Supreme Court Denies Petitions for Cert of Amazon and Overstock

As we recently wrote, last spring New York State’s highest court, the Court of Appeals, issued a decision upholding the state’s Internet affiliate nexus law after a challenge made by Overstock.com and Amazon.com. The Court of Appeals found that the law, which creates a rebuttable presumption of nexus for out-of-state vendors who employ in-state affiliates, satisfies substantial nexus requirements and does not violate the Due Process clause.

In September, Overstock.com and Amazon.com sought review of the decision of the Court of Appeals by filing petitions for certiorari with the United States Supreme Court. After extensive briefing by the petitioners, the State of New York, and many amicus curiae, on December 2, the Supreme Court denied the petitions for cert. (See the cases’ status here and here.)

This ends the petitioner’s facial constitutional challenge to the New York affiliate nexus law as Overstock.com and Amazon.com have now exhausted their appellate options. The decision by the Supreme Court not to hear the case, however, does not mean that every state’s affiliate nexus law is valid and enforceable. For instance, the Illinois Supreme Court held in October that Illinois’s Internet affiliate nexus statute was preempted by the Federal Internet Tax Freedom Act. The Supreme Court’s decision Monday has no impact on the now unenforceable Illinois law.

Amicus Briefs Filed in Amazon.com and Overstock.com Supreme Court Case

On September 23, 2013, several organizations and companies filed briefs as amici curiae in support of the petitions for a writ of certiorari filed by Overstock.Com, Inc., Amazon.com., Inc., and Amazon Services, LLC, requesting review by the United States Supreme Court of the New York Court of Appeals decision in Overstock.com, Inc. v. New York Department of Taxation and Finance, 20 N.Y.3d 586, 987 N.E.2d 621 (2013). Among the briefs filed was the Brief of Newegg, Inc. and the Direct Marketing Association, Inc. (the "DMA") as Amici Curiae in Support of the Petitioners. In their brief, Newegg and the DMA argue that the New York “click through affiliate nexus” statute, N.Y. Tax Law sec. 1101(b)(8)(vi), through an improper legislative presumption, narrows the zone of protected interstate advertising activity for out-of-state retailers under the Commerce Clause by shifting onto the retailers the burden of disproving “substantial nexus” with the state, in violation of the due process rights of retailers. Newegg and the DMA argue that the Constitution’s Due Process Clause prohibits states from using presumptions to interfere with matters that are removed from their authority by the Constitution, such as the regulation of interstate commerce. Brann & Isaacson partners Martin I. Eisenstein, George S. Isaacson, and Matthew P. Schaefer prepared the brief of amici on behalf of Newegg and the DMA.

Among the other organizations filing briefs were the Tax Foundation and the National Taxpayers Union, the American Legislative Exchange Council, the American Association of Attorney-Certified Public Accountants, and Scrapbook.com, Assisted Living Store, Inc., et al.

Amazon.com and Overstock.com Petition U.S. Supreme Court over New York Affiliate Nexus Law

We’ve written frequently about developments in Amazon.com and Overstock.com’s challenges to the New York State affiliate nexus law (a law which has inspired similar laws in many other states). Last spring, the New York Court of Appeals, the State’s highest court, upheld the law, stating that, in regards to the parties’ Commerce Clause claims, the “statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as ‘demonstrably more than a ‘slightest presence’’” under the Tax Appeals Tribunal’s 1995 ruling in the Orvis case. The Court continued by saying that “The bottom line is that if a vendor is paying New York residents to actively solicit business in this State, there is no reason why that vendor should not shoulder the appropriate tax burden.” The Court rejected the parties’ due process claims, as well.

Late last month, both Amazon.com and Overstock.com took their challenge to the United States Supreme Court, each filing a petition for a writ of certiorari, seeking review of the New York affiliate nexus law and of the New York Court of Appeals Decision (see status of the petitions here and here). New York has until October 23 to file a response in each case. However, as the Supreme Court’s review is discretionary, it is unclear whether the matter will be actually be heard by or decided by the Supreme Court. If not, the New York decision will stand, and other states’ versions of the affiliate nexus law will not be impacted. Meanwhile, the Marketplace Fairness Act, which could, in theory, make challenges such as these moot, remains in committee in the House of Representatives.

We will continue to track developments and keep our readers posted.

February 2013: An Eventful Month In The Debate Regarding Use Tax Collection By Internet Retailers

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.

Florida Introduces Affiliate Nexus Legislation

For the sixth year in a row, Florida legislators introduced a bill that (like many states before it) would create a rebuttable presumption that any out-of-state Internet retailer or mail order seller which enters into an agreement with a Florida resident (an “affiliate”) for paid referrals is subject to the State’s sales and use tax.  Referrals which subject out-of-state sellers to Florida tax are broadly defined and can be via “a link on an Internet website, an in-person oral presentation, telemarketing, or otherwise.”  Out-of-state sellers who have cumulative gross receipts of $10,000 or less from the referrals would not be subject to Florida tax.  As in several other states, the bill would allow sellers to rebut the presumption that they are subject to tax by submitting evidence that the affiliates “did not engage in any activity within [Florida] which was significantly associated with the dealer’s ability to establish or maintain the dealer’s market…during the 12 months immediately before the rebuttable presumption arose.”

As we have written previously, in response to a challenge by Amazon.com to a similar law enacted in 2008 in New York, a New York State appeals court held that the law was not unconstitutional on its face because it allows a retailer to rebut the presumption of solicitation.  The court remanded the case to the lower court to determine whether the law violated the Constitution’s Commerce and Due Process Clauses as applied to Amazon.com.  In the meantime, as similar affiliate nexus laws have been passed in a handful of other states, many retailers have terminated their affiliate relationships.  Also, last spring, in a case argued by George Isaacson and Matt Schaefer of Brann & Isaacson, an Illinois court found that Illinois’ affiliate nexus law, which does not allow an affected retailer to rebut the statute’s conclusive determination that having affiliates in the state creates nexus, violates the Commerce Clause as well as the Internet Tax Freedom Act.

More Cautionary Tales of State Tax Laws With Retroactive Effects

We have written before about retroactive tax laws, but there is reason for concern that the phenomenon of states resorting to retroactivity may be on the rise. In the most recent case to wind its way to the end of the state appeal process, the Michigan Court of Appeals upheld a statute that amended Michigan’s use tax code with an effective date 5 years prior to its enactment. General Motors Corp. v. Department of Treasury, 290 Mich. App. 355 (2010), appeal denied, 489 Mich. 991 (2011), and cert. denied, 132 S.Ct. 1143 (2012). The Michigan Supreme Court denied review in the case last year, and the U.S. Supreme Court refused to review the decision a few weeks ago, in late January 2012. The decision by the GM Court, which cited the Kentucky case discussed in our earlier blog post, Miller v. Johnson Controls, 296 S.W.3d 392 (Ky. 2009), rehearing denied (2009), and cert. denied, 130 S.Ct. 3324 (2010), suggests that the legal standard a state must satisfy to amend its tax law retroactively is, in many instances, not very exacting.

GM concerned a statute passed by the Michigan legislature to block the giant automaker (and potentially other companies) from obtaining a refund of use tax paid on “demonstration” vehicles driven temporarily by GM employees, but expressly held by GM in inventory for resale, and later sold to consumers. Over the years, GM had paid tens of millions of dollars in use tax based on the Michigan Department of Treasury’s enforcement position, asserted in audits of the company, that GM was required to self-assess and pay Michigan use tax as a result of its employees’ temporary use of the vehicles in the state.

However, in 2006, the Michigan Court of Appeals held (in a case involving auto dealerships) that such demonstration vehicles acquired and held for resale were not subject to use tax, and that interim employee use did not result in conversion of the autos’ use to a taxable use, as the Department argued. The Michigan Supreme Court affirmed the relevant portion of the Betten decision in 2007. Betten Auto Center, Inc. v. Department of Treasury, 272 Mich.App. 14, 20-22 (2006), aff’d in pertinent part, 478 Mich. 874 (2007).

There May Yet Be Life In The Quill Due Process Prong

In February 2011, we wrote about a case (Gordon v. Holder), in which the federal Court of Appeals for the District of Columbia Circuit vacated the denial of preliminary injunction against the enforcement of the federal Prevent All Cigarette Trafficking Act (PACT Act), P.L. 111-154 (2010). The PACT Act mandates state sales/use tax compliance by “delivery sellers” of tobacco products, regardless of whether the seller has a physical presence in the state. In vacating the denial of the preliminary injunction, the D.C. Circuit also advised the lower court to address on remand the issue of whether the PACT Act’s imposition of “potentially disparate burdens on ecommerce” violates the Due Process Clause of the United States Constitution (even though Congress has the authority to impose such burdens under the Commerce Clause). It appears that the Gordon case remains on remand before the district court as of this writing.

The Second Circuit Court of Appeals has now also ruled that a federal law must satisfy a minimum standard under the Due Process Clause before it may purport to authorize the imposition of state use tax collection by remote sellers. Red Earth LLC v. Holder, __ F.3d __, 2011 WL 4359919 (September 20, 2011). In Red Earth, the Second Circuit upheld the granting of a preliminary injunction against the PACT Act’s state tax collection provisions as they apply to certain Native American “delivery sellers” of tobacco products, on the grounds that the Act may be in violation of basic Due Process standards. Although, as the Court noted, the Due Process Clause does not require that a retailer have a “physical presence” in a state before a use tax obligation may be imposed, the Court found that the district court did not err in ruling that PACT Act likely violates the Due Process Clause because it “requires a seller to collect based on its making of [only] one delivery” in the state.

D.C. Circuit Cites Quill as Instructive in Analyzing the Due Process Ramifications of a National Tax Scheme

The Supreme Court’s analysis in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) has been cited favorably again, this time with regard to a Due Process challenge to a federal statute. On February 18, the United States Court of Appeals for the District of Columbia Circuit vacated the denial of a motion for a preliminary injunction brought by a plaintiff challenging the constitutionality of a federal law regulating online sales of tobacco products, and remanded the case for further proceedings. Gordon v. Holder, 2011 WL559002 (D.C. Cir. Feb. 18, 2011). Previewing the issues to be addressed by the District Court on remand, the Court of Appeals cited Quill as “instructive” in analyzing the plaintiff’s claim that the federal statute violates the Due Process Clause.

In a statement likely to send shivers up the spines of the members of the Governing Board of the Streamlined Sales and Use Tax Agreement and other advocates for federal legislation to override Quill’s “physical presence” requirement arising under the Commerce Clause, the D.C. Circuit commented that “there remains an open question whether a national authorization of disparate state levies on e-commerce renders concerns about presence and burden obsolete” as a matter of Due Process. Id. at *4 (emphasis added). While this statement, and the Court’s opinion, does not alter the analysis under Quill of the constitutionality of state tax (and tax-related) laws under the Commerce Clause, it suggests that the concerns about “presence and burden” presented in Quill are potentially also relevant to determining whether a federal law authorizing state tax levies is consistent with the Due Process Clause.

DMA Wins Landmark Injunction Against State of Colorado

On behalf of the Direct Marketing Association, Brann & Isaacson partners George Isaacson and Matthew Schaefer won a landmark preliminary injunction in federal court in a lawsuit that affects thousands of direct marketers across the country. The ruling prohibits the State of Colorado from enforcing its controversial new law, H.B. 10-1193, that required direct marketers to -- among other things -- report to the state the names, addresses, and purchase amounts of their customers.

To be clear, so long as the injunction remains in place, out-of-state retailers that do not have nexus with Colorado and do not collect Colorado sales tax are no longer required to: (1) give notice to their Colorado customers, in connection with each sale, that the customer must report Colorado use tax (the “Transactional Notice”); (2) send via First Class mail by January 31, to each customer that purchased more than $500 of goods for delivery to Colorado during 2010, a summary of their purchases for the year (the “Annual Purchase Summary”); or (3) submit a report to the Colorado Department of Revenue, by March 1, listing the name, billing and shipping addresses, and total amount of purchases of all customers who purchased goods for delivery to Colorado (the “Customer Information Report”).  See http://www.colorado.gov/cs/Satellite/Revenue/REVX/1251581938320.

The DMA argued that the law violates the Commerce Clause of the United States Constitution by (a) imposing discriminatory obligations upon out-of-state retailers that do not apply to in-state Colorado retailers, and (b) unduly burdening interstate commerce under principles set forth by the Supreme Court in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court accepted these arguments in finding that the DMA had a likelihood of success on both Commerce Clause counts, and concluded that out-of-state retailers subject to the new law would suffer irreparable harm if enforcement of the statute is not barred.

The preliminary injunction entered by the Court does not end the case, but it effectively suspends the law while the litigation continues and until the Court makes a final ruling regarding the law’s constitutionality.

You can read a copy of the order here.

Read previous posts about the lawsuit here and here.

DMA’s Constitutional Challenge to Colorado’s Notice and Reporting Law Will Be Argued In Federal District Court on January 13

A happy new year to our readers. Many internet and catalog retailers have been following with interest the constitutional challenge of the Direct Marketing Association (“DMA”) to Colorado’s new notice and reporting law, H.B. 10-1193, enacted in 2010. In addition to burdensome consumer notice requirements that went into effect last year, the law requires out-of-state retailers that do not collect Colorado sales and use tax to send (by January 31, 2011) annual purchase summaries to customers purchasing $500 or more of goods for shipment to Colorado and, worst of all, to file (by March 1, 2011) with the Colorado Department of Revenue a listing of all of the retailer’s customers who have purchased goods for shipment to a Colorado location, regardless of where the customer resides.

As we previously reported (see our July 2, 2010 post), the DMA contends that the Colorado law violates multiple provisions of the United States Constitution, because it discriminates against interstate commerce, exceeds the State’s regulatory authority over out-of-state businesses, violates the privacy rights of Colorado consumers, infringes the free speech and due process rights of retailers and consumers, and deprives retailers of their valuable customer list information without due process or fair compensation. The DMA has filed a motion for preliminary injunction based on the law’s violations of the Commerce Clause, asking the Court to suspend enforcement of the law’s notice and reporting requirements pending a full adjudication of the law’s constitutionality.

The federal District Court for the District of Colorado has scheduled a hearing on the DMA’s motion to be held on January 13, 2011, at 10:00 a.m. in Denver. B&I senior partner and lead counsel for the DMA, George Isaacson, will argue the motion on behalf of the DMA. We will report on further developments after the hearing.

Is Amnesty Really Amnesty?

States frequently announce amnesty programs. In return for settlement of back taxes, taxpayers obtain waiver of penalties and sometimes a reduction of interest. It has now become increasingly common, however, that states provide a stick to go along with the carrot of penalty waiver. Thus, Pennsylvania completed an amnesty period on June 18 in which it provided for waiver of penalties for payment of back taxes. The Governor of the Commonwealth, Ed Rendell, has announced that in the future, an additional 5% penalty will apply to all tax delinquencies that remained after June 18. In addition, he pointed out that the DOR will begin to seek to hold corporate officers personally accountable for taxes businesses owe and take other aggressive means to enforce the taxes.

Back in 2005, California announced a similar program, by which it increased the accuracy penalty from 20% to 40% and assessed an additional 50% “interest penalty” for all those taxpayers who did not apply for amnesty. Other states have followed a similar approach.

Is an offer of relief from liability coupled with a penalty for failure to take the offer really amnesty? Webster’s defines amnesty as a pardon from an authority. The consideration by the taxpayer for such pardon is the payment of back taxes. The sort of punitive measures, however, that some states impose for failure to acknowledge liability is not a pardon. Serious questions of taxpayer fairness are raised. Why should there be an additional penalty and in some cases threat of personal liability when a taxpayer has a legitimate dispute and chooses not to seek “amnesty”? The Due Process Clause of the U.S. Constitution is designed to provide every citizen their “day in court.” Imposing a penalty for the exercise of this due process right seems to be inconsistent with the basic principle of fair dealing that should be the very foundation of our tax system.

B&I Files Constitutional Challenge to Colorado Notice and Reporting Law for The Direct Marketing Association

We've blogged frequently about Colorado's new notice and reporting law (see here and here).

Since our last posts on the topic, Brann & Isaacson's George Isaacson and Matthew Schaefer filed suit in federal district court in Colorado on behalf of The Direct Marketing Association in The Direct Marketing Association v. Roxy Huber.  Filed on June 30, the suit challenges the constitutionality of the new Colorado law.

The Colorado statute, which targets out-of-state retailers, purports to require those retailers to notify Colorado customers of their obligation to self-report use tax and to require those same retailers to turn over confidential purchasing information regarding Colorado customers to the Colorado Department of Revenue. In the complaint, the DMA, the leading global trade association of direct marketing businesses and nonprofit organizations, asserts that the Colorado statute discriminates against interstate commerce, exceeds the State’s regulatory authority over out-of-state businesses, violates the privacy rights of Colorado consumers, infringes the free speech and due process rights of retailers and consumers, and exposes confidential consumer information to the risk of unauthorized disclosure.

We'll continue updating you as developments arise.

Have a safe and happy Independence Day!

Supreme Court Declines To Review Retroactive Ban On Refund Claims

So you think a state cannot change its tax laws after the fact to validate an erroneous legal interpretation by its revenue department that caused massive over-reporting of tax? Think again. Indeed, we were reminded earlier this week that, at least in some circumstances, states can retroactively adjust the rules to foreclose even pending claims for tax relief.

The United States Supreme Court on May 24 declined to review a decision by the Kentucky Supreme Court in Miller v. Johnson Controls, Inc., 296 S.W.3d 392 (Ky. 2009). In Miller, the Kentucky Court upheld a state statute enacted in 2000 that retroactively barred refund claims by a group of corporate taxpayers who complied with a policy adopted by the Kentucky Revenue Cabinet, challenged the policy as unlawful, and got it invalidated back in 1994 (by the Kentucky Supreme Court, no less).

Here’s the background: In 1988, the Revenue Cabinet interpreted Kentucky law as prohibiting the filing of unitary income tax returns by corporate taxpayers, and instead required each corporation to file a separate return. The inability to file unitary returns resulted in substantially higher Kentucky taxes for a number of corporations. After the Kentucky Supreme Court ruled in 1994 that unitary returns were allowed under Kentucky law, the taxpayers amended their earlier returns, and sought refunds for the excess tax paid during the earlier years.