SALE AND TAXATION OF GOODS OVER THE INTERNET

The "Amazon Tax" and Affiliate Nexus

Amazon.com v. N.Y. State Dep’t of Taxation & Fin., 877 N.Y.S.2d 842 (N.Y. Sup. Ct. 2009)

Background:
  • Amazon affiliates are part of an online advertising approach, which was partly first advocated by the Performance Marketing Association, which involves various Web sites, or affiliates, placing advertisements on their own Web sites for another company, such as Amazon.com.  It really is just a method of providing advertisements for one company on another’s Web site.  For example, a site that reviews blu-ray discs, has a link on each review so that one can purchase the actual disc on Amazon.com.  Generally, these affiliates sign Amazon's Operating Agreement, which enables them to receive a referral fee based on the product sold in exchange for meeting certain requirements and providing the links.
  • Aware of this practice, the New York state legislature passed a law that expanded the definition of "vendor" with regard to sales tax, and included these affiliates. In effect, this statute attempts to create a substantial nexus between Amazon and its marketing affiliates, based on those affiliates who are located in New York.
Holding:  
  • New York argued that this type of arrangement, with an affiliate in New York, created a substantial nexus between Amazon and New York.  The trial court agreed, relying more heavily on Scripto than Quill, and found that because the affiliates are independent contractors according to Amazon’s Operating Agreement, and because these independent contractors received a commission, a substantial nexus existed.
  • The court also held that there is a safeguard in place because the presumption of nexus is rebuttable.  A remote seller can include in its contract with an independent contractor a provision prohibiting its (New York) independent contractor from soliciting sales in New York.  But any finding of solicitation would override any contractual provisions in place.
Implications:
  • If a Web site operator is going to use an affiliate in a way similar to the way Amazon does, it must be sure that affiliate is not a resident of a state that has these similar provisions.  Likewise, if the affiliate is located in a state with similar laws, there must be provisions within the contract so that affiliate does not solicit sales in-state.
  • States such as California, Colorado, Connecticut, Hawaii, Illinois, Iowa, Maryland, Minnesota, Mississippi, New Mexico, North Carolina, Rhode Island, Tennessee, Vermont, Virginia, Wisconsin all have introduced legislation similar to New York’s.
  • Of those states, only two, Rhode Island and North Carolina, have actually enacted statutes.