Tax & Accounting Blog

Supreme Court Denies Cert.: Online Companies Must Keep Collecting Sales Tax in NY

Indirect Tax, ONESOURCE, Sales and Use Tax, Sales Tax Nexus December 4, 2013

AMAZON-395

According to Reuters, the United States has refused to hear Amazon.com and Overstock.com’s appeal of the New York State Court of Appeals decision in Overstock.com, Inc. and Amazon.com, LLC v. New York State Dept. of Taxation & Finance, 20 NY3d at 590 (March 28, 2013). Docket no. 13-252 provides the headlines, but not the context.

The companies’ arguments centered around New York Tax Law section 1101(b)(8)(vi), which expanded the definition of a vendor to include out-of-state sellers with gross sales of more than $10,000 deriving from commission based referrals through New York residents. The law created a statutory presumption of nexus under the right, or wrong circumstances. The law was construed to cover situations in which a New York resident placed a link on the New York residents website directing customers to the out-of-state seller’s website, receiving a commission for sales made through that link. N.Y. TSB-M-08(3)S.

A line of United States Supreme Court cases starting in the 1960s delved into the concept of nexus and sales tax collection obligations in relation to the Commerce Clause of the United States Constitution. In National Bellas Hess, Inc. v. Department of Revenue of Ill., 386 US 753, (1967) the Court held that out-of-state mail-order businesses could not be forced to collect sales and use taxes without physical presence in the taxing state. Bellas Hess, 386 U.S. at 758. The court opined that sellers who would be subject to such a burden could be forced to collect local taxes in all localities in the United States. Id. at 759-860.  The Court revisited the question 25 years later in Quill Corp. v. North Dakota. 504 U.S. 298 (1992). Instead of overturning their decision, the Court reiterated the bright line physical presence requirement. Id at 315.

In the Amazon.com and Overstock.com, the New York Court of Appeals had found that Amazon’s affiliates had acted as an “in-state sales force.” 20 N.Y. 3d at 595.  Indeed, this sales force created a steady stream of customers and sales to the out-of-state sellers. Id. The New York Court of Appeals determined that imposing the obligation to collect taxes that were otherwise due passed Constitutional muster. By denying certiorari, the United States Supreme Court has imposed this collection obligation for sellers utilizing commission based sales in the state of New York and the over 175 different taxing authorities in the State.

Whether this will remain the rule in New York, or become the rule nationwide is somewhat unclear. Both Amazon and Overstock fought a similar law in the State of Illinois and succeeded in their challenge. Whether the State of Illinois will appeal that decision is unclear. Suffice it to say, we await that appeal with bated breath.