Did Not Even “Come Close” In Tax Case

With very little fanfare, a tax case in New York may shake up the online world as we know it. In April 2008, New York passed a new law targeting online sales and requiring that online retailers collect and remit sales tax to the state. balked at the new law and later filed suit against the state of New York, alleging violations of the Commerce Clause in the US Constitution and the Due Process and Equal Protection Clauses of the NY and US Constitutions.

This week,’s case was dismissed. Manhattan Supreme Court Justice Eileen Bransteen has ruled that did “not come close” to demonstrating that the law was unconstitutional.

Justice Bransten found that the new law was sufficiently in line with existing laws requiring retailers to have nexus, or a significant relationship, in the state before imposing sales tax. had argued that associate links were merely advertising. Justice Bransten found otherwise. With a tweak to out of state companies, she wrote: “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.”

New York legislators must be breathing a sigh of relief. In an already stretched thin budget, the tax will add breathing room of about $50 million a year.

Amazon is considering an appeal, according to reports. In light of the strongly worded ruling, I’m guessing any appeal would only come after serious consideration.

What does it all mean? I think there will be two significant outcomes:

1, Online retailers will begin to rethink the way that they do business with affiliates – especially in a tough economic climate.
2, Other states will jump on the bandwagon. California, anyone?

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26 thoughts on “ Did Not Even “Come Close” In Tax Case

  1. I am not sure about the constitutional arguments that Amazon made.

    I do agree with them that this IS advertising. I fail to understand where the Justice disagreed on this point. How can the placement of links on an affiliate website be anything but advertising?

    Does this court case be used to set precedence that we now have nexus in any state in which someone shows an advertisement? Only time will tell what individual states try to make of this and capture their share of the pie.

  2. Great, just what we need. This sounds like it could be a catalyst to more sales tax on a lot of sites. Why doesn’t the New York legislature make ends meet in some other fashion… say, cut expenses?

  3. This is one of the reasons I hate sales taxes. Making private enterprises be your tax collector. The other is if you depend too much upon them , when times get tough (like now) your revenues drop just when you need more revenue.

  4. Glad you like it 🙂

    I was surprised from the beginning that this was filed in state court. NY courts are not generally known as being favorable to litigants bring sales tax cases.

    The only explanation that I can come up with off the top of my head (meaning without research) is that the 11th Amendment would bar the suit in Federal Court.

  5. I don’t see how the New York court completely ignored the Supreme Court’s holding in Quill: in order to have “substantial nexus” under the Complete Auto Transit doctrine, you need to have physical presence in the state to be subject to sales tax.

    Amazon should appeal based on Quill, but unless this makes its way to federal court, I predict they will be shot down here, and in other states as well.

    This is just one more in a long line of state court decisions cherry-picking its way through Complete Auto Transit. Granted, the Supreme Court hasn’t helped matters – it would be nice if they would grant certiorari for a state tax case to update Quill and Complete Auto Transit for the 21st century.

  6. Every American should give all their money to the government and let the government dole out money based on everyone’s needs. Obama is planning massive new government spending while citizens sit back with anticipation as to when the boom times will start again. If so many citizens think that Uncle Sam can stimulate us out of a recession with more government spending, then they must agree that we might as well let the government take all of our money so they can stimulate us into an economic boom of biblical proportions.
    Obviously, it is a ridiculous notion that the government can take our money and stimulate the economy better than the citizens can. It is ridiculous to believe that this stimulus package Obama is planning will do anything for long term economic growth because the government will consume money in administration costs and fraud that will never get out to the economy, where as, all money that stays private can be used to stimulate individuals’ economic situations at a 100% rate. Most of the spending looks like more government programs that will further waste money and become expensive facets of the federal government for future generations to continue to pay for. Also, if you consider the fact that all of this money will most likely be borrowed by the government, there will be interest and principle payments that will further erode away the percentage of money that could create jobs or otherwise stimulate the economy if it were in the private sector.
    I have grown up in an era where many of the boomer generation think that there is a never ending pool of money in which all of their demands can be met by government programs. Baby boomers, more concerned about their personal situations, have spent their children’s, grand children’s, and great grand children’s money so that they can have social security turned into a retirement plan, medicare and prescription drug plans, and massive welfare systems that promote never ending dependence on productive citizens and provide numerous ways for able bodied citizens to work the system to the point were they live better than those paying for it.
    The baby boomers will be remembered in history as possibly the most narcissistic generation in American history, having come after the greatest generation who lived through the toughest economic times and having vanquished the toughest enemy of all time so that their children could become the most self absorbed, spoiled, and culturally destructive generation in the history of the US to date. Boomers will be remembered for crushing later generations with massive debt so you could have it all, while parenting generations with even higher expectations and greater demands on society without the character or means to provide it. By the time the house of cards comes crashing down, you will be gone. So who cares? Not the boomers. You got yours and that is all that matters to you.
    Continuing thanks from the Gen X’ers.

    P.S. Sorry to all those hard working Boomers who ask for nothing from their government but what is constitutionally mandated. There just aren’t that many of you in proportion to your whole generation.

  7. As an accountant, I have enough trouble keeping up with the ever changing sales tax laws here in (frigid) Minnesota. I can’t even begin to fathom the work required to take into account 40+ sales tax laws. Even just the first job of figuring out which states even have a sales tax is daunting. Which is why the Complete Auto Transit case requires physical presence. If you have a physical presence, then you hopefully have some one there who can track the sales taxes.

  8. This will come back to bite NY in the butt. If affiliates make the nexus, then Amazon will just stop the affiliate program (at least in New York). Those affiliates who used to make commissions from Amazon will no longer have that income and won’t pay any income-tax on that income to NY. NY will not collect sales tax, and it will lose income-tax. People in government need to think these things through. They may have won a battle, but they will lose the war. Ed.

  9. Ed, thats’s what I predict (and hope) for as well. NY has a means of collecting this tax, through use tax returns filed by it’s citizens. It’s wrong to offload the collection responsibility just because they think they can. Further, congress should act and expand PL 86-272 from income tax to franchise and nonincome business taxes and sales tax. Otherwise, we’ll see concepts like NY nexus through affiliates and economic nexus continue to squeeze tax from out of state companies with no real nexus.

    Taxgirl, you missed the biggest point – it’s not that NY is attempting to force online retailers to collect tax, I think every state with a sales tax already does that. It’s that NY is stretching (I would say abusing) the concept of nexus to force a company with NO physical connection to NY to collect NY taxes on their behalf.

  10. Oxnate, I agree with the idea that sales tax laws are becoming more complex. It’s one of the reasons that I loathe state and local taxation!

    Another Tax Geek, I touched on this issue with some prior posts. While I am not saying that the courts are right in this case, nor am I saying this is a great result, I don’t think it constitutes abuse. As business changes, the laws have to adapt. Remember Bloomie’s By Mail? Catalog sales, then telephone sales, changed the way that companies did business – and the way that states taxed them. As online sales increase, it’s not surprising that states are trying to capture a piece of that revenue, too. I think we’ll see more – not less – of this in the future.

  11. Kelly, all:

    I’ve studied the legislation and the litigation in this case. So I decided to share a bit. . .

    The suit could not be brought in federal court because of both the 11th Amendment and the Tax Injunction Act (a piece of federal legislation that relegates most tax litigation to the state courts).

    Some of the commentators here are simplifying the New York statute at issue. Nothing in it is contrary to Quill. It creates a presumption of nexus, but it also gives a retailer an opportunity to disprove nexus, which it can do in any number of ways. A part of the court’s ruling was upholding the rationality of the presumption. The statute presumes that solicitation is taking place (which,as a matter of law, creates the required constitutional nexus), if (1) the retailer has sufficient sales in the state taking place through in-state representatives; (2) the retailer pays its in-state representatives on commission (thereby creating incentives to solicit). But solicitation can always be disproven.

    Also, why would Amazon give up a lucrative and useful affiliate/promotional program simply because it had to charge New Yorkers tax? It already charges that tax, btw. I don’t know that it’s negatively affected Amazon’s New York sales. I still order through them, even though I pay tax as part of the sales transaction (instead of on line 59 of my return).

    Finally, the person who suggested that the tax would force New Yorkers to use out-of-state affiliates to refer them to Amazon is mistaken about how the tax collection obligation works. It is the location of the *buyer* that ultimately governs whether or not tax will be charged, not the location of the affiliate. Out-of-staters who use New York affiliates still won’t be charged tax.

    Thanks for bringing this important piece of legislation up for discussion.

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