Amazon and Overstock are taking on the New York State Department of Taxation and Finance in the New York Court of Appeals. The online retailers are suing the state over what they call an “unconstitutional” requirement to collect New York sales tax on online purchases.
This is one of the first legal challenges to the so-called Amazon taxes that more and more states are adopting to require online businesses to collect and remit sales tax. Under the 1992 Quill Corp. v North Dakota Supreme Court ruling, businesses must have nexus — a physical presence — in a state in order to be required to collect sales tax.
In April 2008, New York passed a law (N.Y. Tax Law § 1101 (b) (8) (vi)) that changed the “definition of what constitutes a presence in the state” to include “any Web site based in the state that earns a referral fee for sending customers to an online retailer.” Under the New York law, any online retailer that makes “more than $10,000 in annual sales in the state through New York affiliates” must “charge New York sales tax on all sales in the state, not just those resulting from the affiliate program.”
Amazon has complied with the law, but from the outset it has challenged its legality. The New York Supreme Court dismissed both Amazon and Overstock’s cases against the state in January, 2009, but both retailers appealed and in 2010, the Court of Appeals determined that “the dismissal of the entire complaint was premature… .”
Attorneys for the online retailers argue that web referrals are more like ads in a newspaper than a sales presence. The court is expected to make a decision by June of this year.
Amazon may be challenging the New York law, but it has reached agreements with several states to collect sales tax. It began sales tax collection in Arizona on February 1, 2013, and is slated to collect tax in Connecticut in November 2013. In addition, Amazon supports a federal solution to the problem of online sales tax.