Amazon, the New York Internet Tax, and the Phalanx of Drummers


The New York Court of Appeals (“Court of Appeals”) ruled on March 28, 2013 that internet based retailers, such as Amazon and, are “physically” present in New York State by virtue of the way in which they conduct their retail business over the internet and, therefore, can be required to collect sales tax on purchases destined for New York. Specifically, the case addresses the not so unique circumstance of the established internet based retailer that utilizes an in-state “affiliate” web site for posting ads that could then be “clicked through” to its own retail site, thereby resulting in a presumption in New York that the affiliate solicits business in-state on behalf of the internet retailer, in effect making the affiliate the equivalent of a sales representative.

The case turns on the application of the Commerce Clause to the US Constitution, which has historically been interpreted to require, for a retailer, “physical presence” in a state before becoming subject to a sales tax collection obligation. Under the Commerce Clause, an activity must have “substantial nexus” to a state before sales tax can be imposed, and only a physical presence can satisfy this standard. Going back some years, the Supreme Court addressed a similar issue in 1967 (as similar as it could be in a marketplace before the age of the internet) in the case of National Bellas Hess, Inc. v. Department of Revenue of Illinois (“Bellas Hess”) when it held that an out-of state mail-order business with no offices, property or sales force in a state was not “physically present” in a state where its only activity was through the mail carriers, and therefore the Commerce Clause standard was not met.

Interestingly, the Court of Appeals emphasized the Bellas Hess maxim that imposing sales tax without a retailer's physical presence would result in a “morass of obligations to local governments,” Yet, in a puzzling twist, the Court of Appeals concluded that the “affiliates” of a company like Amazon not only allow the company to advertise in a state, but also amount to the equivalent of a “phalanx of drummers” (Quill Corp v. North Dakota, 504 U.S. 298 (1992)) that satisfies the standards of Due Process and also the substantial nexus (i.e. “physical presence”) requirement of the Commerce Clause.

The dissent in the Amazon case makes the valid observation that an internet ad with a link is “still only an ad” and that “to infer [that] a website owner is actively soliciting business for the [internet retailer] is ‘so strained as not to have a reasonable relation to the circumstances of life as we know them.’”  The Supreme Court will, hopefully in time, resolve this important issue.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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