In 2008, New York passed its so-called Amazon Tax, which required Amazon.com (and certain other internet retailers) to collect New York sales tax on its sales to New York residents.
But wait, you may object, doesn’t the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota mean that out-of-state retailers without a physical presence in New York don’t have to collect New York sales tax?
Good memory. New York cleverly attempted to circumvent Quill‘s limitations by enacting section 1101(b)(8)(vi) of its tax law.[fn1] Under this provision, New York declared that an out-of-state internet retailer would be obligated to collect New York sales tax if one or more state residents referred customers to the retailer, the retailer’s gross receipts from these referrals exceeds $10,000 during the prior year, and the referrers are paid a commission.
Basically, New York went after Amazon’s Associates program. Under that program, bloggers or others who sign up can link to products on Amazon and, if a reader clicks through that link and buys something, Amazon pays the person who provided the link a percentage of the sale.
Amazon challenged the constitutionality of the Amazon Tax in the New York courts, all of which found the tax constitutional. So now it has filed a petition for a writ of certiorari in the Supreme Court, asking the Supreme Court to review (and, of course, overturn) the decision of the New York Court of Appeals.
Amazon makes two primary arguments about why New York’s decision should be overturned and the Amazon Tax should be found unconstitutional. The Amazon Tax, it argues, violates both the Commerce Clause and the Due Process Clause of the Constitution.
Due Process. The Amazon Tax violates the Due Process Clause, Amazon argues, because it tries to circumvent a constitutional prohibition by using a rebuttable presumption. That is, under the Amazon Tax, the state presumes that Amazon is soliciting business in New York by virtue of having link-posting Associates who are in the state. Although the presumption is rebuttable, Amazon says, rebutting it would require Amazon to identify all of its Associates and gather evidence of their day-to-day activities, a virtually insurmountable burden, made even more insurmountable by the fact that it would have to gather sufficient evidence to prove that none of them were engaged in solicitation.
With the caveat that I’m a tax guy, not a constitutional guy, I’m not sure that Amazon is going to win the Due Process argument. Under Quill, the Court held that the North Dakota tax, at least as applied to Quill, met the Due Process requirements: there was “no question that Quill has purposefully directed its activities at North Dakota residents, that the magnitude of those contacts are more than sufficient for due process purposes, and that the use tax is related to the benefits Quill receives from access to the State.” Amazon, even without its Associates, has clearly purposefully direct activities at New York, and it has plenty of contacts in the state.
Commerce Clause. For a state to require an out-of-state retailer to collect sales tax, the Commerce Clause requires the retailer to have a physical presence in the state. Though physical presence does not necessarily require an office or store in the state, the Supreme Court held in Quill that merely sending catalogs and products into a state doesn’t rise to the level of presence necessary to meet the Commerce Clause requirements; the presence of a sales force in the state, however, would.
Basically, New York’s Amazon Tax argues that Associates function as a sales force for Amazon. Amazon counters that the Associates aren’t actively soliciting consumers, but instead are merely advertising Amazon’s products. After a potential customer clicks on an Associate’s link, everything passes to Amazon: Amazon sells the product, bills the customer, responds to customer needs. The presence of Associates, therefore, doesn’t move Amazon from the minimum contacts required to satisfy Due Process to the substantial nexus demanded by the Commerce Clause.
What will the Supreme Court decide here? I don’t know; it seems to me largely a factual question: are Associates passive advertisers or are they an active sales force, soliciting New York’s consumers?[fn2]
But Doesn’t Amazon Support Sales Tax Collection Now?
The enduring mystery of Amazon’s cert petition seems to be that it has previously come out in support of the Marketplace Fairness Act, which would allow states generally to require out-of-state retailers with sufficient sales in the state to collect sales tax. If Amazon is willing to collect state sales taxes, why is it challenging New York’s?
Nobody (except Amazon and its attorneys) knows for certain. But we can at least make an educated guess.
Amazon has, for the last almost 20 years,[fn3] benefited from the fact that it could sell products cheaper than brick-and-mortar retailers because it didn’t have to collect sales taxes. That said, the Amazon Tax targets Amazon’s strategy. Presumably, Amazon doesn’t want its competitors to undercut its price by not collecting sales tax. But, under the Amazon Tax, competitors could do just that, provided they’re willing to forgo whatever benefits having link-happy affiliates provides. So, while Amazon’s happy to have the whole world of internet retailers required to collect taxes, it doesn’t want to be the only one required to collect them.
Moreover, assuming the Supreme Court takes the case and addresses it on the merits, on a macro level, there are three possible outcomes:
- The Supreme Court declares the Amazon Tax unconstitutional;
- The Supreme Court reverses Quill; or
- The Supreme Court upholds the Amazon Tax.
None of the results is particularly bad for Amazon. Sure, if the Supreme Court upholds the Amazon Tax, Amazon is forced to collect sales tax, potentially putting it in a competitive disadvantage, but it’s facing that disadvantage whether or not it appeals.
And, while Amazon would undoubtedly prefer (1), (2) would also meet its requirements: if the Supreme Court reverses Quill, Amazon will be required to collect sales tax on its sales, but so will all of its competitors. For the same reason Amazon supports the Marketplace Fairness Act, the reversal of Quill puts all internet retailers on the same footing.
[fn1] Because it’s kind of a pain to scroll through the whole section to find (b)(8)(vi), I’ve copied the language here:
For purposes of subclause (I) of clause (C) of subparagraph (i) of this paragraph, a person making sales of tangible personal property or services taxable under this article (“seller”) shall be presumed to be soliciting business 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. This presumption may be rebutted by proof that the resident with whom the seller has an agreement did 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. Nothing in this subparagraph shall be construed to narrow the scope of the terms independent contractor or other representative for purposes of subclause (I) of clause (C) of subparagraph (i) of this paragraph.