On December 2, 2013, the United States Supreme Court denied certiorari in the consolidated cases Amazon.com LLC v. N.Y. Dept. of Taxation and Overstock.com v. N.Y. Dept. of Taxation, thereby allowing the New York state law requiring online retailers to collect and remit sales tax to stand.
In 1992, the Supreme Court decided in Quill Corp. v. North Dakota that a business must have a physical presence in a state for that state to require it to collect sales taxes. In the Amazon/Overstock case, the New York Court of Appeals, the state’s highest court, acknowledged the Quill decision but stated that “although an in-state physical presence is necessary, it need not be substantial.” Instead the Court of Appeals stated that an online retailer’s presence “must be demonstrably more than a ‘slightest presence’” in order to subject it to the New York sales tax. Further, the “presence requirement will be satisfied if economic activities are performed in New York by the seller’s employees or on its behalf.”
Although maintenance of an office or warehouse creates a physical presence for Amazon and Overstock in other states, neither company maintains any such facility in New York. Instead, the online retailer placed an advertisement on the website of a company that had a physical presence in New York. If a customer clicks on that advertisement and subsequently purchases an item from Amazon, by an affiliation agreement the local website received a commission from Amazon. Notwithstanding that the affiliation agreements between Amazon and the local website stated that “the Associates are independent contractors and that there is no employment relationship between the parties,” the Court of Appeals held that “through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.” It is this “active, in-state solicitation” through these affiliation agreements that creates the substantial nexus with New York that subjects the online retailer to the New York state sales tax.
In a preface to its analysis, the New York Court of Appeals stated:
“The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated. An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet. That question, however, would be for the United States Supreme Court to consider.”
Although the U.S. Supreme Court presently refused to address this issue, sales tax on internet sales is not a settled matter. Other states will likely enact similar laws and the question of how far a state can reach out-of-state online retailers under the Commerce and Due Process Clauses of the U.S. Constitution has yet to be determined.