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 courtheard 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.
On Valentine’s Day, proposed federal legislation that would authorize states to require remote sellers with no physical presence in the state to collect the state’s sales and use taxes was introduced in both the United States Senate (S. 336) and House of Representatives (H.R. 684). The two bills, each entitled the “Marketplace Fairness Act,” are identical. Like similar legislation introduced in Congress last year, the current “Marketplace Fairness Act” does not require meaningful uniformity or simplification by states of their complex sales and use tax systems as a precondition for imposing a tax collection obligation on retailers with no physical presence in the state. S. 336 was referred to the Senate Finance Committee, and H.R. 684 was referred to the House Committee on the Judiciary. Some members of Congress, including chairpersons of each of the relevant committees (Senator Baucus (D-MT) and Representative Goodlatte (R-VA)), have expressed concerns about the bill.
On February 22, 2013, the Performance Marketing Association (“PMA”) filed its brief with the Illinois Supreme Court in response to the appeal taken by the Director of the State Department of Revenue from the ruling of the Cook County Circuit Court issued in May 2012. The Circuit Court’s Order, entered in the PMA’s favor, struck down the 2011 Illinois affiliate nexus law as unconstitutional and preempted by the Internet Tax Freedom Act (“ITFA”). The Illinois statute creates a conclusive rule of law imposing a use tax collection obligation on an out-of-state Internet retailer that enters into a contract with an affiliate located in Illinois for the placement of a link on the affiliate’s website that refers internet users to the retailer’s website, pays the affiliate compensation based on sales to customers completed through the link, and makes a minimum $10,000 in such sales to customers (regardless of location). See 35 ILCS 105/2 (para. 1.1). The Circuit Court for Cook County agreed with the PMA that the statute, on its face, violates the Quillphysical presence standard of substantial nexus under the Commerce Clause, and is preempted under the Supremacy Clause by virtue of the ITFA moratorium on discriminatory state taxes against electronic commerce. The state appealed and filed its brief late last year. The PMA again emphasized the Act’s fundamental shortcomings, and the weaknesses in the state’s arguments in defense of the law, in its brief filed on February 22. After the state files its reply March, oral argument in the appeal is likely this fall. George Isaacson and Matt Schaefer of Brann & Isaacson represent the PMA in the case.
Finally, during February 2013, legislators in four more states--Maine, Michigan, Minnesota and Mississippi--introduced bills proposing New York style affiliate nexus provisions. They join at least four other states that introduced similar measures in January 2013, including Florida, Hawaii, Indiana and Kansas. Affiliate nexus bills have failed to pass in several of these states in prior legislative sessions.
If this month is any indicator, 2013 may be an active year for developments regarding the states’ authority to require use tax collection by Internet retailers and other remote sellers. Please stay tuned for updates and further analysis in this area.
