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N.Y. appeals court revives Amazon's sales tax suit

Long-awaited decision resuscitates and's lawsuit over a New York law requiring them to collect sales tax, but also gives the state some reason to cheer.

In a long-awaited decision that could shape the debate over Internet taxes, a New York appeals court today reinstated and's lawsuit claiming a state law forcing them to collect sales taxes is unconstitutional.

A New York appeals court ruled 5-0 that the "dismissal of the entire complaint was premature" and that the lawsuit should continue.

The legal actions, filed a few weeks apart in early 2008, claimed that the state law was "invalid, illegal, and unconstitutional." Amazon has, however, been collecting sales taxes on shipments to Empire State customers while the case is under way.

Today's decision is not, however, a complete victory for the Internet retailers; the judges ruled that, in at least some cases, the state law can be constitutional.

That leaves the retailers' other arguments--which are separate and still in play--that the statute remains unconstitutional as applied to the Internet and their businesses. Further proceedings and evidence are necessary "before a determination can be rendered" on that point, the appeals court said.

Brad Maione, a spokesman for the New York State Department of Taxation and Finance, told CNET, "We're pleased with the decision in light of the fact that the court found that the statute is indeed constitutional. We are confident that we will prevail in the end."

Amazon declined to comment.

In general, a 1992 Supreme Court ruling says that retailers can't be forced to collect sales tax on out-of-state shipments unless they have offices in those states.

In the last few years, though, revenue-hungry state governments have tried to find ways to test the boundaries of that decision.

A report earlier this year said that 16 states have considered or are considering enacting laws targeting Amazon and other e-commerce companies that typically do not charge sales tax for shipments sent outside their home state, and that four states already have enacted them.

The justification for the laws is a reprise of arguments that state tax collectors have made for at least a decade: they claim that Amazon, Overstock, Blue Nile, and other online retailers that don't collect taxes are unreasonably depriving states of revenue, and that they enjoy an unfair competitive advantage over local retailers that must collect taxes.

New York's law says that companies without offices or employees in the state--a legal concept called "nexus"--nevertheless must collect sales tax if the firm receives revenue from affiliates located in the state.

The nonpartisan Tax Foundation, which filed a brief arguing the New York law was unconstitutional, said the appellate court offered some "ominous" suggestions about Amazon's liability. "Solicitation plus sales creates nexus for the affiliates, but it shouldn't create nexus for Amazon," the foundation said.

Today's decision could be appealed to the highest state court, which is called the Court of Appeals.

Updated at 11 p.m. PT with Amazon's response and comment from the Tax Foundation.