New York "Amazon Law" Ruled Constitutional: But Wait, There's More
The New York Court of Appeals (New York's (NY) highest court) finally rules in Amazon.com and Overstock.com case that NY's "Amazon" law is NOT unconstitutional because it subjects online retailers (without a physical presence in NY) to NY sales and compensating use taxes.
Why is this important?
Online retailers are presumed to be soliciting business in NY if the retailer enters into an agreement with a NY resident for a commission or consideration, and directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller.
This sales tax collection requirement (presumption) only kicks in if the cumulative gross receipts from sales by the online retailer to NY customers who are referred to the retailer by all NY residents with this type of commission agreement with the retailers, is greater than $10,000 during the preceding four quarterly periods.
If your online business has commission (website link "click-thru") arrangements with 3 NY residents, then you would add together all of the NY sales your business had that came to your business via those 3 NY residents to see if you exceeded the $10,000 threshold. If you exceed that threshold, then you would be presumed to have nexus.
Court "Punts" Physical Presence Issue To U.S. Supreme Court
The ruling states, "the world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated. An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet. That question, however, would be for the United States Supreme Court to consider."
Court Agrees with NY Legislation Attaching Significance to Physical Presence of Website Owner
The ruling states, "there are clearly parallels between a mail-order business and an online retailer –- both are able to conduct their operations without maintaining a physical presence in a particular state. Indeed, physical presence is not typically associated with the Internet in that many websites are designed to reach a national or even a global audience from a single server whose location is of minimal import. However, through this statute, the legislature has attached significance to the physical presence of a resident website owner. The decision to do so recognizes that, even in the Internet world, many websites are geared toward predominantly local audiences -- including, for instance, radio stations, religious institutions and schools -- such that the physical presence of the website owner becomes relevant to Commerce Clause analysis. Indeed, the Appellate Division record in this case contains examples of such websites urging their local constituents to support them by making purchases through their Amazon links. Essentially, through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force."
Opportunity to Rebut Presumption if Considered "PASSIVE ADVERTISING"
According to the ruling, "no one disputes that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites. The bottom line is that if a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden."
Therefore, the question remains - is your online business simply advertising on other websites, or is their a commissioned sales arrangement which turns the in-state resident into a sales rep?
The DISSENTING Opinion
One dissenting judge in the case stated, "the majority correctly summarizes the law by saying that "if New York residents were merely engaged to post passive advertisements on their websites" no tax could be collected, but that a vendor who "is paying New York residents to actively solicit business in this State" may be required to remit tax."
"Our task here is to decide whether certain New York based websites -- Overstock's "Affiliates" and Amazon's "Associates" -- are the equivalent of sales agents, soliciting business for Overstock and Amazon, or are only media in which Overstock and Amazon advertise their products. I think they are the latter."
If you are an online retailer with New York "affiliates" or "independent contractors" with links on their website to your site, then you will want to take a closer look at how this impacts your business.
If you are an online retailer with non-NY "affiliates" or "independent contractors" with links on their website to your site, then this is a reminder to be aware of where those affiliates are located. Other states either have laws similar to New York's or may simply interpret their current nexus laws in a broad manner to apply nexus to online retailers. Each state's rules are different and need to be reviewed before making any decision regarding your company.
For more information on nexus, check out my previous posts.
Brian Strahle is the owner of LEVERAGE SALT, LLC where he provides state and local tax technical services to accounting firms, law firms and tax research organizations across the United States. He also writes a weekly column in Tax Analysts State Tax Notes entitled, "The SALT Effect." For more info, visit his website: www.leveragestateandlocaltax.com
You can reach Brian at firstname.lastname@example.org.
Because state and local taxes are deceptively simple and endlessly complicated.