New York Internet Tax Law Does Not Violate Commerce Clause

Writing for the panel, Justice Eugene Nardelli said the challenges to the tax law have “far-reaching ramifications because of the exponential expansion of cyberspace in general, and commerce over the Internet in particular.”

The panel made one ruling in Amazon.com, LLC v. New York State Department of Taxation and Finance, 2010 NY Slip Op. 07823 (available at www.law.com/jsp/nylj/CaseDecisionNY.jsp?id=1202474434225&pStyle=decision). It encompassed both appeals by Amazon.com and Overstock.com of the lower court rulings as well as the constitutionality of the tax law.

When Gov. David A. Paterson signed the bill as part of the 2008-09 state budget, he estimated that New York would collect about $50 million a year in taxes on online sales of goods to New York residents by retailers located outside the state.

Under the law, online retailers are subject to collecting and remitting state sales taxes if they have contracts with companies or groups in New York to pay commissions for referrals on sales worth $10,000 or more a year by the out-of-state retailer.

In Re: Amazon

Amazon argued that it has thousands of “associates” in New York in the form of Web sites that advertise the Amazon name and that provide a link to the Nevada-based online retailer.

Amazon contended that the Web sites merely provide passive advertisement of the Amazon.com brand and that the associates do not solicit business in a way that would establish a “substantial nexus” between the company and New York for purposes of requiring the company to collect sales tax.

In Re: Overstock

Overstock.com mostly operates under the same system of having browsers redirected to the Utah company's site through other sites in New York and elsewhere, according to the court.

The statute demands tax collections only by companies that have a “substantial nexus” with New York, as demonstrated by the $10,000 minimum-purchase requirement by New Yorkers, the court held.

“Our analysis leads us to the conclusion that on its face the statute does not violate the Commerce Clause,” Justice Nardelli wrote. “It imposes a tax collection obligation on an out-of-state vendor only where the vendor enters into a business-referral arrangement with a New York State resident, and only when that resident received a commission based on a sale in New York.”

Claims Rejected

The panel rejected claims by both companies that the sales tax statute amendments, contained in Tax Law '1101(b)(8)(vi), violate constitutional due-process guarantees on their face because they are too vague and contain an “irrational” presumption that online retailers are paying commissions when consumers link to their sites from third-party sites in New York.

“This is not an irrational presumption,” the court held. “Both the out-of-state vendor and the in-state representative seek, quite frankly, to make money. It is not irrational to presume that the in-state representative will engage in various legal methods to enhance earnings.”

The court likewise rejected claims by both companies that the law violates their right to equal protection, either on its face or as applied. Justice Nardelli wrote that the law does not single out just one of the online companies for enforcement and does not treat them differently from how similarly situated companies are treated.

'Viable Case' Uncertainties

The judges did conclude, however, that they could not tell from the record whether either Amazon.com or Overstock.com can make a viable case for either a Commerce Clause or due process violation as the law is being applied to them by state tax officials.

Both argue that their New York representatives do nothing more than advertise on New York-based sites and that applying the tax-collection requirement to them is a violation of the Commerce Clause and their due-process rights.

“Inasmuch as there has been limited, if non-existent, discovery on this issue we are unable to conclude as a matter of law that plaintiffs' in-state representatives are engaged in sufficiently meaningful activity so as to implicate the State's taxing powers, and thus find that they should be given the opportunity to develop a record which establishes, actually, rather than theoretically, whether their in-state representatives are soliciting business or merely advertising on their behalf,” the court held in sending the cases back to the trial court.

Concerned Parties

Justices Richard T. Andrias, John W. Sweeny and Leland G. DeGrasse joined in Justice Nardelli's ruling.

In a concurring opinion, Justice James M. Catterson said he agreed that there is a triable issue of fact about the applicability of the Commerce Clause to the two companies. But he argued that the plaintiffs had failed to assert an as-applied challenge to the constitutionality of the tax law under the clause, only a facial challenge to the statute.

Daniel S. Connolly, Rachel B. Goldman, David A. Shargel and David J. Ball of Bracewell & Giuliani represented Overstock.

Connolly, managing partner in Manhattan for Bracewell & Giuliani, said the case is being watched in other states that want to impose sales taxes on in-state purchases by their residents from out-of-state retailers.

“This is really a significant test of the commerce clause in the Internet age and probably the first of its kind in the country,” Connolly commented.

Randy M. Mastro, Gabriel Herrmann and Timothy D. Swain of Gibson, Dunn & Crutcher represented Amazon.

Solicitor General Barbara D. Underwood and Assistant Solicitor Generals Peter Karanjia and Andrew D. Bing represented the Department of Taxation and Finance.

“We're very pleased that the court has ruled in our favor on the constitutionality issue and we think at the end of the day, as this moves forward, we are ultimately going to be successful,” tax department spokesman Brad Maione said.

An appeals court ruled last month that a state law requiring most online retailers to collect sales taxes on purchases by New Yorkers is constitutional on its face, though the panel ordered the reinstatement of claims that the tax law may violate the Commerce and Due Process clauses as applied to Amazon.com and Overstock.com.

The Appellate Division, First Department, panel unanimously modified the decisions in two cases by Manhattan Supreme Court Justice Eileen Bransten: Amazon.com v. New York State Department of Taxation and Finance, 601247/08 (available at www.nycourts.gov/reporter/3dseries/2009/2009_29007.htm), and Overstock.com v. New York State Department of Taxation and Finance, 107581/08. The rulings dismissed the Constitution claims the online giants made against the 2008 sales tax law.

The Nuts and Bolts

Writing for the panel, Justice Eugene Nardelli said the challenges to the tax law have “far-reaching ramifications because of the exponential expansion of cyberspace in general, and commerce over the Internet in particular.”

The panel made one ruling in Amazon.com, LLC v. New York State Department of Taxation and Finance , 2010 NY Slip Op. 07823 (available at www.law.com/jsp/nylj/CaseDecisionNY.jsp?id=1202474434225&pStyle=decision ). It encompassed both appeals by Amazon.com and Overstock.com of the lower court rulings as well as the constitutionality of the tax law.

When Gov. David A. Paterson signed the bill as part of the 2008-09 state budget, he estimated that New York would collect about $50 million a year in taxes on online sales of goods to New York residents by retailers located outside the state.

Under the law, online retailers are subject to collecting and remitting state sales taxes if they have contracts with companies or groups in New York to pay commissions for referrals on sales worth $10,000 or more a year by the out-of-state retailer.

In Re: Amazon

Amazon argued that it has thousands of “associates” in New York in the form of Web sites that advertise the Amazon name and that provide a link to the Nevada-based online retailer.

Amazon contended that the Web sites merely provide passive advertisement of the Amazon.com brand and that the associates do not solicit business in a way that would establish a “substantial nexus” between the company and New York for purposes of requiring the company to collect sales tax.

In Re: Overstock

Overstock.com mostly operates under the same system of having browsers redirected to the Utah company's site through other sites in New York and elsewhere, according to the court.

The statute demands tax collections only by companies that have a “substantial nexus” with New York, as demonstrated by the $10,000 minimum-purchase requirement by New Yorkers, the court held.

“Our analysis leads us to the conclusion that on its face the statute does not violate the Commerce Clause,” Justice Nardelli wrote. “It imposes a tax collection obligation on an out-of-state vendor only where the vendor enters into a business-referral arrangement with a New York State resident, and only when that resident received a commission based on a sale in New York.”

Claims Rejected

The panel rejected claims by both companies that the sales tax statute amendments, contained in Tax Law '1101(b)(8)(vi), violate constitutional due-process guarantees on their face because they are too vague and contain an “irrational” presumption that online retailers are paying commissions when consumers link to their sites from third-party sites in New York.

“This is not an irrational presumption,” the court held. “Both the out-of-state vendor and the in-state representative seek, quite frankly, to make money. It is not irrational to presume that the in-state representative will engage in various legal methods to enhance earnings.”

The court likewise rejected claims by both companies that the law violates their right to equal protection, either on its face or as applied. Justice Nardelli wrote that the law does not single out just one of the online companies for enforcement and does not treat them differently from how similarly situated companies are treated.

'Viable Case' Uncertainties

The judges did conclude, however, that they could not tell from the record whether either Amazon.com or Overstock.com can make a viable case for either a Commerce Clause or due process violation as the law is being applied to them by state tax officials.

Both argue that their New York representatives do nothing more than advertise on New York-based sites and that applying the tax-collection requirement to them is a violation of the Commerce Clause and their due-process rights.

“Inasmuch as there has been limited, if non-existent, discovery on this issue we are unable to conclude as a matter of law that plaintiffs' in-state representatives are engaged in sufficiently meaningful activity so as to implicate the State's taxing powers, and thus find that they should be given the opportunity to develop a record which establishes, actually, rather than theoretically, whether their in-state representatives are soliciting business or merely advertising on their behalf,” the court held in sending the cases back to the trial court.

Concerned Parties

Justices Richard T. Andrias, John W. Sweeny and Leland G. DeGrasse joined in Justice Nardelli's ruling.

In a concurring opinion, Justice James M. Catterson said he agreed that there is a triable issue of fact about the applicability of the Commerce Clause to the two companies. But he argued that the plaintiffs had failed to assert an as-applied challenge to the constitutionality of the tax law under the clause, only a facial challenge to the statute.

Daniel S. Connolly, Rachel B. Goldman, David A. Shargel and David J. Ball of Bracewell & Giuliani represented Overstock.

Connolly, managing partner in Manhattan for Bracewell & Giuliani, said the case is being watched in other states that want to impose sales taxes on in-state purchases by their residents from out-of-state retailers.

“This is really a significant test of the commerce clause in the Internet age and probably the first of its kind in the country,” Connolly commented.

Randy M. Mastro, Gabriel Herrmann and Timothy D. Swain of Gibson, Dunn & Crutcher represented Amazon.

Solicitor General Barbara D. Underwood and Assistant Solicitor Generals Peter Karanjia and Andrew D. Bing represented the Department of Taxation and Finance.

“We're very pleased that the court has ruled in our favor on the constitutionality issue and we think at the end of the day, as this moves forward, we are ultimately going to be successful,” tax department spokesman Brad Maione said.