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Overstock sues New York over Net sales tax law

Company is asking the New York State Supreme Court to declare the new law unconstitutional. has filed a lawsuit challenging a New York law that expands the state's requirements for online retailers to collect sales taxes.

The Utah-based company announced Friday that it is asking the court to issue an injunction and declare the law unconstitutional.

In April, Gov. David Paterson signed a new law requiring companies that pay New York-based entities for "directly or indirectly referring customers" to their retail business to collect sales taxes from New York-based customers. The new law goes into effect Sunday. It's an attempt to get around a 1992 U.S. Supreme Court decision in the Quill v. North Dakota case that says retailers aren't required to collect sales taxes from customers who live in states where the businesses don't have a physical presence.

About two weeks ago, Overstock announced it was cutting ties to its New York-based affiliates because of the new law. The discount online retailer said it told its more than 3,400 affiliates that as of Sunday they would no longer be able to provide advertising for the company.

"I am confident of our position in the suit," said Mark Griffin, general counsel, in a statement. "The applicable United States Supreme Court cases on the question of whether the state can collect taxes under these circumstances make it clear that New York cannot constitutionally require to collect these taxes."

The New York State Department of Taxation and Finance, tax commissioner Robert Menga, and Paterson are named as defendants in the suit filed with the New York State Supreme Court.

Amazon, which filed a similar suit in April, has said it plans to abide by the law and begin collecting New York state sales taxes.

CNET's Anne Broache contributed to this report.