New York’s Internet Sales Tax Law and Its Implication for Colorado

The Boulder Business Lawyers of LaszloLaw discuss New York’s internet sales tax laws and its implication for Colorado.

The U.S. Supreme Court refused to hear an appeal raised by Amazon.com and Overstock.com, challenging a New York appeals court decision upholding the constitutionality of New York’s internet sales tax. This refusal to hear Amazon.com and Overstock.com could have implications as to the constitutionality and enforceability of other states internet sales tax laws, including Colorado’s internet sales tax law.

Amazon and Overstock primarily challenged the New York law on the basis that it violated the Commerce Clause of the U.S. Constitution which states that Congress shall have the power to regulate commerce among the states. Because the Constitution specifically enumerates that Congress has the exclusive power to regulate interstate commerce, there is a “negative” implication of that power in that individual states cannot place a “undue burden” on interstate commerce.  This is referred to as the “dormant Commerce Clause.”  Thus, Amazon and Overstock were arguing that the New York internet sales tax placed an undue burden on interstate commerce and should be held to be unconstitutional.

Interestingly, Amazon backed the Marketplace Fairness Act that passed the Senate and currently sits in the House which allows states to tax internet sales. According to Amazon, it supports a federal approach to the issue of internet sales taxes  from online retailers with at least $1 million in out-of-state sales in exchange for states simplifying their sales tax laws. Walmart and BestBuy also back the federal approach. It is seemingly counterintuitive that large business entities like Amazon and Walmart would support ANY scheme that increases their taxes but, given their size, they can easily withstand the blow of compliance with the various tax regimes across the 50 states.  Medium and smaller retailers may not be so fortunate. Thus, the law is competitively advantageous in the long run to larger retailers.

Turning back to the decision, under the Commerce Clause, state taxes do not create an undue burden on interstate commerce if they meet certain criteria–at issue here was whether New York’s internet sales tax was applied to an activity with a “substantial nexus” with the taxing state. The New York appeals court determined that New York’s internet sales tax was applied to an activity with a substantial nexus to New York and thus did not violate the Commerce Clause.

However, while the U.S. Supreme Court’s refusal to hear the issue on appeal might be seen as a tacit approval for other states’ internet sales tax laws, including Colorado’s, the devil is in the details…as it usually is with the law. The New York specifically targets out-of-state retailers who solicit business though in-state independent contractors or representatives. The statute creates a presumption that an out-of-state retailer is “soliciting business” in the state of New York and thus should be taxed if the retailer “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…” Amazon uses hundreds of thousands of “Associates” across the world, including in the state of New York, who are paid commission when someone clicks through a link on the Associates’ websites and purchases an item from Amazon. The New York law creates a presumption that Amazon is “soliciting business” in New York and should be taxed based on the presence in-state of these commission-based associates.  Amazon can overcome this presumption by showing that:

“‘the only activity’ of its in-state representatives consisted of the placement of Internet links connecting their Web sites to the out-of-state seller’s Web site, i.e., advertisers only, and that ‘none of the resident representatives engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller.’ Thus, more than a mere pass-through ‘click’ on the Internet was required to impose tax collection responsibilities on the out-of-state sellers. The in-state contractor actually has to engage affirmatively in customer solicitation before the out-of-state vendor becomes subject to the statute.”

However, for Amazon, proving that an Associate did not solicit business and was simply an advertiser might be difficult and potentially burdensome.  But more importantly, according to the appeals court, Amazon’s very own policies regarding its “Associates” suggest that in-state solicitation of business is in fact the purpose of the Associate program and for what the Associate is being compensated. This is apparently the reason New York crafted its internet sales tax laws is such a way–to target large retailers like Amazon. Consequently, the New York appeals court decision, and the Supreme Court’s refusal to entertain an appeal, might be rather limited to the facts and law of this case and not necessarily support other states internet sales tax laws.

Boulder Business Lawyers

The Boulder business lawyers of LaszloLaw counsel established and startup businesses on a variety of legal needs, including business formation, litigation and risk management concerns, and trademarks. Contact our Boulder business lawyers today at 303-926-0410 or online today.