New York Court Sends ‘Amazon Tax’ Case Back for More Information

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BY JOSEPH HENCHMAN – Today, the intermediate court of New York handed down its long-awaited “Amazon tax” opinion in Amazon.com, LLC v. New York State Department of Taxation and Finance. New York requires companies with no property or employees in New York to collect New York sales tax if the non-resident company receives revenue from in-state independent affiliates. The Tax Foundation filed a brief in the case arguing that the law is unconstitutional, explaining more about the issue in this report.

In Quill Corp. v. North Dakota and other cases, the U.S. Supreme Court has held that states can tax interstate commerce only if the target company has a “nexus” with the state – property or employees in the state. Otherwise, the Court has held, there is a serious threat to interstate commerce as states try to impose thousands of sales taxes, each with different rules.

The New York court’s opinion was 13 months in coming, and it neither dismisses all challenges against the statute as the trial judge had, nor does it strike the statute down as unconstitutional. Indeed, the specific ruling by the majority is to send the case back to the trial court to further develop the record. The majority says the key unresolved question is how significant the affiliates are for Amazon’s operations in New York and whether they actively solicit.

Amazon argued that affiliate referrals represent just 1.5% of their sales in the state. The court acknowledges this but says they need more information to determine significance. In a footnote, they suggest that a high dollar figure could be significant regardless of proportion. This is a mistake – significance to operations should be a judgment based on the proportion of the whole operation, not just a dollar threshold.

The Court rightly emphasizes that advertising does not create nexus. However, the opinion ominously notes that the challenged law would be valid if “a New York representative uses some form of proactive solicitation which results in a sale by Amazon, and a commission to the representative; and the representative has an in-state presence sufficient to satisfy the substantial nexus test.” What they forget is the significance to operations test, which they emphasize elsewhere. Solicitation plus sales creates nexus for the affiliates, but it shouldn’t create nexus for Amazon.

The case may be appealed to New York’s highest court, the Court of Appeals. Stay tuned. More on nexus here.

Joseph Henchman is Tax Counsel & Director of State Projects for the Tax Foundation

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