N.Y. Judge Rejects Amazon's Claim Against Web Sales Tax Statute

Manhattan Supreme Court Justice Eileen Bransten has ruled that Amazon.com did "not come close" to demonstrating the unconstitutionality of a new state tax statute that requires many online retailers to collect state sales tax on purchases by New York residents. Bransten held that the statute contains the requisite requirement that an online retailer must do a substantial amount of business in New York before companies can be forced to collect and remit state sales tax.

Joel Stashenko

New York Law Journal

2009-01-14 12:00:00 AM

A state judge has ruled that Amazon.com did "not come close" to demonstrating the unconstitutionality of a new state tax statute that requires many online retailers to collect state sales tax on purchases by New York residents.

Manhattan Supreme Court Justice Eileen Bransten dismissed the Internet giant's claim that the law, enacted in April 2008, violates the Commerce Clause of the U.S. Constitution and the Due Process and Equal Protection Clauses of both the state and federal constitutions.

Justice Bransten held that the statute contains the requisite requirement that an online retailer must do a substantial amount of business in New York before companies can be forced to collect and remit state sales tax.

"It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement," Bransten wrote in Amazon.com v. New York State Department of Taxation and Finance, 601247/08. "The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax-collection burden when using New Yorkers to earn profit from other New Yorkers."

Governor David A. Paterson approved the new tax when signing the 2008-09 state budget in April 2008. It contains a "commission-agreement" provision, Tax Law §1101[b][8][i][C], which subjects transactions by online retailers to state sales tax if companies use independent contractors or other New York residents to solicit sales in excess of $10,000 from New York residents.

State officials estimated that the tax would raise about $50 million a year on Internet purchases by New Yorkers.

Tax officials contended that Amazon.com's methods of marketing itself in New York makes it subject to collecting state sales tax on sales to New York residents.

Seattle-based Amazon.com employs thousands of "associates" in New York -- or Web sites containing links to Amazon.com. The associates receive "bounties" and other compensation when customers link to Amazon.com through their sites.

While Amazon.com argued that the links through "associates" amount to nothing more than advertising, state tax officials contended they demonstrate the necessary nexus between the company and New York to make the company liable for collecting sales taxes on everything it sells in New York -- whether through the associates or directly through Amazon.com.

The company did not detail its New York sales in court filings. It did disclose that sales funneled to it through its "associates" amounted to less than 1.5 percent of all its sales to New Yorkers.

The company argued that the new tax law violates the Commerce Clause of the U.S. Constitution because a substantial nexus is not established between Amazon.com and New York through the associate arrangement defined by the state's "commission-agreement" provision.

"Amazon is wrong," Bransten concluded. "The Commission-Agreement Provision is carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes and, if such a basis does not exist, it gives the seller an out."

As to the violation of the Equal Protection Clause alleged by Amazon.com, Bransten held that contrary to the company's contention it is not being singled out by the new tax law. Any out-of-state retailer using agents or independent contractors to solicit $10,000 or more worth of sales in New York is also subject to the sales tax collection requirement, Bransten determined.

She also rejected Amazon.com's claim that the tax statute violates the company's due process rights because it is unconstitutionally vague. The statute is "not so vague and standardless as to leave the public uncertain about its reach," the judge wrote.

Following enactment of the statute in April, 32 of the nation's 100 largest online vendors registered with the state and have been collecting New York sales taxes on purchases by New Yorkers, according to Thomas Bergin, a tax department spokesman. They include Amazon.com, which has been collecting the tax as it has also challenged the statute, Bergin said.

Seventy-six of the largest Internet retailers are now registered with the state because they are either based in New York or recognized that the proper nexus has been established between their companies and the state to make them obligated to collect sales taxes, according to Bergin. He said many Internet retailers have "associate" arrangements with New Yorkers similar to Amazon.com's.

Even where companies are not required to collect sales taxes on purchases by New York residents, New Yorkers are obligated to report the sales themselves and pay the proper taxes. A sales tax obligation line added to state tax forms in 2003 was at first largely ignored by taxpayers, but Bergin said tax officials expect to collect $45 million on that line in the 2008-09 fiscal year.

Of Bransten's decision, Bergin said, "We felt that the legislation was built on a solid foundation and, obviously, the court seems to agree."

Assistant Attorney General Elizabeth Forman argued on behalf of the Department of Taxation and Finance.

Randy Mastro of Gibson, Dunn & Crutcher represented Amazon.com. Patty Smith, a company spokeswoman, said Tuesday that Amazon.com would have no comment on the ruling or whether an appeal is under consideration.