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.










NYC Wins When Everyone Can Vote!

Michael H. Drucker
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IL Supreme Court Strikes Down Amazon Sales Tax Law

Some background.  I was part of the 1992 Supreme Court Quill case that said you only had to collect sales tax if a entity had a retail location, a distribution operation, or a sales team in a state.  At the time of the decision, there was no concept of affiliate marketing of using blogs, coupon sites, or buying links to other websites.

When the state of Illinois passed a law in 2011 requiring online retailers to collect sales tax if they received sales through Illinois-based affiliate web sites, such as blogs and coupon sites, online retailers including Amazon.com Inc. and Overstock.com Inc. cut off their in-state affiliates. As a result, thousands of affiliate site owners moved their tax-generating operations to another state, according to the Performance Marketing Association (PMA), an industry group that challenged the state law in court.

After winning its case in lower state courts, the PMA’s case was upheld today by the Illinois Supreme Court, which ruled the law as “void and unenforceable” and was pre-empted by the Internet Tax Freedom Act of 1998, which prohibits discriminatory taxes on electronic commerce.  “This means that advertisers are free to reinstate their Illinois affiliates whose contracts were terminated out of fear of the ‘click-through’ nexus law,” the PMA said in a blog posting today. The law, similar to ones in New York and other states, had sought to classify in-state web affiliate businesses as an extended physical presence of their client online retailers, and then require those retailers to collect sales tax.

The PMA estimates that about one-third of affiliates also left the 12 other states that have enacted affiliate tax laws since 2008, when New York became the first to pass one.  The laws have been commonly called an “Amazon Tax” because they are aimed at forcing sales tax collection by big web-only retailers like Amazon.com, No. 1 in the Internet Retailer Top 500.

The Illinois court’s ruling took the opposite direction of a March 28 ruling from New York’s highest court, the New York Court of Appeals, which upheld a lower court ruling in favor of New York’s Amazon Tax law.  Amazon and Overstock have each filed petitions to have that ruling reviewed by the United States Supreme Court.

What remains to be seen is whether today’s court ruling in Illinois will make it more likely that the U.S. Supreme Court will review the New York ruling.

We are still waiting for Congress to finalize a federal law that would provide for a nationwide system of sales tax collection, as proposed by the Marketplace Fairness Act legislation, which passed the Senate in April and is now before the House that can go to the Supreme Court to decide if the Quill case decision will be changed.










NYC Wins When Everyone Can Vote!

Michael H. Drucker
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Amazon and Overstock Want the U.S. Supreme Court to Overturn a NY Online Sales Tax Ruling

The U.S. Supreme Court ruled in 1992, Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that states can require retailers to collect sales tax only when retailers have an in-state physical presence, such as stores (including online stores), distribution centers, or sales agents.

I was in the Direct Marketing industry, a member of the Direct Marketing Association, and took part in the case. So this current case is of interest to me, as my son has successful physical/online stores in New York.

After failing in March to persuade New York State’s top court to overturn a state law that ties sales tax collection to in-state affiliate sites, online retailers Amazon.com Inc. and Overstock.com Inc. are seeking a better deal from the U.S. Supreme Court.

“New York’s courts made a bad law that ignored the U.S. Supreme Court’s precedent regarding retailers’ responsibility in collecting sales tax, and we have a higher hope that Supreme Court justices will follow prior Supreme Court law,” says Jonathan Johnson, executive vice chairman of Overstock.

Overstock filed a petition with the Supreme Court last Thursday, followed by a petition filed by Amazon on Friday. Both retailers want the high court to review a March 28, 2013, decision by the New York State Court of Appeals, the state’s highest court, that upheld a lower court ruling in favor of the state’s so-called Amazon Tax law.

Technically speaking, each retailer has filed a petition for a “writ of certiorari,” which is a request to have the high court review the lower court’s ruling.

That law, which New York enacted in 2008, requires online retailers to collect sales tax from New York residents if the merchants get sales leads from consumers clicking links on affiliate web sites based in New York State, such as information sites or blogs.

The state contends that such arrangements with affiliates amount to an in-state physical presence or nexus in legal terms, making a retailer responsible to collect sales tax.

An Amazon spokesman declined to comment on the retailer’s petition, citing “a long-standing company policy of not commenting on active litigation.” Following the court defeat in March, Amazon said the state’s Court of Appeals ruling “conflicts” with the U.S. Supreme Court’s precedents.

Johnson, however, repeated this week what he said in March, that the U.S. Supreme Court would be more likely than New York’s courts to consider views opposing the connection between web site affiliates and nexus. “To get a fair hearing in court, we have to go to the U.S. Supreme Court,” he says.

The concept of affiliates is a difficult issue. Is the affiliate located in New York, or is the online website being hosted in New York?










NYC Wins When Everyone Can Vote!

Michael H. Drucker
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