April 16, 2013

New York State’s Victory Over Amazon.com and Overstock.com – What Does It Really Mean?

By Camille.Mule', Manager, Tax & Business Services

New York State’s Victory Over Amazon.com and Overstock.com – What Does It Really Mean?

In 2008 NYS was the first state in the nation to pass a “click-thru-nexus” law or as it is commonly referred to, the “Amazon Tax”. Since the law was enacted NYS has collected almost $500 million in sales taxes. Many states followed New York and quickly enacted their own version of the law.

In New York online retailers must register and comply with NYS sales and use tax rules when their cumulative gross receipts from sales to customers in New York State referred by seller’s resident representatives total more than $10,000 during the four preceding sales tax quarters. An affiliate is anyone who earns a sales commission for referring web visitors via a link on their web site to an online retailer’s marketplace. Although Amazon.com immediately challenged the law as unconstitutional, they began collecting NYS sales tax on its taxable sales to NYS residents fearing a large tax bill and severe penalties if it didn’t comply. Overstock.com instead immediately ended all relationships with its NYS affiliates.

The first challenge to the law was rejected in January 2009 when NYS Supreme Court Justice Eileen Bransten ruled “There is no basis upon which Amazon can prevail.” The online retailers took their fight – the use of in-state affiliates is not enough to meet the physical presence as ruled in previous cases – to the NYS Court of Appeals.

Last week New York State’s highest court, the Court of Appeals, ruled against Amazon.com and Overstock.com stating “If a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden.”

Amazon.com and Overstock.com challenged the law as being unconstitutional arguing it is in direct conflict with the U.S. Constitution’s Commerce Clause which requires “substantial nexus” and with the Due Process Clause which requires a “minimal connection” with a state before a state can require a taxpayer to comply with its tax laws. The necessary connection is generally referred to as “nexus” which has been a much litigated issue since the 1940’s. The most well known case, and still the current federal sales and use tax nexus standard, is Quill v. North Dakota. In Quill the U.S. Supreme Court ruled that a taxpayer must have a physical presence before a state can require a taxpayer to comply with its tax laws. One problem with the Quill ruling is that the court didn’t go far enough in defining what it meant by having a physical presence. Another problem is that Quill is outdated as the Internet has changed the way business is conducted today. What has made things even more confusing for consumers and remote sellers is that many states have enacted varying versions of the Amazon Tax. This not only causes an enormous administrative burden for remote sellers, but significant tax exposure for many companies that conduct business over the Internet who are unaware of their sales/use tax collection responsibilities.

Is this the end to a five year battle fought by the giant online retailers? Not likely. The federal government may step up and either hear the case should the online retailers request the Supreme Court to opine, or Congress may eventually pass a law such as The Marketplace Fairness Act to help the states in their effort to maintain an equitable tax system for all.

Will the Marketplace Fairness Act help resolve the issue? If adopted into law The Marketplace Fairness Act will grant states the authority to compel online and catalog retailers, no matter where they are located (“remote sellers”), to collect sales tax at the time of a transaction – exactly like brick and mortar local retailers. However, there are some caveats: States are only granted this authority after they have simplified their sales tax laws and it will not apply to smaller retailers.

If you need assistance with determining where you may have established nexus, whether through physical presence or through “click-thru-nexus”, speak to your Marcum State and Local tax professional. We can help you navigate the click-thru-nexus rules that affect your business and recommend how to minimize any tax, penalty and interest exposure that may exist.