Tax Law Updates | New Judicial Opinions
February 11, 2009
NY Court Dismisses Amazon.com's Challenge to Invalidate Nexus Tax Statute
Amazon.com LLC, et al. v. New York State Department of Taxation and Finance, et al.
No.601247/08, Supreme Court of the State of New York – New York County, 1/13/2009
The Supreme Court of the State of New York has held that an online retailer's use of in-state affiliates creates substantial nexus for purposes of collecting sales taxes. In so doing, the Supreme Court dismissed plaintiffs Amazon.com LLC’s and Amazon Services, LLC’s (“Amazon”) constitutional challenge to a state tax law. This statute required collection of New York taxes from New Yorkers by out-of-state sellers that contractually agree to pay commissions to New York residents for referring potential customers to them. Here, the Supreme Court rejected Amazon’s argument that it lacks substantial lexus to New York, stating that it chose to benefit from New York associates that were free to target New Yorkers and encouraged Amazon sales. On the equal protection claim, the Supreme Court held that the complaint was devoid of any assertion that the State of New York has actually treated it any differently than others that are similarly situated. In this regard, the Supreme Court concluded that the questioned tax provision does not broadly tax any and all internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $ 10,000 of revenue from New York sales earned through the arrangement.
In 1995, Amazon began to operate a retail internet business. Its goods were sold online and shipped to buyers worldwide, including to New York. Amazon did not own property in New York or maintain any New York offices. None of its employees worked or resided in New York.
Amazon created an “Associates Program,” which allows participants (“Associates”) to maintain links to Amazon.com on their own websites and compensates them by paying a percentage of the proceeds of the sale. Amazon also offered incentives to Associates that “directly refer” customers to its Amazon Prime program through website links, paying them a “$ 12 bounty” for each new enrollee.
On April 23, 2008, Governor Paterson signed into law N.Y. Tax Law section 1101(b)(S)(vi) (“Commission-Agreement Provision”), which required collection of New York taxes from New Yorkers by out-of-state sellers that contractually agree to pay commissions to New York residents for referring potential customers to them, provided that more than $ 10,000 was generated from such New York referrals during the preceding four quarterly periods. An out-of-state seller that could establish its commissioned New York residents did not engage in any solicitation that would satisfy the United States Constitution’s “nexus requirement,” would be exempt from tax collection.
On April 25, 2008, Amazon commenced this action, alleging among others that the Commission-Agreement Provision “violates the Commerce Clause of the United States Constitution, both facially and as applied to Amazon, because it imposes tax collection obligations on out-of-state entities who have no substantial nexus with New York.” Opinion, p. 6, citing Verified Complaint, at paragraph 3(b).
In dismissing Amazon’s facial challenge, the Supreme Court held that the Commission-Agreement Provision was 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. The statute first requires that a seller enter into a contract with a New York resident before any obligation will be imposed.
Next, the Supreme Court added, before tax-collection is required, it mandates that the New York resident refer potential customers to the seller. The measure further necessitates an arrangement whereby the seller pays the New York resident a commission or provides other consideration for the referral. Finally, New York’s Tax Law requires that the seller receive in excess of $ 10,000 from New York customers referred to it through its business arrangement.
The Supreme Court stated that it did not find anything infirm about the Commission-Agreement Provision, which contemplates a substantial nexus with New York. Significantly, New York residents, with whom out-of-state sellers entered into agreements, must refer more than $ 10,000 of business—and New York business no less—before there is any collection obligation. The statute thus requires ‘“demonstrably more than a “slightest presence”’ and obligates collection of taxes based on economic activities in New York performed by the vendor’s personnel or on its behalf. Id., p. 10, citing Matter of Orvis Co., 86 NY 2d at 178.
Amazon next maintained that it lacked a substantial nexus with New York and that its Associates’ activities are insufficient to justify imposition of New York tax-collection obligations. The Supreme Court however rejected this claim stating that Amazon contracts with thousands of Associates that provided it with a New York address. Certainly, if Amazon were to have a dispute with any of them, it could easily ascertain New York residency for purposes of a lawsuit.
“Amazon should not be permitted to escape tax collection indirectly, through use of an incentivized New York sales force to generate revenue, when it would not be able to achieve tax avoidance directly through use of New York employees engaged in the very same activities.” Id., p. 13.
On the equal protection claim, the Supreme Court held that the complaint was devoid of any assertion that the State of New York has actually treated it any differently than others that are similarly situated. In this regard, the Supreme Court concluded that the questioned tax provision does not broadly tax any and all internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $ 10,000 of revenue from New York sales earned through the arrangement.
The Supreme Court thus granted the State’s motion to dismiss.
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