Amazon.Com LLC v. Nys Taxation

• Decision Date: 12 January 2009
• Docket Number: No. 601247/08,601247/08
• Parties: AMAZON.COM LLC et al., Plaintiffs, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Defendants.
• Court: New York Supreme Court

23 Misc.3d 418

877 N.Y.S.2d 842

2009 NY Slip Op 29007

AMAZON.COM LLC et al., Plaintiffs, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Defendants.

No. 601247/08

Supreme Court, New York County.

Decided January 12, 2009.

Andrew M. Cuomo, Attorney General, New York City (Elizabeth Forman of counsel), for defendants.

Gibson, Dunn & Crutchor LLP, New York City (Randy Mastro of counsel), for plaintiffs.

OPINION OF THE COURT

EILEEN BRANSTEN, J.

Pursuant to CPLR 3211 (a) (2) and (7), defendants New York State Department of Taxation and Finance, Robert Megna, in his official capacity as Commissioner of the New York State Department of Taxation and Finance, the State of New York, and David A. Paterson, in his official capacity as the Governor of the State of New York (collectively the State) move to dismiss the complaint. Plaintiffs Amazon.com LLC and Amazon Services, LLC (collectively Amazon) oppose dismissal and cross-move for summary judgment.

Background

Since 1995, Amazon has been operating a retail Internet business (Mastro aff, exhibit 1, ¶ 4). Its goods are sold on line and shipped to buyers worldwide, including to New York (id. ¶ 20). Amazon does not own property in New York or maintain any New York offices.¹ None of its employees work or reside in New York (Mastro aff, exhibit 1, ¶ 20).

Amazon's Associates Program

Amazon created an "Associates Program," which allows participants (associates) to maintain links to Amazon.com on their own Web sites and compensates them by paying "a percentage of the proceeds of the sale" (Mastro aff, exhibit 1, ¶ 23). Amazon also offers incentives to associates that "directly refer" customers to its Amazon Prime program through Web site links, paying them a "$12 bounty" for each new enrollee (id., exhibit 24, ¶ 5).

Prospective associates must apply to join the program (Mastro aff, exhibit 1, ¶ 21; exhibit 24). Assuming that Amazon accepts the application, the parties enter into an operating agreement, which makes clear that the "Relationship of [the] Parties" is that of "independent contractors" (id., exhibit 24, No. 14). Associates are granted "a revocable, non-exclusive, worldwide, royalty-free license . . . solely for purposes of facilitating referrals from [their sites] to the Amazon Site" (id., exhibit 24, No. 2).

Amazon authorizes associates to place different types of links from their Web sites to its own. For example, associates can set up a "product link," generally allowing them to "select one or more Products [on Amazon's site] to list on [their own] site," a "search box link," which permits visitors to the associate's site to view Amazon merchandise related to their queries, or a "cart link," which "when clicked will allow visitors [of the associate's site] to add products to their shopping cart and/or purchase products via [Amazon's] 1-Click feature" (id.).

As a condition of participation, associates acknowledge that Amazon "may receive information from or about visitors to [their sites]" and that Amazon "may from time to time send [them] email updates about the Program" (id.).

The operating agreement further sets forth that associates will be paid through a "referral fee" and can elect between the "Classic Fee Structure" (generally 4% of qualifying revenues from sales of products sold through special links) or the "Performance Fee Structure" (a percentage of qualifying revenues set forth in a table that varies with the number of total items shipped) (Mastro aff, exhibit 24, No. 5).

Amazon has hundreds of thousands of associates. Thousands "of them have provided Amazon with addresses in New York" (Mastro aff, exhibit 1, ¶ 25). Sales to New York customers originating from New York-based associate referrals constitute less than 1.5% of Amazon's New York sales (Comfort aff ¶ 6). Without disclosing the dollar amount of those sales, Amazon simply acknowledges that its "Associates Program generates more than $10,000 per year in sales to customers located in New York" (id. ¶ 13).

2008 Amendment of New York's Tax Law

In New York, "every vendor of tangible personal property" is required to collect sales tax (see Tax Law § 1131 [1]; § 1105). Included in the definition of "vendor" is:

"A person who solicits business . . .:

"(I) by employees, independent contractors, agents or other representatives "and by reason thereof makes sales to persons within the state of tangible personal property or services, the use of which is taxed by this article" (Tax Law § 1101 [b] [8] [i] [C]).

On April 23, 2008, Governor Paterson signed into law Tax Law § 1101 (b) (8) (vi) (commission-agreement provision), which provides that for purposes of the above-quoted section of the Tax Law:

"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 . . . This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution during the four quarterly periods in question."

The commission-agreement provision thus requires collection of New York taxes from New Yorkers by out-of-state sellers that contractually agree to pay commissions to New York residents for referring potential customers to them, provided that more than $10,000 was generated from such New York referrals during the preceding four quarterly periods.

An out-of-state seller that could establish its commissioned New York residents did not engage in any solicitation that would satisfy the United States Constitution's "nexus requirement" would be exempt from tax collection (see State's mem of law-[State mem] at 7). The State has clarified that an out-of-state seller that includes in its agreement a condition that in-state commissioned representatives are prohibited from engaging in solicitation activities in New York on its behalf and ensures compliance through a certification, may rebut the presumption that the seller is a vendor so long as the State does not subsequently determine that in-state solicitation actually took place (see State mem, exhibit 3 [June 30, 2008 Tax Bureau Services mem]).

Once the commission-agreement provision was enacted, Amazon began collecting taxes from its New York customers under protest (Comfort aff ¶¶ 14-15).

This Action

On April 25, 2008, Amazon commenced this action, alleging that the commission-agreement provision "violates the Commerce Clause of the United States Constitution, both facially and as applied to Amazon, because it imposes tax collection obligations on out-of-state entities who have no substantial nexus with New York" (verified complaint ¶ 3 [b]). Amazon also contends that the provision violates the Federal and State Constitutions' Due Process Clauses, both facially and as applied, because "it effectively creates an irrebuttable presumption of `solicitation' and is overly broad and vague" (id.). Amazon further maintains that the enactment violates the Constitutions' Equal Protection Clauses because "it intentionally targets Amazon" (id. ¶ 3 [c]).

Analysis

Amazon's complaint must be dismissed in its entirety for failure to state a cause of action (CPLR 3211 [a] [7]). Even accepting all the facts alleged to be true, there is no basis upon which Amazon can prevail.

Commerce Clause

A state may require an entity engaged in interstate commerce to collect taxes on its behalf provided the "tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State" (Complete Auto Transit, Inc. v Brady, 430 US 274, 279 [1977]).

To establish a "substantial nexus" with the taxing state, "physical presence of the vendor is required, [however] it need not be substantial. Rather, it must be demonstrably more than a `slightest presence.' And it may be manifested by . . . economic activities in the taxing State performed by the vendor's personnel or on its behalf" (Matter of Orvis Co. v Tax Appeals Trib. of State of N.Y., 86 NY2d 165, 178 [1995] [citation omitted], cert denied sub nom. Vermont Info. Processing, Inc. v Commissioner, N.Y. State Dept. of Taxation & Fin., 516 US 989 [1995]). As Amazon acknowledges, physical presence "can be actual or imputed based on the in-state solicitation of sales by an employee, agent, or independent contractor of the retailer on its behalf" (Amazon's mem of law [Amazon mem] at 14).

In Scripto, Inc. v Carson (362 US 207, 209 [1960]), for example, the United States Supreme Court held that a state could require tax collection by an out-of-state company that had contracts with 10 in-state residents—deemed "independent contractors"—who solicited orders for products on its behalf. The agreement with the contractors provided that they were to be paid by commission and salespeople sent orders out of state for fulfillment (id.; see also Standard Pressed Steel Co. v Department of Revenue of Wash., 419 US 560, 561 [1975] [sufficient nexus based on single employee who resided in-state and consulted with customer therein]; Felt & Tarrant Mfg. Co. v Gallagher, 306 US 62, 64 [1939] [collection mandated based on presence of two general agents contractually granted the right to...