The Days of Tax-Free Internet Sales May Be Over – Takeaways for Online Retailers

“…it appears as though the age of tax-free clicks is coming to an end.” (Looper Reed)

Late last month, New York’s highest court ruled that Amazon, Overstock.com, and other Internet retailers who get business from affiliates based in that state could be required to charge sales tax on purchases generated from those relationships.

The background, from attorney David Morganelli at Partridge Snow & Hahn:

“The case turns on the application of the Commerce Clause to the US Constitution, which has historically been interpreted to require, for a retailer, ‘physical presence’ in a state before becoming subject to a sales tax collection obligation. Under the Commerce Clause, an activity must have ‘substantial nexus’ to a state before sales tax can be imposed, and only a physical presence can satisfy this standard.”

To get around this – and cash in on lost sales tax revenues – New York changed the rules. Hollis Hyans and Irwin Slomka from law firm Morrison & Foerster explain:

“The New York law was amended in 2008 to provide a presumption that the definition of a ‘vendor,’ required to collect New York State sales tax on sales to New York customers, includes an entity that enters into an agreement with a New York resident under which the resident refers potential customers, including via a link on a website, ‘for a commission or other consideration.’”

Amazon and Overstock.com challenged the law, claiming it was unconstitutional. From attorneys at Baker Donelson:

“Overstock.com and Amazon.com initiated their constitutional challenges to New York’s ‘click-through nexus’ statute on the basis that the statute as-applied and on its face was unconstitutional in violation of the Commerce Clause because they did not have the requisite substantial nexus with New York (and also that the statute violated the minimum contacts requirement of the Due Process Clause).”

In plain English: we don’t have operations in New York, so you can’t make us charge sales tax. Unfortunately for the online retailers (and their customers), the court disagreed. Again, Hyans and Slomka:

“The Court of Appeals found that it was rational for the state legislature to presume that New York residents who were compensated on a commission basis would seek to increase their business by soliciting New York customers, and that the ability to rebut the presumption through an annual certification ‘sensibly’ placed the burden on the retailers to demonstrate the lack of solicitation activities.”

Three takeaways for online merchants:

1. This is a lot bigger than New York:

“New York’s statute was the first of its kind and spawned similar legislation in other states, including Arkansas, Connecticut, Georgia, Illinois (declared unconstitutional by a trial court, appeal pending), North Carolina, Pennsylvania, Rhode Island and Vermont. Similar legislation has been proposed in a number of other states.” (Baker Donelson)

2. It could get very expensive, very quickly:

“There are approximately 9,600 individual tax jurisdictions throughout the United States, all of which have unique tax laws and regulations. While there is significant infrastructure and software to help businesses keep track of the different applicable tax regulations, one can expect significant switching costs for implementation and training – costs that will likely hit small internet businesses and start-ups the hardest.” (Fuerst Ittleman David & Joseph)

3. Amazon and Overstock may appeal – but it may not matter:

“On April 22, the U.S. Senate voted to limit debate on a motion to proceed to the consideration of Senate Bill 743, otherwise known as the Marketplace Fairness Act (the “Act”), by a bipartisan vote of 74 to 20… The Act empowers states and municipalities to require internet retailers to collect the use tax due from the consumer at the time of purchase.” (Dinsmore)

The updates:

Also read:

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