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"This is a gray area"

Even if passed into law as part of the state's budget, observers say any New York online tax provision will rest on uncertain legal footing -- and is likely to be challenged in state or federal court.

The 1992 U.S. Supreme Court ruling in Quill v. North Dakota held that only businesses with a physical presence in a state are required to collect sales taxes on purchases shipped there. Typically, companies have been deemed to have physical presence if they maintain a store, office or distribution center in the state, or if any employees are based there, such as a sales representative.

Amazon does not have any employees in New York, but the budgetary provision asserts that its affiliates are enough to constitute physical presence.

The budget, as submitted originally by Spitzer, singles out e-tailers who "enter into agreements with organizations under which the organization receives a commission if it includes a link on its Web site that connects the users to the Internet retailer's Web site."

According to the provision, those organizations are representatives of the company, and it asserts that "the extent of these local solicitation activities is easier to ascertain for the sellers than it is for the [state]."

But observers said the matter is far from cut and dried.

"It's sort of this new definition of what a representative could be. It's going into an area that hasn't been touched on yet," said Hugh Goodwin Jr., a state and local tax attorney and partner with international law firm DLA Piper. "This seems to me to be really pushing it. This is a gray area."

Goodwin said that the definition of physical presence varies among states, and that New York has historically taken an aggressive stance on the issue.

Viewed in that light, the legal defense of the provision would be that it is not a new law, but rather a clarification of an old one. Affiliate programs of the kind employed by Amazon did not exist in 1992, when the Supreme Court ruled on Quill.

The crux of any legal challenge would be the definition of terms, where opponents of the provision would claim that affiliates should not be considered on a par with company employees, while New York would argue that it is within the boundaries of Quill.

The Quill case established the rule of physical presence, which New York claims it is updating to apply to a new economic model. Another Supreme Court ruling from three decades earlier could also be used to marshal a defense of the new tax provision.

In its 1960 ruling in Scripto v. Carson, the Supreme Court determined that independent contractors working in Florida on behalf of the Georgia-based Scripto pen company established a "nexus" in the state, and thus it was responsible for collecting sales taxes on purchases made by Florida residents.

The similarities between Scripto's contractors and participants in an affiliate program such as Amazon's -- neither being full-time employees -- may boost New York's case in the event of a legal challenge. New York could, perhaps convincingly, claim that in taking commission for customer referrals, online affiliates act in the same capacity as Scripto's contractors.

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