Tax Foundation Legal Brief Calls for Reversal of NY "Amazon Tax" Ruling

Written by TaxFoundation.org


Washington, DC - In a friend-of-the-court brief filed with the New York State Supreme Court's Appellate Division, the Tax Foundation argues that the state cannot legally compel Amazon.com, an out-of-state retailer, to collect sales taxes on purchases because the retailer does not have a physical presence in the state. In arguing against the lower court's decision in Amazon.com, LLC v. New York State Dept. of Taxation and Finance, Tax Foundation Tax Counsel Joseph Henchman reviews the standards by which companies are proven to have a "substantial nexus" in a state - by meeting one of two tests establishing "physical presence."

The brief finds that the State Supreme Court failed to address whether the activities of Amazon.com's in-state affiliates (independent persons within the state who post a link to Amazon.com on their websites and receive a share of revenues) are vital to maintaining the company's market in New York. "In ruling that Amazon.com must collect sales taxes, the New York State Supreme Court has established an unconstitutionally expansive standard for determining whether a business has a 'substantial nexus' in a state - one that goes beyond any standing precedent," Henchman said. "Widespread adoption of such vague and expansive nexus standards undermines legal certainty, interstate commerce, and economic growth."

In April 2008, New York Gov. David Paterson signed into a law a budget requiring that out-of-state online retailers collect sales taxes on purchases if the company does at least $10,000 worth of business with in-state affiliates. Amazon.com filed suit shortly thereafter, but the New York State Supreme Court - the state's trial-level court (the Court of Appeals is the state's highest court) - ruled in favor of the state and upheld the so-called "Amazon tax." In doing so, the Tax Foundation brief argues, the State Supreme Court confused elements from two separate physical presence tests established by legal precedent and determined that the in-state Amazon.com affiliates were independent contractors, but did not address whether their activities were significant for Amazon.com's New York market (which, given that they represent only 1.5 percent of the company's in-state sales, is doubtful).

"The economic and technological developments of the past few decades make preserving a bright-line physical presence nexus rule for state taxation all the more vital," Henchman said. "The State Supreme Court's Appellate Division should act swiftly to ensure that interstate commerce is not impeded." Tax Foundation Fiscal Fact No. 187, " 'Amazon Tax' Unconstitutional and Unwise," provides a summary of the brief and may be found online at http://www.taxfoundation.org/news/show/25120.html.

The full brief may be found online at HERE. The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937. Since 2007, the Center for Legal Reform at the Tax Foundation has participated as amicus curiae before the U.S. Supreme Court and appellate courts in five states in cases involving tax/fee distinctions, taxpayer protections, multiple taxation and tax discrimination, and the power to impose taxes.


The mission of the Tax Foundation is to educate taxpayers about sound tax policy and the size of the tax burden borne by Americans at all levels of government. From its founding in 1937, the Tax Foundation has been grounded in the belief that the dissemination of basic information about government finance is the foundation of sound policy in a free society. 

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