"Amazon Tax" Suits Thrown Out by New York Court

The days of sales tax-free purchases on the Internet edged closer to an end on Monday, as a New York court dismissed the lawsuits which had been filed by Overstock.com and Amazon.com over the so-called "Amazon Tax."

New York enacted this tax on Internet retailers that have affiliates based in the state. Previously, only retailers with a "physical presence" in the state were required to collect sales tax. New York changed its law to say that having an affiliate (meaning, a site like this one that has Amazon.com ads and gets revenue from click-thrus) constitutes a physical presence.

Overstock.com eliminated any New York affiliates, but still filed suit.

Amazon's argument was three-fold:

• The statute is "overly broad and vague." It is impossible, Amazon.com asserted, for it to determine which of its affiliates are actually in New York State. Our thought is it would be pretty difficult, but not impossible.

• Amazon.com also stated in the lawsuit that its affiliates are not agents, but simply sites on which it places ads. We agree, because how is this really different than a newspaper ad, for example?

• Amazon.com also used the fact that legislators foolishly nicknamed this the "Amazon Tax," stating that the law violates the equal-protection law of the Constitution. They say, "It was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes."

However, Judge Eileen Bransten tossed the case, saying:

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

In reality, the crux of the matter is the definition of physical presence. n fact, in a 1992 Supreme Court decision, Quill vs. North Dakota, the Supreme Court ruled that out-of-state retailers cannot be required to collect sales tax on purchases sent to states where they did not have a physical presence.

The Supreme Court’s reasoning was at least partially based on the fact that, at the time the case was decided in 1992, there were over 6,000 separate sales and use tax jurisdictions in the United States (states, localities, special tax districts, etc.) and to impose a collection obligation on a remote seller would impose a crushing burden that would severely restrict interstate commerce.

We're not sure how New York's definition of "physical presence" really stands the test of common sense. In particular, it may just convince Amazon.com to follow Overstock.com and dump it's New York affiliates.

This will definitely be appealed, and you can bet that other states are watching this; after all, so many states are facing budget deficits in this recession they are looking at any possible option for more revenue.