State and Local Tax (SALT) | | Oct 08, 2013
Summary. Overstock.com and Amazon.com litigation against the State of New York over sales and use tax heats up as both firms file petitions in the United States Supreme Court to review the Court of Appeals of New York’s decision against both firms.
Background. Historically, a state could not tax out-of-state businesses that lack a physical presence in that state. This principle was most recently reaffirmed in Quill Corp. v. North Dakota ex rel Heitkamp, 504 U.S. 298 (1992),when the U.S. Supreme Court held that the State of North Dakota’s taxation of a mail order business was unconstitutional under the dormant Commerce Clause. In 2008, the State of New York enacted a law that required internet retailers to collect sales tax on purchases by New York residents if the retailer enters into commission-based referral payment agreements with New York state resident website operators. Plaintiffs Overstock.com and Amazon.com operate affiliate advertising programs under which website operators are paid a commission on purchases made by customers who click through the website operators’ sites to make a purchase at the plaintiffs’ websites. The State of New York’s Legislature enacted, and its courts upheld, a law that this level of economic contact with the state was sufficient nexus to require the plaintiffs to collect sales tax. The legal questions presented to the U.S. Supreme Court come down to two main issues:
1. Quill established a bright-line, physical presence requirement before a business had a sufficiently substantial nexus with a state before that state can tax the business.
2. Historically, only the authorized agents for a company have been considered sufficient to establish a substantial nexus. Advertising, even if extensive and pervasive within a state, was not sufficient to establish a substantial nexus.
This leads to the primary question before the Supreme Court: Is the presence of an authorized agent still the minimum required contact with a state before the state can tax an otherwise out-of-state business?
At stake are sales & use taxation revenue on trillions of dollars of purchases over the internet each year. The top appellate courts of several states are deeply divided on this issue. Some have ruled similarly to New York, while others have continued to follow Quill’s bright-line physical presence test.
Prager’s Take. In general, the U.S. Supreme Court tends to avoid overruling prior cases if at all possible, especially long-standing cases. Even though Quill is only twenty years old, its principles reach back over half-a-century. This suggests that the Amazon.com and Overstock.com should prevail. In Quill, however, the Supreme Court also said that Congress could resolve this issue with appropriate legislation. By itself, this improves the likelihood that the appellants will prevail. A win for the appellants may prompt Congress to resolve this issue through legislation, effectively handing the victory to the State of New York.