As states struggle to secure new sources of revenue, many are turning to sales tax from online retailers. At first, it appeared as though the constitutionality of such taxes was in question because it was difficult to show out of state companies satisfied the physical presence requirements. However, a recent decision by New York’s highest court has found a way to circumvent this problem in certain circumstances.
In 2008, Amazon and Overstock sued the state’s Department of Taxation and Finance seeking to overturn a law which makes retailers pay state sales taxes if they solicit business within the state. The companies argued the law violated their due process rights by creating an irrational presumption of solicitation in the state because they did not have a physical presence there. They appealed the lower courts’ decisions upholding the law and eventually had their case heard before the NY State Court of Appeals. The Court upheld the decision noting that the companies did, in fact, have an in-state sales force through agreements with affiliates who received commissions for posting links on their websites to Amazon and Overstock.
As more states begin implementing new laws that augment the physical presence test, it is likely we will see the issue go up to the Supreme Court. Although Overstock has terminated the services of its New York based advertisers, Amazon intends to pursue the issue on appeal.