Overstock.com, Inc. v. N.Y. State Dep't of Taxation & Fin.

• Citation: 2013 N.Y. Slip Op. 02102,20 N.Y.3d 586,965 N.Y.S.2d 61,987 N.E.2d 621
• Parties: OVERSTOCK.COM, INC., Appellant, v. NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Respondents. Amazon.com, LLC, et al., Appellants, v. New York State Department of Taxation and Finance et al., Respondents.
• Decision Date: 28 March 2013
• Court: New York Court of Appeals

20 N.Y.3d 586
987 N.E.2d 621
965 N.Y.S.2d 61
2013 N.Y. Slip Op. 02102

OVERSTOCK.COM, INC., Appellant,
v.
NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE et al., Respondents.
Amazon.com, LLC, et al., Appellants,
v.
New York State Department of Taxation and Finance et al., Respondents.

Court of Appeals of New York.

March 28, 2013.

[965 N.Y.S.2d 62]Bracewell & Giuliani LLP, New York City (Daniel S. Connolly and Rachel B. Goldman of counsel), for appellant in the first above-entitled action.

Gibson, Dunn & Crutcher LLP, New York City (Randy M. Mastro and Oliver M. Olanoff of counsel), and Gibson, Dunn & Crutcher LLP (Julian W. Poon, of the California bar, admitted pro hac vice, and Kahn A. Scolnick, of the California bar, admitted pro hac vice, of counsel) for appellants in the second above-entitled action.

Eric T. Schneiderman, Attorney General, New York City (Steven C. Wu, Barbara D. Underwood and Andrew D. Bing of counsel), for respondents in the first and second above-entitled actions.

[20 N.Y.3d 590]

[987 N.E.2d 622]

OPINION OF THE COURT

Chief Judge LIPPMAN.

Plaintiffs challenge Tax Law § 1101(b)(8)(vi) (the Internet tax), alleging that it is unconstitutional on its face because it violates the Commerce Clause by subjecting online retailers, without a physical presence in the state, to New York sales and compensating use taxes. They also maintain that the Internet tax violates the Due Process Clause by creating an irrational, irrebuttable presumption of solicitation of business within the state. We reject plaintiffs' facial challenges.

[20 N.Y.3d 591]I.

Plaintiff Amazon.com, LLC is a limited liability company formed in Delaware; Amazon Services LLC is a limited liability company formed in Nevada (collectively Amazon). Its principal corporate offices are located in the State of Washington. Amazon is strictly an online retailer—selling its merchandise solely through the Internet—and represents that it does not maintain any offices or property in New York.

Amazon offers an “Associates Program” through which third parties agree to place links on their own websites that, when clicked, direct users to Amazon's website. The Associates are compensated on a commission basis. They receive a percentage of the revenue from sales generated when

[987 N.E.2d 623]

965 N.Y.S.2d 63]a customer clicks on the Associate's link and completes a purchase from the Amazon site. The operating agreement governing this arrangement states that the Associates are independent contractors and that there is no employment relationship between the parties. Thousands of entities enrolled in the Associates Program have provided a New York address in connection with their applications.

Plaintiff Overstock.com is a Delaware corporation with its principal place of business in Utah. Overstock likewise sells its merchandise solely through the Internet and does not maintain any office, employees or property in New York. Similar to Amazon, Overstock had an “Affiliates” program through which third parties would place links for Overstock.com on their own websites.¹ When a customer clicked on the link, he or she was immediately directed to Overstock.com, and if the customer completed a purchase, the Affiliate received a commission. According to the parties' Master Agreement, the Affiliates were independent contractors without the authority to obligate or bind Overstock.

In April 2008, the legislature amended the Tax Law to include the subparagraph at issue here. In connection with the statutory definition of “vendor,” the Internet tax provides that

“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 [20 N.Y.3d 592]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” (Tax Law § 1101[b][8][vi] ).

The statutory presumption, however, can “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” (Tax Law § 1101[b][8][vi] ).

Shortly after the legislation was enacted, the Department of Taxation and Finance (DTF) issued a memorandum to provide taxpayer guidance on the recent amendment. The document clarified that advertising alone would not invoke the statutory presumption, but further observed that, for purposes of this statute, the placement of a link to the seller's website where the resident was compensated on the basis of completed sales deriving from that link would not be considered mere advertising ( see N.Y. St. Dept. of Taxation & Fin. Mem. No. TSB–M–08[3]S). The memorandum also explained that the statutory presumption could be rebutted through proof that the residents' only activity in New York on behalf of the seller was to provide a link to the seller's website and that the residents did not engage in any in-state solicitation directed toward potential New York customers ( see N.Y. St. Dept. of Taxation & Fin. Mem. No. TSB–M–08[3]S).

The following month, DTF issued a second memorandum, further detailing how sellers could rebut the statutory presumption

[987 N.E.2d 624

965 N.Y.S.2d 64]The presumption would be deemed successfully rebutted if the seller satisfied two conditions: (1) if the parties' contract prohibited the resident representative from engaging in any solicitation activities in New York State on behalf of the seller, and (2) if each resident representative submitted an annual, signed certification stating that the resident had not engaged in any of the proscribed solicitation ( see N.Y. St. Dept. of Taxation & Fin. Mem. No. TSB–M–08[3.1]S).

[20 N.Y.3d 593]Amazon commenced this action on April 25, 2008, seeking a judgment declaring that the statute was unconstitutional both on its face and as applied. Overstock commenced its action on May 30, 2008, making essentially the same arguments and also seeking injunctive relief. Supreme Court, in separate decisions, granted DTF's motions to dismiss the complaints for failure to state a cause of action and denied plaintiffs' cross motions for summary judgment as moot, rejecting all of plaintiffs' challenges to the constitutionality of the statute ( see Amazon.com LLC v. New York State Dept. of Taxation & Fin., 23 Misc.3d 418, 877 N.Y.S.2d 842 [Sup.Ct.N.Y.County 2009] ).

The Appellate Division affirmed the portions of the orders that dismissed the facial challenges under the Commerce and Due Process Clauses and declared the statute constitutional on its face (81 A.D.3d 183, 913 N.Y.S.2d 129 [1st Dept.2010] ). However, the Court modified by reinstating the as-applied challenges, finding that further discovery was required before those claims could be determined. Plaintiffs then entered into stipulations of discontinuance withdrawing their as-applied constitutional challenges with prejudice, which were deemed the final judgments. They now appeal pursuant to CPLR 5601(b)(1) and (d), bringing up for review the prior nonfinal Appellate Division order.

II.

Having elected to forgo their as-applied challenges, plaintiffs now confront the substantial hurdle of demonstrating that the Internet tax is unconstitutional on its face. It is well settled that facial constitutional challenges are disfavored. “Legislative enactments enjoy a strong presumption of constitutionality ... [and] parties challenging a duly enacted statute face the initial burden of demonstrating the statute's invalidity ‘beyond a reasonable doubt.’ Moreover, courts must avoid, if possible, interpreting a presumptively valid statute in a way that will needlessly render it unconstitutional” (LaValle v. Hayden, 98 N.Y.2d 155, 161, 746 N.Y.S.2d 125, 773 N.E.2d 490 [2002] [citations omitted] ).

There is some dispute as to the appropriate standard for evaluating a facial challenge under the Commerce Clause—whether we must determine that there is “no set of circumstances” under which the statute would be valid ( see Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443, 448, 757 N.Y.S.2d 513, 787 N.E.2d 624 [2003], quoting United States v. Salerno, 481 U.S. 739, 745, 107 S.Ct. 2095, 95 L.Ed.2d 697 [1987] ) or apply the stricter test of whether “the statute has a plainly legitimate sweep” ( see [20 N.Y.3d 594]Washington State Grange v. Washington State Republican Party, 552 U.S. 442, 449, 128 S.Ct. 1184, 170 L.Ed.2d 151 [2008] [internal quotation marks and citation omitted]; Crawford v. Marion County Election Bd., 553 U.S. 181, 202, 128 S.Ct. 1610, 170 L.Ed.2d 574 [2008] ). Under either standard, however, the Internet tax is constitutional on its face.

The dormant Commerce Clause has been interpreted to prohibit states from imposing an undue tax burden on interstate commerce ( see

[987 N.E.2d 625

965 N.Y.S.2d 65]Matter of Orvis Co. v. Tax Appeals Trib. of State of N.Y., 86 N.Y.2d 165, 170–171, 630 N.Y.S.2d 680, 654 N.E.2d 954 [1995] ). However, in the absence of an improper burden, entities participating in interstate commerce will not be excused from the obligation to pay their fair share of state taxes ( see Orvis, 86 N.Y.2d at 171, 630 N.Y.S.2d 680, 654 N.E.2d 954). To that end, a state tax impacting the Commerce Clause will be upheld “ ‘[1] when the tax is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related...