New York State's 'Amazon Law' Draws a Bright-Line in the Sand
Source: Rachel M. Stephens
In the realm of sales and use tax nexus, the bright-line physical presence requirement established by National Bellas Hess and Quill has been the standard for determining whether certain business activities constitute more than the slightest presence in a jurisdiction, thereby requiring a seller to register to collect sales and use taxes on behalf of that jurisdiction.
On April 23, 2008, New York state amended its tax law, expanding the definition of a vendor required to collect and remit sales and use taxes. Effective June 1, 2008, under New York State Tax Law §1101(b)(8)(iv), a seller is considered to be a vendor if both of the following conditions are met:
1. The seller enters into an agreement or agreements with a New York state resident or residents under which, for a commission or other consideration, the resident representative directly or indirectly refers potential customers to the seller, whether by link on an Internet web site or otherwise. A resident representative would be indirectly referring potential customers to the seller where, for example, the resident representative refers potential customers to its own web site, or to another party’s web site which then directs the potential customer to the seller’s web site.
2. The cumulative gross receipts from sales by the seller to customers in New York state as a result of referrals to the seller by all of the seller’s resident representatives under the type of contract or agreement described above total more than $10,000 during the preceding four quarterly sales tax periods. NYS TSB-M-08(3)S
On April 25, 2008, two days after New York state amended its law, online retailer Amazon.com filed suit in New York Supreme Court asserting that the law violates the due process and equal protection clauses of the federal and state constitutions by: violating the commerce clause with its presumption that affiliates with New York residency will solicit business in New York and by specifically targeting the online retailer. In May 2008, online retailer Overstock.com filed a companion suit in New York State Supreme Court and the retailer ended its affiliate relationships with New York residents. On June 1, 2008, Amazon.com began collecting and remitting New York sales tax under protest.
Prior to the law change, both Amazon.com and Overstock.com utilized a network of affiliates to advertise by way of establishing links on the affiliates’ web sites that direct potential customers to the online retailers’ web sites or allow customers to purchase the online retailers’ products directly from the affiliates’ web sites. The affiliates are then paid a commission based on the percentage of revenue generated from the sales of products via the links.
New York Supreme Court rendered decisions on January 12, 2009, that upheld the new law and dismissed both suits with the reason of failure to state a cause of action.
The new law in New York has prompted additional states to introduce similar laws in an attempt to recover lost tax revenue resulting from an increase in online purchases from retailers without a sales tax collection responsibility in their jurisdictions. California, Connecticut, Minnesota, and Vermont are among several states that have bills modeled on New York’s “Amazon Law.” However, these bills are having a difficult time making their way out of state assemblies. During the California Assembly’s April 27, 2009, hearing, the Committee on Revenue and Taxation voted to remove Assembly Bill 178, nicknamed the Amazon Tax Bill, from the docket, providing online retailers in the state with relief for another year.
With states continually in search of methods to increase revenue, it is likely that more states will write bills targeted at online sellers and in response, we can expect more suits challenging the constitutionality of virtual physical presence.
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About the Author
Rachel M. Stephens joined Thomson Reuters as manager of consulting and workflow processes in 2008. With more than 15 years of experience in state and local tax, she possesses expertise in sales and use tax including audit defense, nexus studies, voluntary disclosures, due diligence, and compliance. Prior to joining Thomson Reuters, Stephens was a tax manager at a multibillion dollar telecommunications corporation. In this capacity, she managed the sales and use tax responsibilities for the corporation’s non-regulated affiliates and supervised a staff of state and local tax professionals. Stephens graduated from St. John’s University with a B.S. in Accounting. She received her Masters in Taxation from St. John’s University Tobin College of Business.