Summary: In 2008, New York enacted the Amazon Tax Law, requiring certain e-tailers to collect and remit tax on sales to NY residents. The law has created controversy as to whether the relationship between the e-tailers and the in-state businesses creates sufficient nexus for imposition of this requirement. The law, which is currently being litigated, may have set a trend as other states have proposed or enacted similar measures emulating the New York Amazon Law.

Author Andrew Swain writes: By way of background, Amazon.com is an online retailer headquartered in Seattle, Washington, which makes online sales throughout the world. Amazon.com LLC v. New York State Dept. of Taxation & Fin., 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 2009). Amazon.com does not own property, maintain offices, or retain any employees in New York. The company does, however, maintain an affiliate marketing program, known as its Associates Program, which allows participants to link to Amazon and receive up to 15% in fees on products Amazon sells as a result of the referrals. While Amazon does not have a physical location based in New York, many of its affiliates are residents of New York that clearly have nexus with the state. Thus, a question arises as to whether Amazon's relationship with its New York participants creates nexus between the state and Amazon. In essence, the law as enacted by New York State states that this is exactly what happens.

NY CLS Tax § 1101(b)(8) as amended by Chapter 57 of the Laws of 2008 (the Amazon Tax Law) provides that "certain sellers of taxable, tangible personal property or services are sales tax vendors that are required to register for sales tax purposes and collect state and local sales taxes." The "certain sellers," as defined in Technical Services Memorandum Bulletin TSB-M-08(3)S, New Presumption Applicable to Definition of Sales Tax Vendor (2008), which was issued by the New York State Department of Taxation and Finance to clarify the amended NY CLS Tax § 1101(b)(8), are out-of-state vendors who work with independent contractors or other representatives that are residents of the state of New York.

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The law creates a rebuttable presumption that the online retailer is subject to the state's tax jurisdiction. The presumption can be rebutted "by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the U.S. Constitution during the four quarterly periods in question." See NY CLS Tax § 1101(b)(8)(vi).

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An out-of-state seller that meets the definition of a vendor under the amended law can rebut the presumption only if it meets two conditions:

• First, the seller must have a written contract or agreement with the New York resident that prohibits the resident from soliciting potential customers in the state and referring them to the seller.
• Second, the seller must demonstrate compliance with the Amazon law. It does this by having each of its in-state resident representatives annually sign and submit to it a certification that the representative has not engaged in prohibited solicitation in New York at any time in the previous year.
  

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Since New York enacted its Amazon Tax Law, 10 other states (California, Connecticut, Hawaii, Illinois, Minnesota, Maryland, North Carolina, Rhode Island, Tennessee, and Wisconsin) have either considered or are currently considering enacting a similar law. Of these ten, two (California and Maryland) failed to pass their versions of the Amazon Law, while two others (Hawaii and Rhode Island) succeeded in passage. (NOTE: The Hawaii legislation was later vetoed by the Governor, a veto that the legislature chose not to override.)

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The long-term implications of Amazon Tax Laws are uncertain. Proponents of the Amazon provisions present them as a means of leveling the playing field between in-state retailers, usually brick-and-mortar sellers, who have had to collect state and local sales taxes, and out-of-state sellers, who can often avoid those collection responsibilities. In truth, though, the main reason that states consider the provisions is the millions of dollars in sales tax revenue that the provisions allow the states to collect. It is estimated that state and local taxing authorities lost $16 billion in taxes in 2004, for example, and that, based on current rates, losses for 2008 are probably between $21.5 billion and $33.7 billion.

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A negative implication for states that enact an Amazon tax provision is a probable decline in state income taxes as out-of-state, online retailers sever their ties with their in-state affiliates. Online retailers such as Amazon, Overstock, and Blueline have already severed ties with thousands of in-state affiliates in New York and Rhode Island and have threatened to do the same in states where similar provisions are pending. The impact on individual businesses ranges from a loss of only hundreds of dollars per year to tens of thousands, driving some out of business. Of course, any decline in state income tax as a result of a state's enacting an Amazon Tax Law would subtract from the usefulness of the provision.

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For further discussion, see 1-12 Bender's State Taxation: Principles and Practice § 12.04.