Amazon.com Inc. (AMZN:US), the world’s biggest online retailer, and discount Internet seller Overstock.com Inc. (OSTK:US) lost a challenge to New York’s Internet sales tax law as the state’s highest court rejected their arguments that it was unconstitutional.
Amazon, based in Seattle, and Overstock, based in Salt Lake City, sued the state’s Department of Taxation and Finance separately in 2008, seeking to overturn a law requiring retailers to pay taxes if they solicit business in New York through a link to a website.
The companies argued that the law violated the Commerce Clause of the U.S. Constitution by subjecting online retailers without a physical presence in the state to sales and compensating use taxes. It violated the Due Process Clause by “creating an irrational, irrebuttable presumption of solicitation of business within the state,” they said.
Justice Eileen Bransten dismissed the suits in January 2009. An appeals court in Manhattan affirmed her rulings in 2010, and the state Court of Appeals agreed today, saying the companies “established an in-state sales force” through agreements with affiliates who received commissions for posting links on their websites directing users to Amazon.com or Overstock.com.
“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,” Chief Judge Jonathan Lippman wrote in a majority decision.
The decision affirms New York’s approach to “ensure fair tax administration for both brick-and-mortar and Internet-based businesses,” the state’s commissioner of taxation and finance, Thomas H. Mattox, said in a statement.
“We commend the court for recognizing the logical application of existing precedent to the 21st Century economy,” Mattox said. “Since being implemented, this law has resulted in the collection of roughly $500 million in state and local sales tax. This is equivalent to approximately $6 billion of taxable retail sales into New York that were previously made without the sales tax being collected.”
The ruling conflicts with U.S. Supreme Court precedents and with decisions by other state courts, Amazon spokesman Ty Rogers said in an e-mail.
“Given the confusion reflected by this decision, we believe the best way to effectively fix this problem is through passage of the Marketplace Fairness Act by Congress, which Amazon strongly supports,” Rogers said.
Overstock will probably appeal to the U.S. Supreme Court as Colorado and Illinois state courts have found similar laws violated the Constitution, said Jonathan Johnson, the company’s acting chief executive officer. Eight states other than New York have passed similar laws, “the chief effect of which has been to put many Internet advertisers out of business,” Johnson said in a statement.
“We’re disappointed in the ruling but are confident that the New York law is unconstitutional,” Johnson said in a telephone interview. “We will very likely file to have it heard by the U.S. Supreme Court since there are other states that on almost the same law have ruled the opposite way.”
The New York ruling won’t have any impact on Overstock’s operations because the company terminated the services of its New York-based advertisers after the law was passed, the company said. Johnson said he has been working with congressional representatives to craft a national plan allowing states to use remote retailers for tax collection.
“We have opposed at each opportunity the patchwork quilt of state laws, but we do not oppose the right federal solution to this national question,” Johnson said. “This is a fairness question which the Congress alone must resolve.
‘‘There are more than 9,600 taxing districts in the country, and if Congress moves that enormous tax collection burden to remote retailers, then in fairness, Congress should require states to pay reasonable compensation to those retailers for the associated costs, especially when those retailers have no real connection to the state, have no political influence there and derive no benefit from the states in which they have no physical presence,’’ he said.
Judge Robert Smith of the Court of Appeals disagreed with the majority. The tax law should be overturned because it violates the Commerce Clause, he wrote in a dissent. Links to Overstock.com and Amazon.com that appear on websites owned by proprietors in New York serve the same purpose as advertising by out-of-state retailers in local newspapers, he said.
‘‘The websites are not soliciting customers for Overstock and Amazon in the fashion of a local sales agent,’’ Smith wrote. ‘‘Of course the website owners solicit business for themselves; they encourage people to visit their websites, just as a newspaper owner would seek to boost circulation. But there is no basis for inferring that they are actively soliciting for the out-of-state retailers.’’
The cases are Amazon.com LLC v. Department of Taxation, 601247/2008, and Overstock.com v. New York State, 107581/2008, New York State Supreme Court, New York County (Manhattan).
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