Amazon.com suits New York State

Massive web retailer Amazon.com, best known for selling books and CD's online, is suing New York State regarding a new law that demands certain online retailers collect taxes from NY customers and then deliver the tax money to the state revenue branch. In the suit, Amazon claims the law is unconstitutional, as against the Commerce Clause and Due Process. Amazon named New York's taxation and finance commissioner, Robert Megna, and New York Governor David Paterson as defendants. The Department of Taxation and Finance has 20 to 30 days to respond.

The law at issue took effect April 23, 2008, and requires that out-of-state Web retailers collect sales taxes from buyers in the state if the web retailers have NY State-based representatives referring business to them. According to NY, Amazon and like Internet retailers are subject to this law since they have "affiliate" marketing arrangements. In this law, an "affiliate" is defined as an entity that advertises Amazon on their website and then receives a sales commission when the referred visitor purchases something on Amazon.

The new law was introduced in a state budget news release, titled: GOVERNOR PATERSON AND LEGISLATIVE LEADERS ANNOUNCE FIVE-WAY CONSENSUS BUDGET AGREEMENT. This mentions a novel source of income, "Revenue Actions: Enacting a number of revenue actions including: ... requiring Internet retailers such as Amazon.com to collect sales tax which is already owed to the State ($50 million)."

In the specific complaint, which was filed April 25th in New York's Supreme Court, Amazon claims the law violates several aspects of the U.S. Constitution. For one, they aver it is "impermissibly vague and overbroad" in how it demands Amazon collect taxes, especially since they have no physical presence or employees based in New York, to collect sales taxes. Amazon does not have a brick-and-mortar store in the state and, according to the 1992 U.S. Supreme Court ruling on the topic, cannot be said to have a situs in NY.

The Seattle-based e-retailer has long done business via associations with Web sites that run ads linked backed to Amazon. These affiliated sites do advertising and then get a percent of the purchase made by a customers directed by their ad to Amazon. There are thousands of Amazon associates located across the country, many of whom are located in New York. The State claims these affiliates create a tax liability much like having a sales representative living in New York. But Amazon claims it cannot establish which affiliates are actually based in New York. State residents are already legally-bound to pay sales taxes on items they purchase from out-of-state companies.

On this, the Amazon complaint reads, "None of the in-state advertisers with whom Amazon has associated has ever been considered an employee, independent contractor, agent or other representative of Amazon under any provision of the tax law." The lawsuit also claims the new law violates the due process clauses because such imposition of tax-collection duty an on out-of-state online retailer that does not have actual physical presence in the state is unfair, as it violates the equal protection clauses of the U.S. and New York by intentionally targeting Amazon. The lawsuit buttressed this point by stating that the NY "State officials have described the statute as the 'Amazon tax.'"

Further, the lawsuit states, "Because some independently operated, New York-based Web sites post advertisements with links to Amazon and are compensated for these advertisements, Amazon is now presumed to have engaged in solicitation under this statute and, thus, must collect New York sales and use taxes on all of its sales to New Yorkers or face hefty civil and criminal penalties -- despite the fact that Amazon lacks any physical presence in New York and that no solicitation by Amazon actually exists."

The Commerce Clause of the U.S. Constitution (Article 1, Section 8, Clause 3) states, "The Congress shall have Power... To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes." Generally, the Commerce Clause is invoked in cases to show that a law will have an unduly negative impact upon the right of all states to engage equally in interstate commerce.