Amazon.com, LLC v. N.Y. State Dept. of Taxation and Finance

• Citation: 913 N.Y.S.2d 129,81 A.D.3d 183
• Parties: AMAZON.COM, LLC, et al., Plaintiffs-Appellants, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, et al., Defendants-Respondents. Performance Marketing Alliance, Tax Foundation and American Legislative Exchange Council, Amici Curiae. Overstock.com, Inc., Plaintiff-Appellant, v. New York State Department of Taxation and Finance, et al., Defendants-Respondents.
• Decision Date: 04 November 2010
• Court: New York Supreme Court Appellate Division

913 N.Y.S.2d 129

81 A.D.3d 183

AMAZON.COM, LLC, et al., Plaintiffs-Appellants,

v.NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, et al., Defendants-Respondents.

Performance Marketing Alliance, Tax Foundation and American Legislative Exchange Council, Amici Curiae.

Overstock.com, Inc., Plaintiff-Appellant,

v.New York State Department of Taxation and Finance, et al., Defendants-Respondents.

Supreme Court, Appellate Division, First Department, New York.

Nov. 4, 2010.

Gibson, Dunn & Crutcher LLP, New York (Randy M. Mastro, Gabriel Herrmann and Timothy D. Swain [and Julian W. Poon, Taheane E. Kapur, and Kahn A. Scolnick, of the California Bar, admitted pro hac vice], of counsel), for Amazon.com, LLC and Amazon Services, LLC, appellants.

Bracewell & Giuliani, LLP, New York (Daniel S. Connolly, Rachel B. Goldman, David A. Shargel and David J. Ball of counsel), for Overstock.com, Inc., appellant.

Andrew M. Cuomo, Attorney General, New York (Peter Karanjia, Barbara D. Underwood and Andrew D. Bing of counsel), for respondents.

Venable LLP, New York (Gregory W. Gilliam of counsel), for Performance Marketing Alliance, amicus curiae.

McDermott Will & Emery LLP, New York (Arthur R. Rosen of counsel), for Tax Foundation, amicus curiae.

Stewart Occhipinti, LLP, New York (Charles A. Stewart, III of counsel), for American Legislative Exchange Council, amicus curiae.

RICHARD T. ANDRIAS, J.P., JOHN W. SWEENY, EUGENE NARDELLI, JAMES M. CATTERSON, LELAND G. DeGRASSE, JJ.

NARDELLI, J.

In a case with far-reaching ramifications because of the exponential expansion of cyberspace in general, and commerce over the Internet in particular, the issue presented is the constitutionality of a recent amendment to the Tax Law § 1101(b)(8)(vi) intended to force on-line retailers to collect a sales tax on purchases made by New York residents. Since we find that there are issues of fact concerning some of the as-applied challenges raised by plaintiffs to the statute, we conclude that the dismissal of the entire complaint was premature, and remand for further proceedings. We do, however, find that the facial challenges fail to state a cause of action, and declare in the State's favor to that extent.

In New York "every vendor of tangible personal property" is required to collect sales and use taxes on sales of tangible personal property (Tax Law § 1131[1]; see also §§ 1101[b][8], 1105, 1110, 1132[a] ). A "vendor" is defined to include, inter alia, "[a] person who solicits business ... 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" (Tax Law § 1101[b][8][i][C] [I] ). Vendors are required to register with the Department of Taxation and Finance (DTF), and are granted certificates of authority permitting them to collect sales taxes (Tax Law § 1134[a] ).

On April 23, 2008, the Tax Law was amended to reflect the reality that many sales of goods to New York residents are effected through the Internet, and to place upon certain sellers who use the Internet the same responsibilities that are imposed upon other out-of-state sellers. The statute, as amended, created a presumption that an out-of-state seller was

"soliciting business [in New York] through an independent contractor or other representative if theseller 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 whoare 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 ending on the last day of February, May, August, and November" (Tax Law § 1101[b][8][vi] ).

The effect of this amendment was that the responsibility to collect sales or use taxes was now imposed on an out-of-state seller which used an in-state resident to solicit business from New York residents, through an Internet Web site.

The law further provided, however, that the presumption that the vendor was doing business in New York could be rebutted by proof that the resident with whom the seller had 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" ( id.).

Shortly after the statute became effective, and Amazon instituted its lawsuit, DTF issued two memoranda, known as Technical Services Bureau Memoranda. In the first memorandum (TSB-M-08(3)S, dated May 8, 2008), DTF advised that the statute applied to sellers, including e-commerce retailers, which "solicit business within the state through employees, independent contractors, agents or other representatives and, by reason thereof, make sales" to New York residents of taxable property or services. This memorandum also offered six examples of how certain transactions would be affected by the statute. Example 4 made clear that the statutory presumption would only be triggered by commission-based referral agreements, as opposed to flat-fee agreements. The memorandum further explained that the presumption that solicitation had occurred could be rebutted if the seller established that "the only activity" of its in-state representatives consisted of the placement of Internet links connecting their Web sites to the out-of-state seller's Web site, i.e., advertisers only, and that "none of the resident representatives engage in any solicitation activityin the state targeted at potential New York State customers on behalf of the seller." Thus, more than a mere pass-through "click" on the Internet was required to impose tax collection responsibilities on the out-of-state sellers. The in-state contractor actually has to engage affirmatively in customer solicitation before the out-of-state vendor becomes subject to the statute.

The DTF then issued a second memorandum (TSB-M-08(3.1)S, dated June 30, 2008) which set forth a "safe harbor" procedure whereby sellers could rebut the presumption by including in their business-referral agreements a provision prohibiting their in-state representatives from "engaging in any solicitation activities in New York State that refer potential customers to the seller," and requiring each in-state representative to submit a signed certification every year, stating that it has not engaged in any such solicitation during the prior year.

Plaintiff Amazon.com, LLC is a limited liability company incorporated in Delaware, and Amazon Services, LLC is a limited liability company incorporated in Nevada. Neither has offices, employees or property in New York. New York residents order products from Amazon solely through its Web site. Amazon does not have any in-state representatives in New York to assist customers in placing orders, and all technical support telephone calls or e-mails are handled by Amazon's representatives located outside of New York. Products sold by Amazon are shipped directly to customers from fulfillment centers located outside New York.

Amazon, however, has developed a program using entities known as Associates which it allows hundreds of thousands of independent third parties located around the world, many of which have provided Amazon with New York addresses, to advertise the Web site "Amazon.com" on their own Web sites. Visitors to the Affiliates' Web sites can click on the link and immediately be redirected to Amazon.com. If the visitor ends up making a purchase from Amazon on the Amazon.com Web site—and only in that event—the Associate is paid a commission. Any purchase made by the visitor takes place solely with Amazon, and all customer inquiries are handled only by Amazon, its corporate affiliates, or other sellers without any involvement of the Associate.

In the standard operating agreement which governs the relationship between Amazon and its Associates, Amazon expressly disavows any control over their activities or Web site content,except to state that Associates are prohibited from "misrepresent[ing] or embellish[ing]" the relationship between themselves and Amazon.

Co-plaintiff Overstock.com is a Delaware corporation with its principal and only place of business in Utah. As Amazon does, it offers various products over the Internet at discounted prices. Overstock does not have any retail stores or outlets. All goods purchased through Overstock.com are shipped to customers directly via the mail or by common carrier. None of Overstock's employees or representatives live in New York. Like Amazon, Overstock allows owners of other Web sites located around the world to advertise Overstock.com on their own Web sites. Advertisements on the Web sites of these owners, known as Affiliates, consist of electronic links and banners. When a visitor to the Affiliate's Web site clicks on the link or banner, the visitor's browser navigates to the Overstock.com Web site.

The Master Agreement between Overstock and the Affiliate permits the Affiliate to provide advertising for Overstock in the form of links or banners. Affiliates are paid a commission only when a customer clicks on the link or banner and arrives at Overstock's Web site, and then purchases goods from Overstock. Furthermore, the Master Agreement provides that an Affiliate is only paid a commission if the Affiliate's Web site is the last site visited before Overstock's Web site, and the customer makes a purchase within a specified period of time. After the statute was enacted on April 23, 2008, Overstock suspended its relationships with all of its Affiliates in New York.

On April 25, 2008, two days after the bill was signed by the Governor, Amazon filed a complaint seeking declaratory and injunctive relief on the ground that the statute was...