In what may be viewed as a departure from long-standing U.S. Supreme Court precedent by many jurists, New York’s highest court ruled in favor of a controversial remote seller law last month. The underlying law in dispute was used to impose the obligation to collect sales tax on remote sellers who only conducted business through the Internet in New York and had no employees within the state. The relevant portion of the law reads:
…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[.]
Amazon and Overstock.com, both appellants in the case (“Online Retailers”), argued that physical presence was required in New York in order for New York to require Online Retailers to collect New York sales tax. Neither Online Retailer had a physical presence or employees in New York. Both Online Retailers offered an “Associates Program” through which third parties (the “Associates”) agreed to place links on their own websites that, when clicked, directed users to the respective Online Retailer’s website. The Associates were compensated on a commission basis by receiving a percentage of the revenue from sales generated when a customer clicked on the Associate's link and completed a purchase from the respective Online Retailer’s site. The governing agreement for each Online Retailer stated that the Associates were independent contractors and not employees. Many of these Associates provided New York addresses when applying to the Associates Program.
The court was not convinced by the Online Retailers’ argument that the law was unconstitutional. The primary substance of Online Retailers’ arguments was that the law was in violation of the Commerce Clause because it subjected remote online sellers (without physical presence in New York) to New York sales taxes.
One of the primary U.S. Supreme Court cases cited in remote seller circumstances is Quill Corp. v. North Dakota (504 U.S. 298 (1992)). Quill Corp. held that the bright line test – “[w]hether or not a State may compel a vendor to collect a sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office” – was still valid.
However, in New York, the court held that the “presence requirement will be satisfied if economic activities are performed in New York by the seller’s employees or on its behalf.” This conclusion was reached despite the fact that physical presence was not typically associated with a website where the location of the server was remote. Through the statute cited above, the court reasoned that the New York Legislature believed there is significance to the physical presence of a resident website owner.
As discussed in our previous Multistate Tax Alerts, the Marketplace Fairness Act of 2013 introduced in Congress, is an attempt by Congress to level the playing field for remote sellers. Based on this ruling, it appears that New York is being aggressive by pursuing remote sellers related to sales being made into the state. Consequently, we will need to watch and see if other states follow New York’s lead and attempt to expand the bright line test validated in Quill.