This post was written by Kelley C. Miller and Daniel M. Dixon.
On March 21, we posted Clouds Continue To Rain State Tax On Retailers, the most recent in a series of blog posts related to the U.S. state tax implications of cloud computing, e-Commerce and retailing. To keep the thread going, this past Thursday (March 28), the New York Court of Appeals, the highest state court thus far to consider the issue, issued a much-anticipated ruling in Overstock.com v. New York Department of Taxation and Finance (combining two similar cases brought by e-retailers Overstock.com and Amazon.com. At issue is the New York statute that requires the collection of sales or use tax from an e-retailer (a remote vendor) with no physical presence in the state, if, as part of its business model, it pays in-state residents to assist in business solicitation; and the question being litigated is whether that statute violates the Due Process Clause or Commerce Clause of the U.S. Constitution. The Trial Court—and now the Court of Appeals—have upheld the law.
Significant to the Court of Appeals’ decision is its deference to the bright-line requirement of physical presence necessary for a state to require sales or use tax collection. This standard was set forth by the United States Supreme Court in Quill v. North Dakota (504 U.S. 298; 1992). Although the Court of Appeals acknowledged that Quill is still applicable even though the “world has changed dramatically in the last two decades,” it nonetheless noted that changing the physical-presence requirement in light of the way e-retailers now conduct their business, “would be something for the United States Supreme Court to consider.” A key issue in the case was whether the in-state residents hired or engaged by Overstock and Amazon, and who were involved in soliciting business – they are often referred to as “affiliates” – were actively soliciting customers in the state or whether their actions were more akin to that of an advertiser seeking to influence buying patterns – conduct that might be seen as more passive and, accordingly, would not meet Quill’s physical presence standard.
Despite hopes that the Court of Appeals might address this issue in its decision, the majority deferred discussion of this important distinction in lieu of a more focused analysis of whether the New York statute was unconstitutional on its face. The court held that a discussion of the affiliates’ activities was not warranted as neither Overstock.com nor Amazon.com could prove there were no circumstances under which the statute could be constitutionally applied: "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 dissenting opinion, however, does address the possibility that there could be significant distinctions between those who act as sales agents for a company and those who place advertisements for a company on websites. The dissent noted that mere advertising by a remote seller, through use of an in-state affiliate that might place advertisements on websites, does not meet the Quill test for physical presence. Placing links on websites from within the state to e retailers are advertisements and not solicitations.
Reacting to the decision, Overstock.com indicated that it may ask the United States Supreme Court to review the issue. In a press release issued yesterday by Overstock.com, Acting Chief Executive Officer Jonathan Johnson noted, "Given that courts in other states have upheld U.S. Supreme Court precedent, and struck down similar laws, the matter appears ripe for resolution by the U.S. Supreme Court." To ask the Supreme Court to review the ruling in the case, a petition for writ of certiorari would be due on or before June 26.
The Reed Smith State Tax Team will be closely following developments in this case, including not only the possibility of an appeal to the United States Supreme Court, but also the status of The Main Street Fairness Act of 2013 – U.S. federal legislation currently pending in the House of Representatives (and recently given symbolic approval in the Senate) that would allow states to impose sales and use tax requirements on e-retailers (presumably engaged in inter-state commerce) even if the e-retailer does not have a physical presence in a state.
For more information regarding these developments and to stay on top of the legal wrangling in state taxation related to e-Commerce, contact Kelley C. Miller or Daniel M. Dixon directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joe Rosenbaum, or the Reed Smith attorney with whom you regularly work.
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So now it is official and perhaps an illustration of how life can imitate art – in this case the motion picture “ Pluto.gif)
