The Court of Appeals said in a 4-1 ruling that the 2008 amendment meets the U.S. Supreme Court test that the sellers have "a substantial nexus" with the taxing state. Taxes apply when the online retailers generate at least $10,000 in annual sales to New Yorkers from in-state websites that earn commissions by bringing in potential customers through links to the big retailers.
Amazon.com, with corporate offices in Washington state, has an "Associates Program" where others put such links on their websites. Overstock.com, based in Utah, suspended its similar "Affiliates" program in New York after the state statute was enacted.
"Through this statute, the Legislature has attached significance to the physical presence of a resident website owner. The decision to do so recognizes that, even in the Internet world, many websites are geared toward predominantly local audiences," Chief Judge Jonathan Lippman wrote. "Viewed in this manner the statute plainly satisfies the substantial nexus requirement."
"The bottom line is that if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden," Lippman wrote. Judges Victoria Graffeo, Susan Read and Eugene Pigott Jr. agreed.
New York's sales tax is 4 percent and all its counties and New York City add an additional tax ranging from 3 percent to near 5 percent. Both apply to applicable Internet sales, according to the state Department of Taxation and Finance.
Tax Commissioner Thomas Mattox said the ruling affirms New York's approach to fair tax administration for both brick-and-mortar and Internet-based businesses. Since the law was implemented, it has resulted about $500 million of state and local sales taxes collected, representing about $6 billion of sales into New York, he said.
Overstock.com chief executive Jonathan Johnson said the ruling has no operational impact on that company because it ended those affiliate relationships in 2008.
"It just means the court battle will likely continue," Johnson said, suggesting it's time for the U.S. Supreme Court to sort out conflicting state laws and rulings. "It seems like an issue that's ripe to weigh in on which of the state courts do it correctly."
Amazon spokesman Ty Rogers said the ruling conflicts with both Supreme Court precedents and rulings by other state courts that have looked at the issue. "We believe the best way to effectively fix this problem is through passage of the Marketplace Fairness Act by Congress, which Amazon strongly supports," he said.
The federal legislation would grants states authority to compel out-of-state online and catalog retailers to collect their sales taxes, but the states would have to simplify their laws.
In his dissent, Judge Robert Smith wrote that mere advertising by an out-of-state retailer through in-state media does not constitute a physical presence or sufficient nexus, concluding links from the New York websites to big online retailers are simply that.
Lippman wrote that the world has changed dramatically over the past two decades, where an entity can have a profound impact elsewhere through the Internet, and the physical presence test may now be outdated. "That question, however, would be for the United States Supreme Court to consider," he wrote.