Internet Tax Held Constitutional

In a full-fledged opinion by Judge Lippman, the Court of Appeals determined the Internet Tax (Tax Law 1101(b)(8)(vi) was constitutional on its face and did not violate either the Commerce Clause or the Due Process Clause.  The plaintiffs in the action, Overstock.com and Amazon.com, sued the New York State Department of Taxation and Finance.  The activities found to be legitimately taxable in New York were described by the Court as follows:

Amazon offers an “Associates Program” through which third parties agree to place links on their own websites that, when clicked, direct users to Amazon’s website. The Associates are compensated on a commission basis. They receive a percentage of the revenue from sales generated when a customer clicks on the Associate’s link and completes a purchase from the Amazon site. The operating agreement governing this arrangement states that the Associates are independent contractors and that there is no employment relationship between the parties. Thousands of entities enrolled in the Associates Program have provided a New York address in connection with their applications.

Plaintiff Overstock.com is a Delaware corporation with its principal place of business in Utah. Overstock likewise sells its merchandise solely through the Internet and does not maintain any office, employees or property in New York. Similar to Amazon, Overstock had an “Affiliates” program through which third parties would place links for Overstock.com on their own websites. When a customer clicked on the link, he or she was immediately directed to Overstock.com, and if the customer completed a purchase, the Affiliate received a commission. According to the parties’ Master Agreement, the Affliates were independent contractors without the authority to obligate or bind Overstock.

Judge Smith dissented and would have found the statute unconstitutional under the Commerce Clause.  Overstock.com, et al, v NYS Department of Taxation and Finance, et al, 33, CtApp 3-28-13