Amazon.com and Overstock.com failed to demonstrate that a provision that requires out-of-state Internet retailers with no physical presence in New York to collect New York sales and use taxes is unconstitutional on its face under the Commerce Clause or the Due Process Clause. The click-through nexus provision created a rebuttable presumption that a retailer solicits business in New York if any in-state entity is compensated for directly or indirectly referring customers to the retailer, whether by an online link or otherwise, and the cumulative gross receipts from these and other New York affiliate referrals exceed $10,000. Amazon and Overstock alleged that the statute is unconstitutional on its face because it violates the Commerce Clause by subjecting online retailers, without a physical presence in the state, to New York sales and use taxes. The court held that although there is some dispute as to the appropriate standard to apply when evaluating a facial challenge under the Commerce Clause, the statute is constitutional on its face under either standard. A state tax that impacts the Commerce Clause will be upheld when the tax: is applied to an activity with a substantial nexus with the taxing state; is fairly apportioned; does not discriminate against interstate commerce; and is fairly related to the services provided by the state. All parties agreed that the only item at issue was whether the statute satisfies the substantial nexus test.Taking precedent into consideration, the court noted that although an in-state physical presence is necessary, it does not need to be substantial, but it must be demonstrably more than the slightest presence. The presence requirement is satisfied if economic activities are performed in-state by the seller’s employees or on its behalf. When the click-through statute was enacted, the legislature attached significance to the physical presence of a resident website owner, recognizing that many websites are geared toward predominantly local audiences, so that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Through these affiliate agreements, a vendor is essentially deemed to have established an in-state sales force. As such, the Court of Appeals ruled that the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as demonstrably more than a slightest presence. If a vendor is paying New York residents to actively solicit business in the state, the vendor should shoulder the appropriate tax burden.The court also observed that vendors are not required to pay these taxes out-of-pocket, but are instead collecting taxes that are unquestionably due, which are difficult to collect from individual purchasers, and for which there is no risk of multiple taxation.
Physical presence is not required in order to satisfy due process. Due process analysis focuses on whether a party has purposefully directed its activities toward the state and whether it is reasonable, based on the extent of a party’s contacts with that state and the benefits derived from that access, to require it to collect taxes for that state. An entity engaged in continuous and widespread solicitation of business within a state has fair warning that its activity may subject it to the jurisdiction of the state, even in the absence of physical presence. The court held that a “brigade” of affiliated websites compensated by commission constitutes such solicitation.
Amazon and Overstock claimed that the statute violates the Due Process Clause by creating an irrational and non-rebuttable presumption of solicitation of business within the state. They argued that there must be a rational connection between the facts proven and the fact presumed, and a fair opportunity for the opposing party to make a defense. The court noted that the New York residents are compensated for referrals resulting in purchases, and at least some of those residents will actively solicit other residents in order to increase their referrals and their compensation. Given the direct correlation between referrals and compensation, the court found it rational to presume that it is likely that residents will seek to increase their referrals by soliciting customers, and that it is not unreasonable to presume that affiliated website owners in New York State will reach out to their in-state friends, relatives, and other local individuals in order to accomplish this purpose. Amazon and Overstock also argued that the presumption is not rebuttable because it will be extremely difficult, if not impossible, to prove that none of their New York affiliates is soliciting customers on the retailers’ behalf. However the New York Department of Taxation and Finance has provided a method (contractual prohibition and annual certification) through which the retailers will be deemed to have rebutted the presumption. Although obtaining the necessary information may impose a burden on the retailers, inconvenience does not make the presumption non-rebuttable. The court also noted that the presumption places the burden on the retailers to provide information about the activities of their own affiliates, information that the department would have significant difficulty uncovering on its own.
(Overstock.com, LLC v. New York State Department of Taxation and Finance, Court of Appeals of the State of New York, Nos. 33 and 34, March 28, 2013)