New York's Amazon Tax Not Out of the Forest Yet: the Battle Over Affiliate Nexus
| Publication year | 2009 |
"[I]n this world nothing is certain but death and taxes."
Benjamin Franklin(fn1)
I. Introduction
We've all done it. After finding an item we want in a store, we think, "I can find it online for less. Plus, I won't have to pay sales tax!" This phenomenon, occurring at an ever-increasing rate, has left many state governments feeling that they are missing out on tax revenue from those online sales.(fn2) For this reason, it was a virtual certainty that states would attempt to impose state sales tax on sales by internet retailers, or "e-tailers," located out-of-state.
On April 9, 2008, New York attempted to do just that.(fn3) As part of its budget for the 2008-2009 fiscal year, the state of New York passed § 1101(b)(8)(vi) of the New York Tax Law ("the Statute"), more commonly known as the "Amazon Tax."(fn4) The Statute seeks to impose a state sales tax collection obligation on out-of-state e-tailers by creating a re-buttable presumption that the vendor has a taxable physical presence in New York.(fn5) The most controversial feature of the Statute is that an internet retailer's agreements with its affiliate marketers(fn6) located in New York trigger this rebuttable presumption, creating a taxable "nexus"(fn7) in New York.(fn8) Not surprisingly, Amazon.com was unimpressed with the idea of the Amazon Tax and filed suit against New York.(fn9) The suit challenging the constitutionality of the Statute was filed on April 25, 2008, just two weeks after the measure was adopted.(fn10) Overstock.com filed a similar suit on May 30, 2008.(fn11) (fn12)
The plaintiffs, Amazon and Overstock, advanced nearly identical arguments, noting that U.S. Supreme Court precedent erects significant hurdles to imposing state sales tax collection obligations on vendors who do not have a physical presence in the state.(fn13) The plaintiffs argued that these hurdles should preclude New York's attempt to impose state tax collection obligations on internet vendors.
Unfortunately for the plaintiffs, the New York Supreme Court ("NY Court")(fn14) did not agree. On January 12, 2009, the court ruled in favor of New York, granting summary judgment for the state.(fn15) In fact, the court was rather emphatic in its decision, stating that "[the plaintiffs] ha[ve] not come close to refuting the [Statute's] presumed constitutionality . . . ."(fn16)
This Comment argues that the NY Court's dismissal was only partially correct.(fn17) The court was correct in noting that applying the Statute to the plaintiffs is consistent with the Due Process Clause under current U.S. Supreme Court precedent because the plaintiffs purposefully directed their activities toward New York.(fn18) However, the NY Court erred in holding that the Statute meets the dormant Commerce Clause's "substantial nexus" requirement by imputing the affiliates' activities to the plaintiffs. While the activities of an in-state contractor or salesperson are sufficient to create a taxable nexus, traditional advertising is considered insufficient in this regard. Because the affiliates' activities more closely resemble traditional advertising than the activities of an in-state contractor or salesperson, the Statute is in violation of the Commerce Clause.(fn19) Because of this violation, the Statute is unconstitutional and should be overturned.(fn20)
To introduce the issues involved, Part II of this Comment describes sales and use taxes, particularly their significance as a state revenue source and problems with collecting them. Additionally, Part II discusses the motivations behind taxing e-commerce. Part III explores applicable case law, including several relevant Supreme Court cases that define the parameters of the plaintiffs' claims and a New York Court of Appeals case. Part IV introduces the statutory language and describes how the Statute has been interpreted by the agency charged with enforcing it-the New York State Department of Taxation and Finance (DTF). Part V examines the NY Court's
II. Overview of Sales and Use Taxes
The central issue presented in the
Simply put, a sales tax is a tax on the sale of goods and services.(fn21) While forty-five states and the District of Columbia employ sales taxes,(fn22) individual counties or cities within these states may also impose their own separate sales taxes.(fn23) As a result, there are presently at least 7,600 taxing jurisdictions within the U.S.(fn24) Sales taxes, along with use taxes, are the largest source of revenue for most states-accounting for nearly one third of all state taxes collected in 2008.(fn25)
The most unique feature of the sales tax is the way it is collected and remitted to the proper governmental authority. Instead of being the consumer's responsibility, as is the case with income and use taxes, sales taxes require the vendor to collect and remit the tax.(fn26) Given the large number of jurisdictions, this can be an extraordinarily complex task and a substantial burden on the vendors. Thus, the U.S. Supreme Court has held that states can impose a sales tax collection obligation only on vendors that have a substantial nexus with the state.(fn27) Due to this limitation, states began to utilize the use tax in order to tax sales from out-of-state vendors.(fn28)
A use tax is a tax on the use of goods that are purchased outside of a taxing authority's jurisdiction.(fn29) Because the use tax applies only to the use of products within the state that were purchased out of state, and thus not previously subjected to the sales tax, the use tax is complementary to the sales tax.(fn30) The main difference between the two taxes is the location of the purchaser relative to the vendor; an intrastate transaction triggers a sales tax, while an interstate transaction triggers a use tax.(fn31)
Use taxes are generally imposed to discourage interstate transactions for the purpose of avoiding sales tax.(fn32) Thus, the use tax rate is typically identical to the sales tax rate.(fn33) A use tax credit must be given for sales tax paid in another state so that the same purchase is not taxed twice.(fn34) The burden of remitting the use tax lies on the purchaser or user of the goods.(fn35)
Putting the burden of remitting the use tax on the purchaser creates several problems, which result in almost universal noncompliance. First, most consumers do not realize that they need to remit use tax for online or other out-of-state purchases.(fn36) It is a common misconception that if a vendor does not collect sales tax, there is no tax at all.(fn37) Second, an almost complete lack of enforcement of the use tax by states aggravates this misconception.(fn38) Without an effective system to monitor residents' purchasing behavior, states have difficulties enforcing payment of the use tax.(fn39) In addition, any attempt to monitor such behavior would create numerous operational and privacy issues.(fn40) The third and final problem is plain, old disobedience.(fn41) Even if a consumer is aware of the use tax obligation, knowledge that a violation is unlikely to be punished contributes to non-compliance.(fn42)
This non-compliance has long troubled states due to the accompanying loss of tax revenue.(fn43) The erosion of state tax collections(fn44) has been exacerbated by the growing popularity of internet retail sales(fn45) and total dollar amount.(fn46) One study reported that the increase in e-commerce cost states between $15.5 and $16.1 billion in lost tax revenue in 2003 alone.(fn47) That amount was predicted to increase to between $21.5 and $33.7 billion in 2008.(fn48) The states with the largest populations, such as New York, will see the largest losses.(fn49)
Given the important role that sales taxes play in states' revenue production, states are attempting to fill gaps in the revenue losses resulting from e-commerce. The increasing popularity of internet shopping has begun to erode states' sales tax collections without a corresponding increase in use tax collections because most e-tailers are located out-of-state and therefore are not obligated to collect and remit state use tax. As a result of this erosion, many states are looking for ways to generate additional revenue,(fn50) including ways to impose tax collection obligations on out-of-state e-tailers. In their search for a solution, states must be aware of certain constitutional issues that may arise.
III. The Evolution of Sales and Use Tax Jurisprudence
Remote retailers typically use two separate constitutional challenges to fight the imposition of a use tax collection obligation on interstate commerce.(fn51) First, the Due Process Clause...
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