Thursday, February 6, 2014

State Sales Tax Enforcement After the Supreme Court’s Denial of Cert in Amazon/Overstock

As we have discussed in prior posts, Amazon and filed petitions for certiorari with the U.S. Supreme Court seeking review of the New York Court of Appeals decision that the New York affiliate click-through nexus statute, on its face, did not violate the Commerce Clause. Late last year, the U.S. Supreme Court denied the petitions and, therefore, the New York Court of Appeals’ decision stands.

While the denial of cert means that the New York statute is constitutional on its face, it is not an indication that the U.S. Supreme Court agrees with the New York Court of Appeals’ decision or that the Court has blessed affiliate click-through nexus laws. It simply signifies that the issues presented in that case did not warrant review. Less than 5% of all petitions for certiorari are granted.

States, however, have taken the denial of cert as a prompt to propose affiliate click-through nexus laws. Thus, representatives have introduced bills in the legislatures of four states—Hawaii, Indiana, Tennessee, and South Carolina—that are modeled after the New York statute. There are some variations among this proposed legislation, but in general each provides for a presumption of nexus if the remote seller pays commissions to a person (the affiliate) who resides in the state for referrals by a website link or otherwise, if the retailer’s sales in the state from such referrals exceed $10,000. The bills would also permit the retailer to overcome the presumption by showing that the affiliate does not otherwise solicit sales on behalf of the retailer or otherwise make a market in the state. The New York Court of Appeals in the Amazon/Overstock cases stated that the presumption was rebuttable, so that the retailer could prove that the affiliate did not engage in solicitation activities on behalf of the retailer in New York. The rebuttable presumption saved the constitutionality of the statute.

In contrast, the Illinois affiliate click-through nexus law that the Illinois Supreme Court ruled was unconstitutional in the Performance Marketing case automatically created nexus based on the affiliate relationships. Similarly, the Connecticut affiliate click-through nexus law does not permit the retailer to submit evidence that its Connecticut affiliates do not make a market in Connecticut on behalf of the retailer. Whether the Connecticut Department of Revenue Services will enforce this statute is unclear at this point, but a recent notice by the Department signifies that it may be preparing to do so. Three weeks after the Supreme Court denied cert in the Amazon/Overstock cases, the Department in AN 2013(9) revoked Special Notice 92(19). Special Notice 92(19) had been issued shortly after the U.S. Supreme Court’s Quill decision.  It provided that the Department would not enforce a Connecticut statute which stated that any retailer that makes retail sales by means of print, radio, or television media or by mail is required to collect the Connecticut tax if the retailer makes more than 100 retail sales from outside Connecticut. The Department took that position in Special Notice 92(19) because it felt that mere “economic presence” is not sufficient to pass the Quill Commerce Clause standard. The Connecticut statute addressed in Special Notice 92(19) is still in effect, albeit with expanded coverage to include Internet sales. See Connecticut General Statutes Section 12-407(a)(12).

In short, five states have already used the Supreme Court’s denial of cert as a basis to consider expanding the reach of their sales tax laws. It is likely that other states will follow suit. Yet the state of the law has not changed as a result of the Amazon/Overstock denial of cert.

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