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Amazon, Overstock argue in NY court against sales tax demand

The two retailers are trying to convince a New York judge that forcing them to collect state sales tax is unconstitutional.

James Martin/CNET

Amazon and Overstock are duking it out with New York state in a court battle over the issue of collecting sales tax.

In a case being heard by the State of New York Court of Appeals, attorneys for both retailers claimed yesterday that a 2008 New York law requiring them to collect sales tax on online purchases is unconstitutional, as reported by Reuters.

A 1992 Supreme Court decision found that retailers can't be forced to collect sales tax on out-of-state purchases unless they have a physical presence in those states. But the New York law skirted that decision. The state concluded that New York-based entities that "directly or indirectly refer customers" to a retailer's Web site represent a sales presence in the state, requiring that taxes be collected.

Not long after New York passed the law in April 2008, both Amazon and Overstock filled lawsuits against the New York State Department of Taxation and Finance. And now all three are defending their positions in New York State's highest court.

Attorneys for Amazon and Overstock argued yesterday that Web referrals don't correspond to a sales presence and instead are more like buying an ad in a newspaper, Reuters noted. The state's attorney countered that Web referrals are different than advertising in that they lead people directly to make purchases.

In the past, lower courts have favored the state's position. But the five appeals court judges seemed at least open to the arguments from the attorneys for the two retailers, Reuters added.

The New York State Department of Taxation and Finance told CNET that "we're confident in our position, and we await the decision of the court."

Much of the debate has centered on Amazon affiliates, which are Web site owners or bloggers who link to Amazon on their sites to help drive traffic to the retailer.

If a sale is made, the affiliate scores a commission.

Amazon had been calling it quits with affiliates in certain states to avoid having to charge sales tax. But lately the retailer has been cutting deals with more states to collect sales taxes.

CNET contacted Amazon and Overstock for comment and will update the story when we receive more information.

Updated 8:45 a.m. PT with response from the New York State Department of Taxation and Finance.