Amazon Faces Off With New York State Over Sales Tax Law

More than two years after a New York State appellate court dismissed claims by Amazon.com and Overstock.com that the state’s sales tax fairness law was unconstitutional, on Wednesday, February 6, the defendants were back in court arguing their case, this time before the State of New York Court of Appeals.

Much of the day’s arguments focused on whether online affiliates, because they work under a commission-based model, were either advertisers or sales agents. Under the 1992 Supreme Court case Quill vs. North Dakota, a company’s sales agents in a state would constitute nexus for that company and would require it to collect state sales tax.

In November 2010, the appellate court [1] concluded that New York’s law was constitutionally sound on its face and is legal and enforceable with respect to the Internet retailers whose business practices bring them within the scope of the new law. The court ruling did order that two of the Amazon and Overstock claims be reinstated for further proceedings to allow the companies the opportunity to avoid sales tax collection by rebutting the presumption that online affiliates solicit business and that the affiliates’ activities are not “significantly associated” with the companies’ ability to do business in New York.

While Amazon and Overstock contended that online affiliates were mere advertisers, similar to an advertisement in the New York Times, Steven Wu, special counsel to the Solicitor General for New York, disagreed. He countered that the commission-model, by its very nature, offers incentives for affiliates to solicit business, thereby rendering them sales agent of the remote retailer. “This is not about advertising,” Wu said. “It’s about solicitation.” He argued that the affiliate model is contract-based so it is “reasonable to assume” that affiliates solicit business, and not merely through banner links on websites, but via e-mail solicitations, as well.

Lawyers for Amazon and Overstock argued that online affiliates were on a commission-based model because it is a more efficient business model, and that, if they could use the same model with print advertisements, such as those placed in the New York Times, they would. “The presumption that [a commission-based model assumes solicitation] is irrational simply because payment in on a commission basis,” Amazon lawyer Randy Mastro stressed.

Mastro went on to argue that it was impossible for Amazon to adequately rebut the presumption at all, declaring that the law as a whole was “absurd and unconstitutional” and that the sheer complexity of the law made rebuttal impossible. He continued, “This is no different than print, and just because a website is located in New York does not mean its target audience is in New York.”

“The idea that commission leads to solicitation is just wrong,” said Daniel Connolly, a lawyer for Overstock, who added that the law violates the Commerce Clause of the Constitution. “The Commerce Clause serves as an inhibitor to what a state can do,” he argued.

The five judges did question Mastro as to why Amazon wouldn’t just go to an advertising “flat fee” model with their online affiliates then. Amazon’s counsel noted that a commission-based model was used because it was more efficient, meaning the online retailer didn’t have to pay the affiliate if no sales were made.

When Associate Judge Robert Smith asked Wu about this, he noted that schools and churches, among other affiliates, send e-mails to solicit business for online retailers and added: “The commission model is an incentive to solicit … Amazon.com makes that explicit” in their online affiliate agreement.