On March 28, 2013 the New York State Court of Appeals (their name for the highest court) ruled against Amazon and Overstock in their lawsuit against New York over a law that changed the definition of physical presence for sales tax purposes. In 2008 New York adopted a law revising the definition of a “vendor” to include“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.”
When the law was adopted, Amazon and Overstock (and countless others) had contracts with in-state New York entities that would “receive a percentage of the revenue from sales generated when a customer clicks on the Associate’s (Affiliate’s) link and completes a purchase.” Amazon and Overstock challenged the law arguing that it violated the US Constitution’s dormant Commerce Clause and Due Process Clause.
The New York State Court of Appeals ruled that the law did not violate the physical presence requirement of the Commerce Clause as established in 1967 by the US Supreme Court in Bellas Hess. The Court of Appeals concluded that “world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated” and the ruling was based on the activity taken by in-state website owners for the benefit of out-of-state retailers.
According to the Court of Appeals “many websites are geared toward predominantly local audiences — including, for instance, radio stations, religious institutions and schools—such that the physical presence of the website owner becomes relevant to Commerce Clause analysis.” Concluding “that the physical presence of the website owner” is relevant the majority opined that “through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.”
Everyone familiar with the debate over the definition of nexus knows that an “in-state sales force” constitutes physical presence. Once the majority determined that the in-state affiliates created an “in-state sales force” it naturally followed they would determine that “the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence.’”
In other words, an in-state affiliate creates an obligation for the out-of-state seller to collect sales tax. Therefore, any retailer using an affiliate program in New York and not collecting must quickly decide whether to continue that program and start collecting sales tax or to end the program. In addition, retailers who use an affiliate program in Arkansas, Connecticut, Georgia, Illinois, North Carolina, Pennsylvania, Rhode Island, and Vermont must decide whether the courts in those states will rule the same as the New York Court.