Amazon.com Sues To Strike Down New N.Y. Tax Law

By JOSEPH GOLDSTEIN, Staff Reporter of the Sun
May 2, 2008

Amazon.com is fighting back with a lawsuit trying to strike down New York state's new law forcing the online retailer to collect sales taxes on the state's behalf.

The dispute, which is before a state court in Manhattan, is heading toward a constitutional showdown that will center on whether New York State is hindering interstate commerce by imposing on out-of-state companies, such as Amazon.com, the burden of serving as a tax collector for New York.

The so-called Amazon tax has been a touchy political issue as Albany has looked for novel ways to fund the state government's soaring spending amid a predicted drop-off in state tax revenue as the economy slows. The state's tax department first set its sights on Amazon.com last year when it quietly changed its policy to require some online retailers to begin collecting state and city sales taxes — a combined 8.375% on purchases in New York City — on all orders from residents of New York State.

Hours after The New York Sun reported the initiative, Governor Spitzer pulled the plug on it — temporarily. Last month, the Legislature and Governor Paterson approved a law that requires Amazon.com to start collecting and remitting sales taxes to New York. No other state is requiring the same of online retailers that don't have a physical presence in the state.

Shopping online is not supposed to be tax-free. New Yorkers are expected, by law, to pencil in the equivalent of a sales tax for out-of-state and online purchases. Many aren't aware of this requirement, and others choose not to do so. Last year, the state estimated that forcing online retailers to collect the tax would bring in about $100 million more each year between both state and local tax revenue.

A spokesman for Seattle-based Amazon.com, Craig Berman, wrote in an e-mail that the company will begin collecting the tax on New York's behalf by June 1. The online retailer is being represented by a former deputy mayor under Mayor Giuliani, Randy Mastro, of the firm Gibson, Dunn & Crutcher LLP. Mr. Mastro has some expertise on the interstate commerce clause, having argued for New York State's ban on shipments of out-of-state wine, a ban that was ultimately stuck down.

Before Internet shopping replaced catalogue orders as the main obstacle to state tax collectors, the U.S. Supreme Court found that a company must have a physical presence in a state before it was obligated to start collecting sales taxes on a state's behalf. That suggested a company would need to have a storefront, or warehouse, or at least a team of sales representatives present in the state.

The question that the Amazon.com suit poses is how this standard applies to the age of the Internet.

New York is expected to argue in court that Amazon.com has the Internet-era equivalent of a sales force in New York State. The focus of the new law, and the sticking point of the lawsuit, is the "affiliate program" used by Amazon.com and other e-retailers. The program consists of independent Web site operators who provide a link to an e-retailer in return for a commission on any sale resulting from customers using the link.

New York's new law treats these Web site operators as evidence that an online retailer has a physical presence in New York. In other words, if Amazon.com so much as pays a single sales commission to a New Yorker with a Web site, Amazon.com is required to collect sales taxes on all purchases originating out of New York State.

Amazon.com's lawsuit argues that New York State is overstating the retailer's presence here. In legal papers, Amazon.com argues that if it can be forced to collect sales taxes, there is no reason that any other out of state retailer, Internet-based or otherwise, that runs television or radio advertisements in New York, shouldn't have to.

Two legal experts said they expected Amazon.com to win.

"I think on Constitutional principles, Amazon should prevail," a tax lawyer, Scott Brandman of the New York office of Baker & McKenzie LLP, said.

"I think Amazon has the slightly stronger position," a professor of Internet governance at Oxford University, Jonathan Zittrain, said. He said he based that assessment on the fact that "an Amazon affiliate is easily distinguishable from" a traveling salesman who worked for a company.

"But a sympathetic court could say it's the same," he noted.

The suit was first reported by Wired magazine.