Online Retailers Lose Challenge to New York’s Sales Tax

April 16, 2013 | Professional Liability | Complex Torts & Product Liability | Intellectual Property

In a case that has far-reaching ramifications because of the exponential expansion of cyberspace in general, and because of the growth of commerce over the Internet in particular, the New York Court of Appeals has rejected challenges by two major online retailers to New York’s “Internet tax,”[1] which requires collection of a sales tax on online purchases made by New York residents.

The court, in, Inc. v. New York State Dept. of Taxation & Fin.,[2] was not persuaded by arguments by and that the Internet tax, Section 1101(b)(8)(vi) of the New York Tax Law, was unconstitutional on its face. The U.S. Supreme Court ultimately may have the opportunity to opine on the constitutionality of the Internet tax. For now, however, the New York Court of Appeals’ decision will allow the state to continue to collect the Internet tax from online retailers.


In New York, every vendor of tangible personal property is required to collect sales and use taxes on sales of tangible personal property.[3]  A “vendor” includes, inter alia, “[a] person who solicits business . . . by employees, independent contractors, agents or other representatives . . . and by reason thereof makes sales to persons within the state of tangible personal property or services.”[4]

On April 23, 2008, the Tax Law was amended to reflect the reality that many sales of goods to New York residents are effected through the Internet, and to place upon certain sellers who use the Internet the same responsibilities that are imposed upon other out-of-state sellers. This Internet tax creates a presumption that an out-of-state seller is:

soliciting business [in New York] through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ending on the last day of February, May, August, and November.[5]

As a result of this amendment, the responsibility to collect sales or use taxes now has been imposed on an out-of-state seller that uses an in-state resident to solicit business from New York residents through an Internet website.

The law further provides, however, that the presumption that a vendor is doing business in New York can be rebutted by proof that the resident with whom the seller has an agreement does “not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution during the four quarterly periods in question.”

Shortly after the legislation was enacted, the New York Department of Taxation and Finance (“DTF”) issued a memorandum clarifying that advertising alone would not invoke the statutory presumption. The department further observed, however, that, for purposes of the law, the placement of a link to a seller’s website where the resident was compensated on the basis of completed sales deriving from that link would not be considered mere advertising. The department also explained that the statutory presumption could be rebutted through proof that the residents’ only activity in New York on behalf of the seller was to provide a link to the seller’s website and that the residents did not engage in any in-state solicitation directed toward potential New York customers. [6]

The department subsequently issued a second memorandum that explained that the statutory presumption would be deemed successfully rebutted if a seller satisfied two conditions: 1) if the parties’ contract prohibited the resident representative from engaging in any solicitation activities in New York state on behalf of the seller, and 2) if each resident representative submitted an annual, signed certification stating that the resident had not engaged in any of the proscribed solicitation.[7]

Amazon does not have any in-state representatives in New York to assist customers in placing orders, and all technical support telephone calls and e-mails are handled by Amazon’s representatives located outside of New York. Products sold by Amazon are shipped directly to customers from fulfillment centers located outside New York. Amazon, however, has developed a program using entities known as Associates that allows independent third parties, including many who have provided Amazon with New York addresses, to advertise the website “” on their own websites. Visitors to the Affiliates’ websites can click on the link and immediately be redirected to If a visitor ends up making a purchase from Amazon on the website, the Associate is paid a commission. also has no employees or representatives in New York. Like Amazon, however, Overstock allows owners of other websites located around the world to advertise on their own websites. Advertisements on the websites of these owners, known as Affiliates, consist of electronic links and banners. When a visitor to an Affiliate’s website clicks on the link or banner, the visitor’s browser navigates to the website. Under the master agreement between Overstock and its Affiliates, Affiliates are paid a commission only when a customer clicks on the link or banner and arrives at Overstock’s website, and then purchases goods from Overstock. Furthermore, the master agreement provides that an Affiliate is only paid a commission if the Affiliate’s website is the last site visited before Overstock’s website, and the customer makes a purchase within a specified period of time. After the Internet tax was enacted, Overstock suspended its relationships with all of its Affiliates in New York.

Amazon and Overstock challenged the Internet tax in court, arguing among other things that it was unconstitutional on its face because it violated the Commerce Clause by subjecting online retailers, without a physical presence in New York, to New York sales and compensating use taxes. They also contended that it violated the Due Process Clause by creating an irrational, irrebuttable presumption of solicitation of business within New York.

The Supreme Court, New York County, granted the Department of Taxation and Finance’s motion to dismiss the complaints.[8] The Appellate Division, First Department, agreed that the facial challenges to the Commerce and Due Process Clauses had to be dismissed and declared the Internet tax constitutional on its face. The dispute reached the Court of Appeals.

Court of Appeals Decision

In its decision, the court first explained that a state tax impacting 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.[9] The issue in this case, the court continued, was whether the Internet tax satisfied the “substantial nexus” test.

As the court observed, an in-state physical presence is necessary to meet that test – although, the court added, that presence “need not be substantial.” Here, the court continued, the legislature had attached significance to the physical presence of a resident website owner. The court then found that the Amazon and Overstock agreements with their in-state Affiliates and Associates “plainly satisfie[d] the substantial nexus requirement.”

The court acknowledged that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites for Amazon or Overstock, but it ruled that if an online retailer was paying New York residents to actively solicit business in New York, there was “no reason why that vendor should not shoulder the appropriate tax burden.” It found that to be the situation for both Amazon and Overstock.

With respect to the Due Process challenges to the Internet tax, the court pointed out that, unlike the bright line presented by the Commerce Clause, physical presence was not required in order to satisfy due process. Instead, it continued, the focus was on whether a party had purposefully directed its activities toward the forum state and whether it was reasonable, based on the extent of a party’s contacts with that state and the benefits derived from such access, to require it to collect taxes for that state.

The court then rejected the Due Process challenges by Amazon and Overstock, finding that the state could require that they collect taxes for the state given the contacts they had with New York through their Affiliates and Associates programs. The court reasoned that it was “not unreasonable” to presume that at least some of the New York-based vendors would actively solicit other New Yorkers to increase their referrals and, consequently, their compensation.


The Internet taximposes a tax-collection obligation on out-of-state vendors such as Amazon and Overstock only where they enter into a business-referral agreement with a New York resident, only when that resident receives a commission based on a sale in New York, and only where there is solicitation, not passive advertising. The Internet tax does not target an out-of-state vendor’s sales through agents who are not New York residents.

Given the dictates of the Internet tax, and the court’s decision, it would appear that the options available to Amazon and Overstock, and available to similar online retailers, are rather limited.

First, they can ask the U.S. Supreme Court to reverse the decision.

Second, they can have all of their Associates and Affiliates (or similar entities) comply with the conditions in the Department of Taxation and Finance’s second memorandum, discussed above,[10] to wit: agree to a contractual prohibition of engaging in any solicitation activities in New York on behalf of the seller and submit an annual, signed certification stating that they had not engaged in any proscribed solicitation.

Another option is that they can limit their sales in New York.

Or, they can pay the tax.


[1] N.Y. Tax Law Section 1101(b)(8)(vi).

[2] No. 33 (N.Y. March 28, 2013).

[3] Tax Law § 1131(1); see also § 1101(b)([8); §§ 1105, 1110, 1132(a).

[4] Tax Law § 1101(b)(8)(i)(C)(I).

[5] Tax Law § 1101(b)(8)(vi).

[6] See N.Y. Dep’t of Taxation & Fin Memorandum No. TSB-M-08(3)S.

[7] See N.Y. Dep’t of Taxation & Fin Memorandum No. TSB-M-08(3.1)S.

[8] See LLC v. New York State Dept. of Taxation & Fin., 23 Misc.3d 418 (Sup. Ct. N.Y. Co. 2009).

[9] See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977). 

[10] Supra, n 7.

Reprinted with permission from the April 16, 2013 issue of the New York Law Journal.  All rights reserved.

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