill   violates the Commerce Clause, the Equal Protection clause, and Amazon’s right to due process under the U.S. Constitution.  Judge Eileen Bransten, writing for the Supreme Court of the State of New York, dismissed the lawsuit upon defendants’ motion in LLC v. New York State Dept. of Taxation and Finance, ___ N.Y.S. 2d ___, 2009 WL 69336 (N.Y. Sup. 2009).

Amazon’s Constitutional Challenges to the Tax Fail

Amazon made three Constitutional challenges to the “Amazon tax.” First, Amazon contended that the new tax violated the Commerce Clause of the U.S. Constitution because it imposed a tax obligation on an out-of-state seller who lacked a “substantial nexus” with New York. States may require a retailer to collect state tax if the “tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977).

The court pointed out that the “substantial nexus” test only requires the “slightest” physical presence, which can be imputed to the retailer through activities performed in the taxing state by the people or entities acting on the retailer’s behalf. Amazon, 2009 WL 69336, *3. Based on this standard, the court found that “[t]he Commission-Agreement Provision is carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes and, if such a basis does not exist, it gives the seller an out… a tax-collection obligation will only be imposed based on an out-of-state seller’s conscious decision to contract with in-state residents who collectively refer more than $10,000 of New York based business.” Amazon, 2009 WL 69336, *4.

In making its due process claim, Amazon claimed that the tax law was unconstitutionally vague, because it could be interpreted to apply to non-Internet out-of-state retailers that buy ads in New York-based print media. But the court found otherwise, stating: “the statute’s applicability upon entry into an agreement with an in-state resident for a commission ‘or other consideration’ based on direct referral of New York customers or ‘indirect’ referrals is not so vague and standardless as to leave the public uncertain about its reach.” Amazon, 2009 WL 69336, *7.

Finally, Amazon claimed that the law violated the Equal Protection Clauses of both the U.S. and New York constitutions because the statute was enacted specifically to collect taxes from Amazon. However, the court noted that Amazon’s complaint contained no assertion that the State has actually treated it differently from other similarly situated retailers. Amazon, 2009 WL 69336, *7.

The Impact of the Amazon Tax

It is expected that Amazon will appeal this decision. In the meantime, online retailers have only two choices regarding New York sales tax – either they register with the state and collect the tax , which Amazon has chosen to do, or they cut off all ties with New York affiliates in order to avoid collecting the tax . The latter course, which has pursued, arguably puts a damper on e-commerce, as many of the affiliates are web start-ups that rely in part on the financial boost from these programs.

More importantly, this may put the online retail industry on a burdensome slippery slope. In reaching its decision in Quill Corp. v. North Dakota, the Supreme Court discussed the crushing burden that it would place on interstate commerce if remote sellers had to comply with the separate sales and use tax provisions in every location in which it conducted transactions. There are more than 6200 separate sales tax jurisdictions and more than 4400 separate use tax jurisdictions. If a significant number of those implemented a statute similar to New York’s, and if that statute were upheld on similar grounds, it would completely undermine the rationale of the Quill decision. The burden of trying to comply with each of those various jurisdictions may be more than a reasonable online retailer can handle.

About the Author

H. Jacob Lager is a Partner of Zuber Lawler & Del Duca, focusing on tax law.

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Companies Mentioned

Amazon Services, LLC LLC

New York State Department of Taxation and Finance

The State of New York

Also See:

In re Quality Stores, Inc.: Sixth Circuit Excludes Some Severance Payments from FICA Tax

TIFD III-E, Inc. v. United States: Second Circuit Rejects Debt Holder as Partner, Enforces § 6662 Penalties

Klauer v. Commissioner: Step Transaction Doctrine Does Not Apply to Multi-Step Bargain Sales to Charity

Holman v. CIR: Valuation of Gifted LLP Shares

Steinhart v. Co. of Los Angeles: Transfer of Life Estate is a “Change in Ownership” of Real Property

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Companies Mentioned

Tax Law

The following companies are mentioned in Tax Law Updates:

Internal Revenue Service

Swallows Holding, Inc.

The State of New York

New York State Department of Taxation and Finance LLC

Amazon Services, LLC

Textron Inc.

County of Los Angeles


Quality Stores, Inc.

Agere Systems, Inc. f.k.a. Lucent Technologies, Inc.

Detroit Medical Center

Department of Justice

Santini Stone LLC

City of Chicago

StubHub, Inc.

Mayer Brown LLP d.b.a. Mayer, Brown, Rowe & Maw LLP

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