Amazon.com v. New York: Amazon’s Constitutional Challenge to NY Tax Law Dismissed

Amazon.com LLC v. New York Dept. of Tax and Finance, No. 601247/08 New York State Supreme Court, First Judicial District, January 12^th 2008 Order

On January 12^th, 2008, Judge Bransten dismissed Amazon’s lawsuit challenging a recently enacted New York State tax law.  The law requires certain sellers, who have no physical presence within the state, to collect sales tax if the seller has commissions-based independent contractors in-state that generate more than $10,000 worth of business in a given year.  Among other things, Amazon alleged the law violated the Commerce Clause because it imposes tax obligations on out-of-state sellers who lack a “substantial nexus” with New York. Judge Bransten rejected all of Amazon’s claims, noting that the statute was “carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes . . . .” 

Law.com and Ars Technica provide an overview of the order and litigation thus far.

Erick Schonfeld of Tech Crunch comments, agreeing with New York’s motive but objecting to the means state legislators used to achieve them.  He writes that the law creates “bad precedent” insofar as it overstates the connection between Amazon and its “affiliates.”

Enacted in April of 2008, the new tax law targets sellers who solicit business from within New York through “independent contractors or other representatives if the seller enters into an agreement with a resident of [New York] under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by link or an internet website or otherwise, to the seller. . . .” N.Y. Tax Law § 1101(b)(8)(vi).  

Amazon ran afoul of the statue by way of its “Affiliates Program” in which participating websites maintain links to Amazon.com.  Generally, when affiliate websites refer customers to Amazon, they receive a “$12 bounty” for each new Amazon enrollee, as well as a commission calculated as percentage of revenues generated by the referral. In its pleadings, Amazon admitted to having “thousands” of such affiliates who provided New York State addresses on their applications, but noted that the program is responsible for less than 1.5% of its total New York sales revenue. 

Amazon raised a variety of constitutional challenges, alleging (a) the law improperly taxed out-of-state entities in violation of the Commerce Clause; (b) the statute was overly broad and vague with regard to defining “solicitation” in violation of Amazon’s Due Process rights and; (c) violated the Equal Protection clause insofar as it specifically “targeted” Amazon in an impermissible “class of one.” 

Judge Bernstein dismissed the complaint in full, noting “there is no basis on which Amazon can prevail.”  The court stated that in order for state taxation to be constitutional, the seller must have a “substantial nexus” with the state; physical presence in the state is necessary, but it need only be more than “a slightest presence.”  Noting the careful wording of the tax law, Judge Bernstein rejected Amazon’s facial challenge and proceeded to analyze the law as applied to the retailer.  Reasoning that Amazon had contracted with New York residents and could reasonably expect this to result in New York referrals in excess of $10,000, the court upheld the tax law as applied. 

Amazon next contended that there was no rational relationship between contracting with New York residents, and the statutory presumption that these residents would solicit business for Amazon from other New York residents.  The court rejected the Due Process claim, recognizing the “high degree of probability” that in-state residents would be motivated by the commission structure to encourage sales, and that the encouragement would be directed towards other state residents. 

Finally, the court rejected Amazon’s Equal Protection claim, noting that the retailer had not asserted any instance in which it had been treated differently from other similarly situated businesses.