Amazon Sues New York Over Internet Tax

Amazon has filed a lawsuit in New York contesting a controversial new state law requiring some online retailers to collect sales tax on purchases shipped to New York’s residents, even if they have no offices or employees there.

The e-commerce giant filed its challenge to the law in the State Supreme Court in Manhattan, seeking a declaratory ruling that the law is “invalid, illegal and unconstitutional.”

The challenge from Amazon (NASDAQ: AMZN) had been widely expected. The law, enacted on April 9 as part of the state’s budget, applies to it and other online retailers that use affiliate marketing programs to solicit sales.

Under a typical affiliate program, a Web site owner places a link to the e-commerce company on his or her own site and receives a commission for sales made by the referrals.

With the new regulations, if a retailer derives at least $10,000 of annual revenue from affiliates in New York, it is responsible for collecting the sales taxes.

Brick-and-mortar retailers in New York cheered the move for closing a loophole they said gave their online rivals an unfair competitive advantage. Critics, however, charged that requiring online retailers to master the complexities of a labyrinthine system of state and local tax codes would be an unreasonable burden on their business.

Tax experts, meanwhile, had anticipated a legal challenge and predicted that if the law held up, other states would follow suit.

The tax itself is not new. Consumers in New York had been responsible for reporting purchases made from out-of-state Internet retailers on their state income tax returns, but collecting those taxes from individuals had been impossible from an administrative standpoint.

The state estimates that shifting the collection requirement to the vendors would generate $50 million in additional annual income.

Spokespeople for Amazon and the New York attorney general’s office, which will be handling the state’s defense, did not respond to requests for comment by press time.

Amazon earlier had lobbied vigorously against the bill, claiming that it violates the Commerce Clause of the U.S. Constitution. The relevant precedent is a 1992 U.S. Supreme Court ruling, Quill v. North Dakota, in which the court held that a retailer must have a “physical presence” within the state in order to be responsible for collecting sales taxes.

In its new court filing, Amazon took issue with New York’s definition of terms. The law interprets Amazon’s affiliates as representatives of the company, who are soliciting sales by placing ads on their sites. Though they are not formal employees, the law holds that those affiliates are enough to give Amazon the physical presence within New York required by the Quill ruling, a conclusion that Amazon roundly rejects.

“Because some independently operated, New York-based Web sites post advertisements with links to Amazon and are compensated for these advertisements [Amazon] must collect New York sales and use taxes on all of its sales to New Yorkers or face hefty civil and criminal penalties,” the complaint charged, “despite the fact that Amazon lacks any physical presence in New York and that no solicitation by Amazon actually exists.”

[cob:Special_Report]The Quill case, which concerned the taxation responsibilities of a mail-order business, held that advertising alone is not sufficient to establish physical presence in a state, Amazon said in its court filing.

Amazon also cited language from its own agreement that governs its affiliate program, which states that “nothing in this agreement will create any partnership, joint venture, agency, franchise, sales representative or employment relationship between the parties.”

Those affiliates, Amazon claimed, are not actively soliciting business for the company. Rather, they are merely resident advertisers, who “indirectly” refer customers to Amazon’s product pages in exchange for commissions.

It further claimed that Amazon has no way of verifying which of the thousands of Web sites registered in the program under a New York address are in fact legal residents of the state.

The state attorney general’s office will be handling the state’s defense, officials confirmed.

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