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By | Timothy Prickett Morgan 12th January 2009 22:40

New York judge OKs Amazon Tax

Genius recognized

A New York Supreme Court judge has approved the state's new-fangled Amazon Tax.

Earlier this year, Amazon.com and Overstock.com sued New York over an ingenious new law that forces the big-name online retailers to collect sales tax if they maintain affiliate networks in the Empire State, and this afternoon, Judge Eileen Bransten dismissed them both.

Bransten handed down her final dispositions in the two cases, which have been watched with a certain amount of trepidation by online retailers because of the precedent it could set for tax collection in states where they do not maintain offices.

Amazon and Overstock did not immediately respond to request for comment.

Back in April 2008, as part of its budget, New York enacted a new tax law called the Commission-Agent Provision, which requires out-of-state retailers to collect and remit sales and use taxes if they have a commission agreement with an in-state resident based on the referral of customers (provided that resident earns more than $10,000 in revenues from New Yorkers).

A 1992 US Supreme Court decision says that retailers needn't collect sales tax unless they have a physical presence in the state where the customer resides. Otherwise, customers are required to declare the tax on their tax returns. But few do. With its new law, New York hung that physical presence tag on affiliate marketers.

On April 25, Amazon sued New York's taxation department. Then, in May, Overstock suspended its relationships with any affiliates that had a New York address. And in June, the company sued the state, challenging the constitutionality of the tax law.

Both Amazon's and Overstock's lawyers contended that the law violates the Commerce Clause of the U.S. Constitution and the Due Process Clauses of the Fourteenth Amendment to the Constitution and sought a permanent injunction prohibiting New York from enforcing the law.

Amazon said it did not have a sufficient nexus (physical presence) in the state to be compelled to collect sales taxes and basically contended that it was being singled out with this tax law tweak. In the dance of the lawyers, New York moved to dismiss the Amazon and Overstock complaints, before Amazon and Overstock opposed the motions and moved for summary judgment from the court.

Judge Bransten basically shot down all of the company's claims that New York state was picking on Amazon because it needed the dough.

"In the end, the Commission-Agreement Provision does not broadly tax any and all Internet sales to New York consumers," she wrote in her ruling. "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. 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."

The dismissal of the Overstock case was based on the ruling Judge Bransten made in the Amazon case. It is fairly certain that both Amazon and Overstock will appeal these rulings. If they decide to, they will take up their cause with the New York State Supreme Court Appellate Division, and then it would go up higher to the New York State Court of Appeals. Because it is a constitutional issue, it could in theory get to the U.S. Supreme Court.

Don't spend that tax money just yet, guv'ner. ®

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