On December 2, the U.S. Supreme Court denied the petitions for certiorari filed in Overstock.com, Inc. v. New York State Department of Taxation and Finance1 and Amazon.com LLC v. New York State Department of Taxation and Finance.2 The taxpayers had sought to challenge the constitutionality of New York's click-through nexus statute which presumes sales tax nexus for certain online retailers, claiming that the statute facially violates the U.S. Constitution's Commerce Clause and Due Process Clause. An earlier decision of the New York State Court of Appeals, the state's highest court, found the statute to be constitutional.3
Background
New York was the first state to enact click-through nexus legislation.4 The definition of "vendor" was amended in 2008 to include Internet retailers that actively encourage Web site owners residing in New York to advertise for the Internet retailer in return for a commission on sales resulting from the followed link. A presumption of taxability exists if the Internet retailer generated more than $10,000 through these referrals during the last four quarterly sales tax periods. The presumption may be rebutted if the Web site owner did not engage in any solicitation in New York that would result in a finding of nexus under constitutional standards.5
The click-through nexus statute was quickly challenged by two large Internet retailers, Amazon.com and Overstock.com. Both retailers operate retail Internet businesses and ships items to buyers worldwide, including buyers located in New York. Neither Amazon.com nor Overstock.com owns property in New York, maintains any New York offices or has employees who work or reside in the state. Both retailers utilize "associates programs" allowing associates to maintain links to the retailers on their own Web sites and compensate the associates based on the resulting sales proceeds. Overstock.com terminated its affiliate program for those affiliates with New York addresses soon after the click-through nexus statute was enacted.
Earlier Decisions
Both Amazon.com and Overstock.com lost their constitutional challenges at the trial court level,6 as well as the Appellate Division of the New York Supreme Court, and appealed only their facial constitutional challenges to the New York State Court of Appeals. The New York State Court of Appeals found that the click-through nexus statute does not facially violate the Commerce Clause.7 As explained by the Court, the Commerce Clause prohibits states from imposing an undue burden on interstate commerce, but taxation is allowed if there is not an improper burden.8 A tax is upheld when it is: (i) applied to an activity with a substantial nexus with the taxing state; (ii) is fairly apportioned; (iii) does not discriminate against interstate commerce; and (iv) is fairly related to the services provided by the state.9 In this case, only the substantial nexus test was at issue.
The Court of Appeals also determined that the click-through nexus statute does not violate the Due Process Clause on its face. As explained in Quill Corp. v. North Dakota,10 Commerce and Due Process Clause challenges are "closely related," but physical presence is not required to satisfy the Due Process Clause. For due process, the "focus is on whether a party has purposefully directed its activities toward the forum state and whether it is reasonable, based on the extent of a party's contacts with that state and the benefits derived from such access, to require it to collect taxes for that state."11
Commentary
The refusal of the U.S. Supreme Court to consider the constitutionality of the clickthrough nexus statute enacted by New York can best be described as an opportunity lost by the Court to resolve the sales and use tax treatment of remote sellers. This is especially true in light of the recent Illinois Supreme Court decision that concluded that Illinois' click-through nexus law is preempted under the Supremacy Clause of the U.S.
Constitution due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the Internet Tax Freedom Act (ITFA).12 While the Illinois Supreme Court did not reach the specific merits of a Commerce Clause challenge in that case, the clear split between the New York and Illinois courts regarding the constitutionality of their respective click-through nexus laws has created a challenging situation for affected taxpayers. Many had hoped for guidance from the U.S. Supreme Court to resolve this dichotomy, potentially through a reassessment of its decision in Quill.
With the refusal of the U.S. Supreme Court to engage in the discussion concerning the constitutionality of the New York click-through nexus law, retailers and other businesses are faced with uncertainty regarding the need to collect sales tax based on the clickthrough nexus laws which have been enacted to date.13 Additionally, states which have contemplated enacting click-through nexus laws may now be emboldened to pass this legislation. No existing guidance at the federal level exists regarding the constitutionality of these statutes, so states are left to their own discretion to write and enforce their laws. The click-through nexus laws that have been adopted by states since New York's adoption in 2008 vary from state to state, requiring businesses to examine their structures each time a state adopts the law to determine whether a sales and use tax filing, collection and remittance obligation may exist.
Further, several states have adopted affiliate nexus statutes14 and sales and use tax notification statutes,15 both designed to require remote sellers to collect and remit sales and use tax to states in which physical presence does not exist. Had the Supreme Court approved Amazon.com and Overstock.com's petitions, the Supreme Court potentially could have broadly addressed the constitutionality of those forms of statutes as well as the click-through nexus statute that would have been directly at issue.
The Supreme Court's rejection of Amazon.com and Overstock.com's petitions, as well as the Supreme Court's comments in Quill implies that it is up to Congress, not the courts, to determine, through legislation, the extent to which remote sellers should be subject to a state's sales and use tax. Congress has repeatedly attempted to address this issue, but has not passed legislation. In May, the U.S. Senate passed the Marketplace Fairness Act (MFA), which would require remote sellers meeting certain criteria to collect sales tax.16 Following passage in the U.S. Senate, the bill moved to the House Judiciary Committee of the U.S. House of Representatives but has not advanced to date. Without Congressional action or U.S. Supreme Court consideration to resolve this conflict, taxpayer uncertainty and state autonomy will continue to create an untenable situation for online retailers in which no clear guidelines exist to limit state authority.
Footnotes
1 U.S. Supreme Court, Dkt. 13-252.
2 U.S. Supreme Court, Dkt. 13-259.
3 Overstock.com, Inc. v. New York State Department of Taxation and Finance, 987 N.E.2d 621 (N.Y. 2013).
Note that the Amazon.com and Overstock.com cases were combined on appeal. For further discussion of this decision, see GT SALT Alert: New York State Court of Appeals Holds Click- Through Nexus Statute Is Facially Constitutional.
4 N.Y. TAX LAW § 1101(b)(8)(vi).
5 The New York State Department of Taxation and Finance has released administrative guidance on the click-through nexus statute. TSB-M-08(3)S, New York State Department of Taxation and Finance, May 8, 2008; TSB-M-08(3.1)S, New York State Department of Taxation and Finance, June 30, 2008. The second memorandum provides that the presumption can be rebutted if the seller satisfies two conditions: (i) the parties' contract prohibits the resident representative from engaging in any solicitation activities in the state on the seller's behalf, and (ii) each resident representative submits an annual, signed certification stating that the resident has not engaged in any of the proscribed solicitation.
6 Overstock.com, Inc. v. New York State Department of Taxation and Finance, New York Supreme Court, No. 107581/08, Jan. 12, 2009; Amazon.com LLC v. New York State Department of Taxation and Finance, 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 2009).
7 Because Amazon.com and Overstock.com decided to forgo their as-applied challenges, the Court of Appeals only considered the facial challenges.
8 Matter of Orvis Co. v. Tax Appeals Tribunal, 654 N.E.2d 954 (N.Y. 1995), cert. denied 516 U.S. 989 (1995).
9 Complete Auto Transit v. Brady, 430 U.S. 274 (1977).
10 Quill Corp. v. North Dakota, 504 U.S. 298 (1992).
11 Citing Quill.
12 Performance Marketing Association, Inc. v. Hamer, Illinois Supreme Court, Doc. No. 114496, Oct. 18, 2013. For further discussion of this case, see GT SALT Alert: Illinois Supreme Court Holds Click- Through Nexus Statute Preempted by Internet Tax Freedom Act.
13 In addition to New York, click-through nexus legislation has been enacted by Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Minnesota, Missouri, North Carolina, Rhode Island and Vermont (contingent on 15 or more states enacting click-through nexus legislation). Also, click-through nexus legislation has been proposed in many other states, including Florida, Hawaii, Indiana, Massachusetts, Michigan, Mississippi, Oklahoma and Utah.
14 The following states have enacted affiliate nexus statutes: Arkansas, California, Colorado, Georgia, Illinois, Iowa, Kansas, Maine, Missouri, New York, Oklahoma, South Dakota, Texas, Utah, Virginia and West Virginia. 15 Sales and use tax notification statutes have been enacted by Colorado, Kentucky, Oklahoma, South Dakota and Vermont.
16 S. 743, as passed by the U.S. Senate on May 6, 2013.
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