In a widely anticipated move, Internet retailer Amazon has sued the state of New York over a new law designed to require Amazon and other online retailers to collect sales tax on items shipped to New York addresses, even when the retailer has no offices or employees in the state.
The law, enacted April 9, affects Internet vendors that use New York-based affiliate marketing programs to solicit sales. In its complaint filed in state court in Manhattan, Amazon asks for a declaratory ruling that the law is "invalid, illegal and unconstitutional."
Affiliates are typically Web sites that link to a retailer’s site and get a commission for sales made by the referrals. Under the new law, if a vendor makes at least $10,000 a year in revenue from New York-based affiliates, it must collect New York sales taxes on all products shipped to state residents.
Theoretically, New York consumers must report purchases from out-of-state Internet retailers on their state tax returns, but the administrative hurdle of collecting those taxes from individuals has proved insurmountable.
The state estimates that forcing out-of-state retailers to collect the tax would produce additional income of $50 million a year.
Amazon argues that the law violates the Commerce Clause of the U.S. Constitution, as interpreted by Quill v. North Dakota, in which the U.S. Supreme Court held in 1992 that a retailer must have a "physical presence" within the state to be responsible for collecting that state’s sales taxes.
Specifically, Amazon takes issue with New York's characterization of Amazon's affiliates as representatives of the company who are soliciting sales by placing ads on their sites. According to New York, such affiliates are enough to give Amazon the physical presence within the state required under Quill.
In its complaint, Amazon rejects this characterization, saying it “lacks any physical presence in New York.” It argues that the Quill case held that advertising alone is not sufficient to establish physical presence in a state. According to Amazon, its affiliates are not actively soliciting business for the company. Rather, they are merely resident advertisers, who "indirectly" refer customers to Amazon's product pages in exchange for commissions.
Amazon also cited language from its standard affiliate agreement stating that "nothing in this agreement will create any partnership, joint venture, agency, franchise, sales representative or employment relationship between the parties." It further argues that it has no way of verifying which of the thousands of Web sites registered in the program under a New York address are actually legal residents of the state.
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