When New York state's top court ruled that Amazon, Overstock must collect sales tax, its thinking was original


When Amazon's and Overstock's efforts to avoid sales tax were slapped down last week by New York state's highest court, the judges took an unusual path. Going beyond the normal arguments of nexus — essentially, whether the online operation has any people or operations based in the state — the judges focused more on what those people are doing. And they concluded they were selling, and very often, to fellow state residents. Therefore, hello sales tax.

The decision raised — but quickly shut down — the question of whether local presence has any real meaning anymore, suggesting that a different top court would have to make that decision. "The world has changed dramatically in the last two decades and it may be that the physical presence test is outdated.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," the court said. "That question, however, would be for the United States Supreme Court to consider. We are bound, and adjudicate this controversy, under the binding precedents of that Court, the ultimate arbiter of the meaning of the Commerce Clause."

The court said it had tried to understand how online sites differ from those courts have dealt with in prior decades, to see if it can then draw lessons from precedent. "There are clearly parallels between a mail-order business and an online retailer. Both are able to conduct their operations without maintaining a physical presence in a particular state. Indeed, physical presence is not typically associated with the Internet in that many websites are designed to reach a national or even a global audience from a single server whose location is of minimal import," the ruling said. "However, through this statute, the legislature has attached significance to the physical presence of a resident website owner. The decision to do so recognizes that, even in the Internet world, many websites are geared toward predominantly local audiences — including, for instance, radio stations, religious institutions and schools — such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force. Viewed in this manner, the statute plainly satisfies the substantial nexus requirement."

Interestingly, the judges also explored whether how the retailer has to pay — or charge — these taxes would make a difference. "Although it is not a dispositive factor, it also merits notice that vendors are not required to pay these taxes out-of-pocket," the court said. "Rather, they are collecting taxes that are unquestionably due, which are exceedingly difficult to collect from the individual purchasers themselves, and as to which there is no risk of multiple taxation. The bottom line is that if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden. We will not strain to invalidate this statute where plaintiffs have not met their burden of establishing that it is facially invalid."

Again, the judges focused on where the representatives of Amazon and Overstock were focusing their sales efforts. "Unlike the bright line presented by the Commerce Clause, physical presence is not required in order to satisfy due process. Instead, the focus is on whether a party has purposefully directed its activities toward the forum state and whether it is reasonable, based on the extent of a party's contacts with that state and the benefits derived from such access, to require it to collect taxes for that state," said the decision. "In this respect, we believe that a brigade of affiliated websites compensated by commission are the equivalent of 'a deluge of catalogs' and 'a phalanx of drummers.'"

The judges painted a picture of site representatives making sales not just directly, but also through referral and word-of-mouth. In effect, the judges reasoned, what Amazon and Overstock — separately — did set in motion sort of a domino effect of in-state sales. "The fact proved is that the resident is compensated for referrals that result in purchases. The fact presumed is that at least some of those residents will actively solicit other New Yorkers in order to increase their referrals and, consequently, their compensation. It is plainly rational to presume that, given the direct correlation between referrals and compensation, it is likely that residents will seek to increase their referrals by soliciting customers. More specifically, it is not unreasonable to presume that affiliated website owners residing in New York State will reach out to their New York friends, relatives and other local individuals in order to accomplish this purpose."

The sites also argued that it's very difficult and awkward for E-Commerce operations to prove whether their associates are focusing their efforts on other state residents. The judges didn't show a lot of sympathy for that burden. "Obtaining the necessary information may impose a burden on the retailers, but inconvenience does not render the presumption irrebuttable. In addition, while not determinative, it is notable that the presumption sensibly places the burden on the retailers to provide information about the activities of their own affiliates, information that (state tax officials) would have significant difficulty uncovering on its own."

One of the court's judges, though, disagreed. In the sole dissent, Associate Judge Robert S. Smith said he viewed these non-employee affiliates' actions more as sending referrals to the e-tailers, rather than selling for them directly. "Our task here is to decide whether certain New York-based websites — Overstock's 'Affiliates' and Amazon's 'Associates' — are the equivalent of sales agents, soliciting business for Overstock and Amazon, or are only media in which Overstock and Amazon advertise their products. I think they are the latter," Smith said.

Smith said that the advertising model analysis is crucial. "The Overstock and Amazon links that appear on websites owned by New York proprietors serve essentially the same function  as advertising that a more traditional out-of-state retailer might place in local newspapers. The websites are not soliciting customers for Overstock and Amazon in the fashion of a local sales agent. Of course the website owners solicit business for themselves (and) they encourage people to visit their websites, just as a newspaper owner would seek to boost circulation. But there is no basis for inferring that they are actively soliciting for the out-of-state retailers. It does not make sense to envision a website owner trying to persuade members of the public, as a sales agent would, that Overstock and Amazon are high quality merchants that the public should want to do business with. Persuasion of that sort does the website owner no good."

He then compared Amazon to a door-to-door vacuum cleaner salesman: "A traditional sales agent, say, a vacuum cleaner salesman, would promote a particular brand of vacuum cleaner so that customers would order the product through him and he would get a commission. But no website owner promotes Overstock or Amazon for a similar reason, because everyone who wants to buy from either of those firms can go to the retailer's website directly. It is true that certain kinds of website owners — churches and schools, for example — may ask their supporters to show their loyalty by using the website when they buy from Amazon, but that is not the same as soliciting business that Amazon would not otherwise get. In any event, a rule applicable to websites generally cannot be justified on the basis of the special characteristics of volunteer-supported organizations. The statute at issue here tries to turn advertising media into an in-state sales force through a presumption."

It seems likely that these cases will eventually go before the U.S. Supreme Court. Until then, though, a political approach of a national E-Commerce sales tax is being actively explored. For the moment, though, the top judges from New York have looked at the issue and have decided that they still want the money.


For more:

- New York decision text

- New York Times story

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