If it seems like there has been a lull in the debate regarding whether ecommerce vendors should be required to collect sales and use tax, this month has seen a series of developments that demonstrate the conflict continues apace.
On February 6, 2013, New York’s highest court
heard oral arguments by attorneys for Amazon.com, Overstock.com, and the state
Department of Taxation and Finance in the Internet retailers’ respective constitutional
challenges to the New York affiliate nexus law enacted in 2008. (The cases are
captioned Amazon.com v. New York State
Department of Taxation and Finance, Court of Appeals Case
No.APL-2012-00045, and Overstock.com v.
New York State Department of Taxation and Finance, Court of Appeals Case No. APL-2012-0001.) Recall that, under the New York law, an
out-of-state retailer is presumed to be soliciting sales through
representatives in the state if it enters into a contract with a New York
resident for the placement of a link on the resident’s website that refers
internet users to the out-of-state retailer’s website, pays the New York
resident compensation based on sales to customers completed through the link,
and makes a minimum $10,000 in such sales to New York customers. See N.Y.Tax Law § 1101(b)(8)(vi).
A retailer with an in-state
representative that solicits sales is required under New York law to collect
and remit use tax on sales to New York customers. The state prevailed before the trial court and
intermediate appellate court finding that the law was not unconstitutional on
its face. According to reports, the Justices on the Court of Appeals appeared somewhat receptive to Amazon’s
arguments that (1) the law violates the Due Process Clause because the
presumption cannot be effectively rebutted and (2) the law violates the Quill “physical presence” standard of
nexus. That said, the state has the advantage of
having prevailed below. Decisions by a
state high court are usually issued several months after argument, and we will
continue to monitor the case.
On Valentine’s Day, proposed federal legislation that would
authorize states to require remote sellers with no physical presence in the
state to collect the state’s sales and use taxes was introduced in both the
United States Senate (S. 336) and House of Representatives (H.R. 684). The two bills, each entitled the
“Marketplace Fairness Act,” are identical. Like similar legislation introduced in
Congress last year, the current “Marketplace Fairness Act” does not require
meaningful uniformity or simplification by states of their complex sales and
use tax systems as a precondition for imposing a tax collection obligation on
retailers with no physical presence in the state. S. 336
was referred to the Senate Finance Committee, and H.R. 684 was referred to the
House Committee on the Judiciary. Some
members of Congress, including chairpersons of each of the relevant committees
(Senator Baucus (D-MT) and Representative Goodlatte (R-VA)), have expressed
concerns about the bill.
On February 22, 2013, the Performance Marketing Association
(“PMA”) filed its brief with the Illinois Supreme Court in response to the
appeal taken by the Director of the State Department of Revenue from the ruling
of the Cook County Circuit Court issued in May 2012. The Circuit Court’s Order, entered in the
PMA’s favor, struck down the 2011 Illinois affiliate nexus law as
unconstitutional and preempted by the Internet Tax Freedom Act (“ITFA”). The
Illinois statute creates a conclusive rule of law imposing a use tax collection
obligation on an out-of-state Internet retailer that enters into a contract
with an affiliate located in Illinois for the placement of a link on the
affiliate’s website that refers internet users to the retailer’s website, pays
the affiliate compensation based on sales to customers completed through the
link, and makes a minimum $10,000 in such sales to customers (regardless of
location). See 35 ILCS 105/2 (para. 1.1).
The Circuit Court for Cook County agreed with the PMA that the statute,
on its face, violates the Quill
physical presence standard of substantial nexus under the Commerce Clause, and
is preempted under the Supremacy Clause by virtue of the ITFA moratorium on
discriminatory state taxes against electronic commerce. The state appealed and filed its brief late
last year. The PMA again emphasized the
Act’s fundamental shortcomings, and the weaknesses in the state’s arguments in
defense of the law, in its brief filed on February 22. After the state files its reply March, oral
argument in the appeal is likely this fall. George Isaacson and Matt Schaefer of Brann & Isaacson represent the PMA in the case.
Finally, during February 2013, legislators in four more
states--Maine, Michigan, Minnesota and Mississippi--introduced bills
proposing New York style affiliate nexus provisions. They join at least four other states that
introduced similar measures in January 2013, including Florida, Hawaii, Indiana
and Kansas. Affiliate nexus bills have
failed to pass in several of these states in prior legislative sessions.
If this month is any indicator, 2013 may be an
active year for developments regarding the states’ authority to require use tax
collection by Internet retailers and other remote sellers. Please stay tuned for updates and further analysis
in this area.