Amazon.com LLC v. New York State Department of Taxation & Finance
23 Misc. 3d 418 (2009)
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Rule of Law:
A state law that presumes an out-of-state seller has a substantial nexus for sales tax collection purposes, based on commission agreements with in-state residents who refer customers, does not violate the Commerce Clause if the presumption is rebuttable and targets sellers who purposefully avail themselves of an in-state sales force.
Facts:
- Amazon.com, an online retailer, has no physical property, offices, or employees in New York.
- Amazon operates an 'Associates Program' where it enters into operating agreements with participants (associates) who are deemed 'independent contractors.'
- Associates place links to Amazon.com on their own websites, and Amazon pays them a commission or 'referral fee' for sales generated through these links.
- Thousands of participants in the Associates Program have provided Amazon with addresses in New York.
- Sales to New York customers generated through referrals from these New York-based associates exceed $10,000 annually.
- New York enacted Tax Law § 1101 (b) (8) (vi), which creates a rebuttable presumption that a seller is soliciting business in the state if it has a commission-based referral agreement with a New York resident and generates over $10,000 in sales from such referrals.
Procedural Posture:
- Amazon.com LLC and Amazon Services, LLC filed a complaint against the New York State Department of Taxation and Finance and other state officials in the Supreme Court of New York, New York County (a state trial court).
- Amazon's complaint sought a declaratory judgment that New York Tax Law § 1101 (b) (8) (vi) violates the Commerce, Due Process, and Equal Protection Clauses.
- The State of New York filed a motion to dismiss Amazon's complaint for failure to state a cause of action.
- Amazon opposed the State's motion to dismiss and filed a cross-motion for summary judgment.
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Issue:
Does a New York law that creates a rebuttable presumption that an out-of-state seller is soliciting business in the state, and thus must collect sales tax, if it pays commissions to in-state residents for customer referrals generating over $10,000 in sales, violate the Commerce, Due Process, or Equal Protection Clauses of the U.S. Constitution?
Opinions:
Majority - Bransten, J.
No. The New York law does not violate the Commerce, Due Process, or Equal Protection Clauses. The law is constitutionally sound because it is carefully crafted to establish a 'substantial nexus' with the state, as required by the Commerce Clause. A sufficient nexus exists when an out-of-state seller purposefully avails itself of the economic activities of in-state independent contractors who are incentivized to generate sales. The statute's requirements—an agreement with a resident, commission-based referrals, and a sales threshold of over $10,000—ensure that the seller's presence is 'demonstrably more than a slightest presence.' Furthermore, the law's presumption is rebuttable, allowing a seller to avoid the tax collection obligation by proving its in-state associates did not engage in solicitation sufficient to create nexus. The due process claim fails because the presumption is rational; it is highly probable that residents paid for referrals will solicit business. The equal protection claim fails because Amazon did not allege that it was treated differently from other similarly situated retailers.
Analysis:
This decision was a landmark ruling in the area of e-commerce taxation, giving judicial approval to the 'click-through nexus' or 'Amazon tax' concept prior to the Supreme Court's Wayfair decision. It established that an out-of-state retailer's use of in-state affiliates or associates for commission-based referrals could be treated as the legal equivalent of an in-state sales force, satisfying the 'physical presence' standard required by Quill Corp. v. North Dakota. This opinion emboldened other states to enact similar laws, escalating the conflict between states seeking to collect sales tax and remote sellers, which ultimately led to the Supreme Court overturning the physical presence rule in South Dakota v. Wayfair.
