Amazon.com sues N.Y. over new online sales tax

As expected, Seattle-based e-tailer asks the New York state supreme court to overturn a new law that expands tax collection requirements for out-of-state companies.

Anne Broache Staff Writer, CNET News.com
Anne Broache
covers Capitol Hill goings-on and technology policy from Washington, D.C.
Anne Broache
3 min read

As expected, Amazon.com is hitting back at New York over a new law requiring online retailers to collect sales taxes from customers residing in that state.

In a complaint filed on April 25, Amazon asked the New York State Supreme Court to declare the recently passed law "invalid, illegal, and unconstitutional." (Wired.com, which reported the lawsuit earlier this week, has posted a PDF of the document.)

New York has long required vendors to collect taxes from customers in its state if they "solicit business" there, according to Amazon's complaint. But a few weeks ago, the state passed a new law, as part of its state budget, that expanded the meaning of "solicit" to include any company that pays New York-based entities for "directly or indirectly referring customers" to its retail business, or risk "hefty civil and criminal penalties," Amazon wrote in its complaint.

That expanded definition clearly implicates Amazon, which says it has hundreds of thousands of independent Web site "affiliates" through its "Associates Program" to whom it pays a commission for linking to products for sale on its Web site.

Amazon in its complaint contended that the statute violates the equal protection clause of the U.S. and New York constitutions because it "intentionally targets" the company, noting that some state officials have even described the new policy as the "Amazon tax."

The Seattle-based e-tailer also argues that the statute is unconstitutional because it imposes tax-collection obligations on an out-of-state retailer without a "substantial" physical presence in New York. Amazon, for its part, said it "does not own, lease or otherwise occupy any physical property in the state, and none of its employees works or resides in the state."

A 1992 U.S. Supreme Court decision in the Quill v. North Dakota case currently limits states' ability to collect sales taxes from out-of-state retailers. It says retailers aren't required to collect sales taxes from customers who live in states where the businesses don't have a physical presence, or "nexus." New York's new statute represents one attempt at getting around those limitations.

Technically, of course, Americans in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15--a concept known as a "use tax." But state officials argue most Americans don't actually do so, potentially depriving them of millions of dollars in revenue, particularly as e-commerce sales continue to grow.

Amazon also argues that the new statue is "overly broad and vague." The company said it has "no way of knowing" whether affiliates who provide New York addresses are actually legal residents of New York--or whether their particular advertisements "qualif(y) as a direct or indirect solicitation on behalf of Amazon."

The litigation is hardly unexpected. Even Neal Osten, federal affairs counsel for the National Conference of State Legislatures, told CNET News.com recently that his lobby group for state politicians would actually discourage the somewhat unique approach taken by New York because it is "probably going to be litigated and will therefore cause delay" in collecting taxes. Other states are seeking to at least some recover sales taxes potentially lost to Internet purchases by signing up for an as-yet voluntary program known as the streamlined sales tax project.

Amazon's complaint instructs the New York State Department of Taxation to file its response with the court within the next few weeks. A department representative told The New York Times on Thursday that the state won't publicly comment on the lawsuit until that document is filed.