On December 2, the U.S. Supreme Court declined to hear an appeal by Amazon.com, Inc. and Overstock.com, Inc. on whether the State of New York may constitutionally impose sales tax on online sales made to New York residents.
The Supreme Court’s refusal to hear Amazon’s argument is significant because the seminal case of Quill v. North Dakota, 504 U.S. 298 (1992), required that a vendor have a “physical presence” in a State in order for such State to constitutionally be able to impose sales tax. This requirement is due to the fact that under the Commerce Clause of the U.S. Constitution, a State cannot constitutionally impose an undue burden on interstate commerce without a strong enough connection between a retailer and the State, called a “substantial nexus.” In Quill, the Supreme Court found that a retailer’s physical presence in a State is the level of connectedness to satisfy the “substantial nexus” standard and constitutionally warrant the imposition of sales tax.
However, neither Amazon nor Overstock have any type of physical, brick-and-mortar buildings located in New York. Therein lies the rub. So, why did the Supreme Court refuse to hear the case? Because of a newly-recognized determination factor called “in-state affiliates.”
Under New York sales tax law, retailers without a physical presence in the State must collect tax if they use a local resident to solicit business online. Amazon was found to be subject to the law because it drums up business through New York-based affiliates and pays them commissions for hosting online links to the retailer. In the words of the New York Court of Appeals, the highest court in the State, such affiliation agreements had the effect of creating an “in-state sales force,” which was enough for the State sales tax law to pass constitutional muster under the Commerce Clause. To further muddy the waters, “click-through nexus” standards are not the same in every state.
As a result, the breadth and reach of State sales tax has been significantly broadened by an expansive interpretation of the “physical presence” standard for establishing a substantial nexus between a retailer and a State. That is, paying commissions to in-state affiliates now rises to the level of a “physical presence” for purposes of imposing State sales tax, indicating the law is not fully settled.
And as Amazon surely discovered, it’s a jungle out there when it comes to State sales tax.