The Independent View: Amazon and Overstock Lose New York Affiliate Sales Tax Appeal

The e-retailers, Amazon.com Inc. and Overstock.com Inc., wanted the U.S. Supreme Court to rule on a New York State law that ties in-state affiliate marketing to the collection of online sales taxes. New York State can continue to collect online sales tax for in-state affiliate site's sales after the U.S. Supreme Court today declined to hear their appeal.

The two large web-only retailers each filed petitions with the U.S. Supreme Court asking it to clarify when states can require retailers to collect sales taxes on online orders placed by consumers in those states.

The e-retailers were appealing a New York State Supreme Court ruling from March that upheld a 2008 New York law. That law makes it easier to require online retailers to collect taxes on orders placed by consumers in New York because it interprets more loosely the definition of what it means for e-retailers to have a physical presence, or nexus, in the state. Most states interpret nexus as having a physical store, office, sales agents, or distribution center in the state. The New York law, however, says that if a retailer works with affiliate marketers—such as coupon sites and bloggers based in New York that post ads or refer traffic to an e-retailer’s site in exchange for a cut of any sale that results—the retailer has a physical presence in New York and must collect sales tax from New York consumers.

The U.S. Supreme Court’s refusal to take on the appeals means the ruling of the New York Supreme Court stands.

In October, the Illinois Supreme Court overturned a similar law, saying it went against existing federal law that restricts states to mandating sales tax collection only when a retailer has an in-state physical presence. After the Illinois court overturned the law both Amazon and Overstock said they would re-start their affiliate programs in Illinois.

The e-retailers have cut off affiliate programs in states that enacted similar New York laws, including Connecticut and Rhode Island.

“We’re not surprised, but we are disappointed,” says Jonathan Johnson, executive vice chairman of Overstock. “I really think the Supreme Court non-decision today is an invitation for Congress to find a workable solution to the tax issue. The Marketplace Fairness Act isn’t it.”

The Marketplace Fairness Act—which passed the Senate by a wide margin in May and is now before the House Judiciary Committee—as currently written would allow states to mandate sales tax collection by online and catalog retailers whether or not they have a physical in-state presence such as stores or distribution centers. In effect, the legislation would overturn the 1992 Supreme Court ruling in Quill vs. North Dakota, which I took part in. Johnson says Overstock supports a set of principles released in September by the House Judiciary Committee as the way forward.

Amazon.com, responding to a request for comment on the Supreme Court’s decision today, reiterated its support of the Marketplace Fairness Act. “The Supreme Court already has addressed the sales tax issue, saying in Quill that Congress can and should act to resolve it,” the e-retailer said “The Marketplace Fairness Act now pending before Congress would protect states’ rights to make their own revenue policy choices while allowing them to collect more than a fraction of the revenue that’s already owed.”

Rebecca Madigan, executive director of the Performance Marketing Association, a trade group that represents affiliate marketers, expressed disappointment in the U.S. Supreme Court’s refusal to take on Amazon’s and Overstock’s appeals. “There are over 80,000 online affiliate marketers in the U.S. who have had their incomes devastated by various states' attempts to regulate interstate commerce,” she says. “These state laws need to be shut down, and that's what we hoped from a Supreme Court ruling.”

She says the only viable solution to the question of affiliate marketers and nexus is to require all retailers to collect sales tax for all states. “Maybe the House will show more interest now that there's not a Supreme Court ruling in the wings,” she says.