Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University.
The author is grateful for the guidance he received from his Cardozo colleagues who are evidence mavens: Profs. Melanie Leslie, Peter Lushing, Peter Tillers, and Alex Stein. He is also grateful for the comments and assistance of his Cardozo tax colleague Prof. Carlton Smith.
The author benefited from the research assistance of members of the Cardozo class of 2010 — Kelly Kannen, Nader Khuri, Jaime Leggett, Cheryl Scher, and Jonathan Soleimanzadeh; members of the Cardozo class of 2011 — Andrew Chang, Damien Fortune, Rowan Liu, and Michelle Taitz; Aaron Zelinsky of the Yale Law School class of 2010; and Nathaniel Zelinsky of the Yale College class of 2013.
* * * * *
Some cases, from their inception, seem destined for importance. Amazon.com LLC v. New York State Department of Taxation and Finance is such a case.1 In this litigation, Amazon.com LLC and Amazon Services, LLC (collectively, Amazon) challenged the constitutionality of New York's new "Amazon" law,2 designed to force out-of-state Internet retailers like Amazon to collect New York use tax on their sales to New York residents.
I offer an analysis of New York's Amazon law that differs from those advanced by the parties and their amici in Amazon.com LLC: On its face, New York's Amazon law can be construed to survive constitutional scrutiny, but only if the courts reject (as they should) part of the administrative gloss that New York's Department of Taxation and Finance places on the statute. The New York statute imposes the obligation to collect New York use tax on Internet sellers only when those sellers' in-state affiliates, by their solicitation activities, satisfy the dormant commerce clause nexus test of physical presence in the taxing state. Moreover, the statute operates through a rebuttable presumption that can be construed by the New York courts to satisfy the requirements of due process.
However, much of the gloss that the department places administratively on the Amazon law is constitutionally infirm. The department indicates that the in-state solicitation that the out-of-state Internet seller affirmatively forbids will nevertheless be imputed to the out-of-state seller to obligate the seller to collect use tax from New York purchasers. That informal administrative position improperly imputes unauthorized in-state activity to an out-of-state Internet seller that prohibits such activity. There is no agency when there is no authority.
As a matter of tax policy, the Amazon law is unwise. At best, that law will raise no revenue but will merely create one more nuisance for firms selling products into the Empire State. More likely, the new law will lose more revenue for New York than it gains by inducing out-of-state Internet retailers to cancel their affiliate programs in New York. If so, New Yorkers will no longer receive commissions as Amazon affiliates and, as a result, will no longer pay state income taxes on those commissions.
Amazon and other Web-based sellers should be required to collect and remit the various states' use taxes. However, rather than proceeding unilaterally, the states are better advised to pursue the difficult, but ultimately more appropriate, course of federal legislation requiring out-of-state sellers to collect use tax on behalf of the states into which they sell.
The background against which New York adopted its Amazon law is well known: In the face of growing retail sales on the Internet and declining tax receipts, state tax collectors have understandably turned their attention to the revenue being lost from sales by out-of-state retailers to the residents of their states. As a matter of law, those who purchase goods from out-of-state firms via the Internet or mail order owe their states of residence use tax on their purchases in lieu of sales tax. In practice, it is often difficult for the states to collect use taxes from Internet and mail-order purchasers. The seller in those transactions is frequently located out of state and consequently avoids the obligation to collect tax on its sales. While the customer is legally obligated to self-report and pay to his state of residence use tax on his Internet and mail-order purchases, enforcing that obligation is usually impractical since the state tax authorities lack the ability to identify those purchases.
Efforts are under way to enact federal legislation that would enable the states to demand that out-of-state sellers collect and remit use tax on their Internet and mail-order sales.3 So far, however, those efforts have proved unavailing.
In this setting, New York state adopted its aptly named Amazon law, designed to force out-of-state Internet retailers to collect New York use tax on their sales to New York residents.4 New York's statute was quickly emulated by North Carolina5 and Rhode Island6 and was promptly challenged on constitutional grounds by Amazon. In the New York Supreme Court, New York's trial court, this challenge was rebuffed.7 Amazon is now appealing the trial court's decision, an appeal that has attracted the interest of a variety of groups.8
If New York succeeds in imposing on Amazon and other out-of-state Internet retailers the obligation to collect the Empire State's use tax, other states will undoubtedly follow. Similarly, if New York's effort fails, that failure will impart renewed urgency to the movement to obtain federal legislation to require out-of-state Internet and mail-order sellers to collect buyers' state taxes on their purchases from such out-of-state sellers.
The first four sections of this article discuss further the background to Amazon.com LLC. I initially describe the dormant commerce clause requirement that a retailer must have nexus to the state in the form of in-state physical presence before that state can impose on the retailer the obligation to collect the state's use tax. That presence may result from the seller's own personnel or property located in the taxing state or from the seller's agent soliciting on the seller's behalf in the taxing state. I then outline New York's Amazon law, which creates a rebuttable presumption that New York affiliates, Web-linked to Internet sellers, are presumed to undertake in-state solicitation on such sellers' behalf. In this context, I discuss the department's expansion of the Amazon law's actual statutory terminology. In informal guidance, the department says that an out-of-state Internet seller that forbids its New York associates from soliciting on its behalf will nevertheless be treated by the department as present in New York and thus obligated to collect New York use taxes.
I then discuss Amazon's associates program under which persons link their Web sites to Amazon's. In this section, I give particular attention to the standard form agreement governing the relationship between Amazon and its associates. Finally, I discuss the standards under which the U.S. Supreme Court has scrutinized rebuttable presumptions in civil settings under the due process clause.
Against this background, I conclude that, on its face, New York's Amazon statute can be interpreted to survive constitutional scrutiny since it merely establishes a rebuttable presumption of in-state physical presence on the part of Internet sellers by presuming that New York affiliates solicit on the sellers' behalf. That presumption can be applied by New York's courts in a fashion that satisfies the requirements of due process.
However, the department's expansive understanding of New York's Amazon law raises serious constitutional problems. That administrative understanding goes beyond the text of the statute and engenders troubling constitutional concerns by imputing the in-state solicitation of an affiliate to an out-of-state Internet seller even if the affiliate has been told not to solicit and has agreed to that ban. Ultra vires acts by an unauthorized New York resident cannot be imputed to the out-of-state seller that proscribes those acts. To preserve the constitutionality of New York's Amazon law, the courts should reject the department's informal construction of the statute that ignores basic principles of agency.
As a matter of tax policy, the Amazon law is unwise, as I discuss in this article's final section. At best, the law will raise no revenue while imposing an unnecessary burden on businesses that want to sell goods into the Empire State. More likely, the law will actually lose revenue for New York as out-of-state Internet sellers respond to the law by terminating their New York affiliate programs and thus end the commission income on which those New York affiliates previously paid state income tax.
It is unusual for me to defend the constitutionality of a New York tax law.9 It is not unusual for me to criticize a New York tax law for being unwise — indeed, self-destructive — as a matter of tax policy.10 That, however, is my conclusion: On the face of the statute, New York's Amazon law can be construed to be constitutional as long as the department's overly expansive understanding of the statute is eschewed. However, as a matter of tax policy, the Amazon law is a bad idea. Federal legislation, not unilateral state action, is the proper way to impose tax collection responsibilities on out-of-state Internet sellers.
Dormant Commerce Clause and Physical Presence
The constitutional framework governing New York's Amazon law emerges from three dormant commerce clause decisions of the U.S. Supreme Court:11 Scripto, Inc. v. Carson,12 Tyler Pipe Industries, Inc. v. Washington State Department of Revenue,13 and Quill Corp. v. North Dakota.14 Those decisions establish that, under the dormant commerce clause, a state can impose the obligation to collect sales and use taxes on a seller only if the seller has physical presence in the taxing state. Solicitation on behalf of a seller by an in-state independent contractor is such a form of physical presence, establishing nexus for the taxing state to impose on the seller the duty to collect tax on the seller's sales in the taxing state.
In Scripto, Florida required a Georgia corporation to collect use tax on the products the corporation sold in Florida. The Georgia corporation had neither a "place of business in Florida"15 nor "any regular employee or agent there."16 However, the Georgia corporation was represented in Florida by 10 "specialty brokers."17 Those brokers were, by contract, characterized as independent contractors.18 Orders were sent for acceptance to the corporation's office in Atlanta; merchandise was shipped from there to Florida.
On those facts, the Court held that there were two reasons that there was sufficient nexus between Florida and the Georgia corporation for Florida to impose on the Georgia corporation the obligation to collect use taxes from Florida purchasers of the corporation's products. First, "the burden of the tax is placed on the ultimate purchaser in Florida and it is he who enjoys the use of the property."19 Second, it is constitutionally irrelevant that the seller's Florida agents are independent contractors, rather than "regular employees . . . devoting full time to [the corporation's] service."20
To permit such formal "contractual shifts" to make a constitutional difference would open the gates to a stampede of tax avoidance. . . . The test is simply the nature and extent of the activities of the appellant in Florida.21
Scripto is a straightforward application of agency principles to the dormant commerce clause: If a seller authorizes persons to solicit sales in a state on the seller's behalf, those persons' in-state activities are properly imputed to the seller for whom, as principal, those activities are undertaken. As a matter of constitutional law, it does not matter how that agency relationship is structured or labeled.
Tyler Pipe involved Washington state's business and occupation tax. Tyler Pipe manufactured products out-of-state and shipped them to Washington wholesalers. Among its challenges to the Washington tax, Tyler Pipe argued that Washington lacked sufficient nexus to Tyler Pipe to assess tax on its wholesale sales in Washington.22 Tyler Pipe had no office, property, or employees in Washington.23 Tyler Pipe's only physical presence in Washington was one "independent contractor located in Seattle."24 Relying on Scripto, the Tyler Pipe Court declared that the single independent contractor representing Tyler Pipe in Washington constituted enough presence in Washington to "support the State's jurisdiction to impose its wholesale tax on" Tyler Pipe.25
Like Scripto, Tyler Pipe also applied traditional agency principles. The activity in Washington of the person representing Tyler Pipe was, as a commerce clause matter, properly attributed to Tyler Pipe as the authorizing principal. Consequently, Tyler Pipe was in Washington for commerce clause purposes and thus subject to Washington's authority to tax.
Quill later distinguished nexus under the due process clause from nexus for commerce clause purposes and limited commerce clause nexus to physical presence in the taxing state. In Quill, North Dakota imposed on an out-of-state corporation the obligation to collect use tax on its sales of merchandise shipped to customers in North Dakota by mail or common carrier.26 The out-of-state firm conducting that mail-order business had no offices, representatives, or other physical presence in North Dakota.27 The firm "solicit[ed] business through catalogs and flyers, advertisements in national periodicals, and telephone calls."28
For due process purposes, the Quill Court held that there was sufficient nexus between North Dakota and the out-of-state firm for North Dakota to impose on that firm the duty to collect tax. In contrast, the commerce clause requires the seller to have physical presence in the taxing state. That commerce clause nexus requirement is "informed not so much by concerns about fairness for the individual defendant as by structural concerns about the effects of state regulation on the national economy."29 In particular, the dormant commerce clause "ensure[s] that state taxation does not unduly burden interstate commerce."30 In this context, "the bright-line rule" of physical presence facilitates interstate commerce by establishing "a safe harbor for [out-of-state] vendors" like Quill that know that as long as they avoid such in-state physical presence, they can sell into the various states unencumbered by the burden of complying with the states' myriad use tax collection laws.31
For dormant commerce clause purposes, the out-of-state seller in Quill (unlike the sellers in Scripto and Tyler Pipe) had no physical presence in North Dakota and thus no nexus to that state. Consequently, North Dakota could not, under the dormant commerce clause, impose on the out-of-state seller the duty to collect use taxes on its sales to North Dakota customers.
That commerce clause emphasis on physical presence has been much criticized.32 Nevertheless, until Congress acts, the dormant commerce clause, per Scripto, Tyler Pipe, and Quill, precludes a state from imposing the duty to collect sales and use taxes on a seller unless that seller has some physical presence in the taxing state, such as an independent contractor soliciting sales in-state as an agent of the seller. Advertising in the taxing state, mailing flyers and catalogs into that state, and making telephone calls into the taxing state do not create the commerce clause nexus that enables the state to impose on an out-of-state seller the duty to collect use tax on its sales to the taxing state's residents.
New York's Amazon law does not challenge that dormant commerce clause framework or its requirement of in-state physical presence. Rather, as we shall see in the next section,33 the New York statute creates a rebuttable presumption that Amazon's New York associates establish Amazon's physical presence in the Empire State through solicitation activity as agents of Amazon.
New York's Amazon Law
New York generally imposes a sales tax on the "retail sale of tangible personal property"34 within the Empire State. If a New York purchaser of that property does not pay sales tax to New York or to another state for his purchase of tangible personal property, he must instead pay a use tax for his use of the property within New York.35 If the seller of tangible personal property is classified as a vendor for purposes of New York law, the seller must collect from New York purchasers the sales or use tax due on his sales to such purchasers and must remit such tax to the New York tax department.36 Among the ways in which a seller may trigger status as a vendor, obligated to collect and remit New York sales and use taxes, is the seller's solicitation of business in New York "by employees, independent contractors, agents or other representatives."37 Those provisions of the New York tax statute are similar to those of the other states that levy sales and use taxes.38
However, New York has, through its Amazon law, expanded the obligation to collect sales and use taxes by creating a new statutory presumption that some Internet sellers are "soliciting business through an independent contractor or other representative"39 in New York and are thus vendors, physically present in New York and consequently obligated to collect from New York purchasers New York's sales and use taxes. That new presumption of vendor status is triggered if two statutory tests are met. The first test is satisfied "if the seller enters into an agreement with a resident of [New York] under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller."40 The second test is met "if the cumulative gross receipts from sales by the seller to customers in [New York] who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods."41
The department's informal administrative pronouncements42 confirm why this new statutory provision is universally known as New York's Amazon law: The statute's evident purpose is to force out-of-state Internet sellers, of which Amazon is the most prominent, to collect New York sales and use taxes on their Internet sales to New York residents by presuming that the sellers' New York associates undertake in-state solicitation that triggers vendor status for these Internet sellers.
Thus, in one example43 indicating its interpretation of this new law, the department postulates that a manufacturer of skiing equipment has its offices and warehouse in Vermont. That Vermont-based firm delivers its product into New York using the U.S. Postal Service or a common carrier and has no physical presence of its own in New York.
That hypothetical Vermont manufacturer sells into New York via the Internet. In particular, that hypothetical manufacturer has agreements with various New York ski clubs under which these clubs link their own Web sites to the Vermont manufacturer's Web site. The New York clubs receive commissions from the Vermont manufacturer for sales that come to the manufacturer through these links. Since, in that example, the sales made by the Vermont manufacturer through those New York Web links amount to more than $10,000 over the preceding four quarters, the New York ski clubs are presumptively deemed to be soliciting business for the Vermont manufacturer, thereby causing the manufacturer to be a vendor for New York tax purposes.
It takes little imagination to see that this example targets Amazon and other out-of-state Internet firms with associates programs similar to Amazon's. The implication for these Internet firms of classification as "vendors" for New York tax purposes is that they must collect use taxes for New York not just on the New York sales made through their associates' in-state Web links, but also on all their Internet sales into New York.44
In its informal guidance, the department stipulates that the presumption of vendor status established by the new law is not easily rebutted. To overcome the statutory presumption created by the link between the Internet seller's Web site and the Web sites maintained by New York residents, the seller must prove a negative. According to the department, the hypothetical Vermont manufacturer can rebut the presumption of vendor status only if it can demonstrate that "none of the ski clubs refer potential customers to [the Vermont manufacturer] through the use of flyers, newsletters, telephone calls or emails to club members or any other means of solicitation in the state targeted a potential New York State customers."45
The department states that to rebut the new statutory presumption of vendor status, the Internet seller must do more than forbid by contract its New York associates from engaging in such solicitation.46 Rather, the seller must also secure annually from each of its New York associates a certification of nonsolicitation. Thus, to continue the example of the Vermont manufacturer, it must obtain annually and retain from each of the New York ski clubs with links to the manufacturer's Web site a certification that the club does not undertake in-state solicitation which crosses the statutory line and thereby subjects the Vermont manufacturer to vendor status.
Even with that certification in hand, the Internet seller (for example, Amazon) is not out of the woods. The department, in its administrative pronouncement,47 reserves the right to audit those in-state associates to determine if any of them have, contrary to their contractual commitment and annual certification, in fact engaged in prohibited solicitation on behalf of the Internet seller. If so, that unauthorized solicitation is imputed to the seller and, according to the department, the seller is consequently classified as a vendor present in New York, obligated to collect use tax on all its New York sales — even though the out-of-state seller forbade the New York associate's solicitation activity.
The New York law contains neither a de minimis rule nor any relief for the Internet seller if it, reasonably and in good faith, tries to comply with the New York law. Thus, under the department's interpretation of the new law, relatively minor incidents beyond the seller's control may have draconian consequences. Suppose, for example, that the hypothetical Vermont manufacturer complies with the department's administrative pronouncements by contractually forbidding solicitation in the Empire State and by obtaining certifications from all the New York ski clubs that, honoring that contractual prohibition, they merely maintain Web links to the manufacturer's Web site and undertake no solicitation in New York on behalf of the manufacturer. Suppose further that, unbeknownst to the manufacturer, one of the ski clubs sponsors an equipment show at which it passes out brochures for the manufacturer's skis, despite the club's contractual agreement with, and annual confirmation to, the manufacturer that it does not solicit in New York.
According to the department, under the new statute, the New York club's unauthorized solicitation triggers vendor status for the out-of-state manufacturer, making the manufacturer liable for use taxes on all its New York sales. In this example, the manufacturer reasonably thought itself compliant with the New York statute because it had contractually forbidden its New York associates from undertaking solicitation and had obtained certifications of nonsolicitation from all of the New York ski clubs with Web links to the manufacturer's Web site. Consequently, the manufacturer did not collect use taxes. Nevertheless, under the department's interpretation of the statute, the manufacturer, because of this single incident of unauthorized solicitation, is deemed to be physically present in New York. Accordingly, the seller is a vendor for New York tax purposes and must remit to the department use tax for all its sales into the state.
As I discuss below,48 the department's informal administrative views stretch the statute into constitutionally treacherous waters by flouting the agency premises of Scripto and Tyler Pipe. Those views are also unwise as a matter of tax policy. The courts should disregard those views to sustain the constitutionality of New York's Amazon law.
Amazon's Associates Program
Amazon's relationship with its associates is governed by a publicly available standard form contract to which those associates must adhere.49 A person seeking to become an Amazon associate must apply for that status.50 Amazon reserves the right to accept or reject applications to its associates program at its "sole discretion."51 Among the reasons Amazon will reject an application are that the applicant's Web site promotes sexually explicit material, violence, discrimination, or illegal activities.52 Amazon forbids associates' Web sites from including the name "Amazon" or "any other trademark" of Amazon or any variation or misspelling of such name or mark.53 Thus, for example, an associate cannot have a Web site called "Amazon.com."54 Residents of North Carolina and Rhode Island, the two states that have adopted Amazon laws like New York's, are forbidden from being associates,55 but New York residents are not — at least so far.
Once an associate is accepted into the program, a link can be created between Amazon and the associate's Web site.56 When a customer purchases a product through such a link, Amazon pays a "referral fee" to the associate.57 The associate receives from Amazon a "graphic image" for its Web site indicating its participation in Amazon's associates program.58 The associate cannot use that image "in an offline promotion or other offline manner (e.g., in any printed material, mailing or other document)."59 The relationship between Amazon and its associate is an at-will affiliation and can be terminated without cause, at any time, by Amazon or by the associate.60 Amazon reserves the right to modify, at any time and in any respect, the terms of its program and its agreement with its associates.61 The associate agrees that Amazon has the right to "crawl or otherwise monitor" the associate's Web site,62 as well as the right to send the associate "email updates about the Program."63
Amazon's associate program is similar to those maintained by other Internet sellers.64
Presumptions and Due Process
A century ago, the U.S. Supreme Court addressed the constitutionality of rebuttable presumptions in civil settings in Mobile, Jackson & Kansas City Railroad Co. v. Turnipseed.65 Turnipseed's deceased had worked for a railroad company and had been standing by the side of a track when a train derailed and killed him. A Mississippi statute provided that proof that a railroad employee was killed by the railroad's operation was "prima facie evidence of the want of reasonable skill and care on the part of the" railroad's employees.66 The Court sustained the statute against equal protection and due process challenges, characterizing the statute as "creat[ing] a presumption of liability, since its operation is only to supply an inference of liability in the absence of other evidence contradicting such inference."67 Such a prima facie presumption, the Turnipseed Court declared, passes due process muster as long as there is "some rational connection between the fact proved and the ultimate fact presumed" and the party against whom the presumption operates has "a reasonable opportunity" to rebut the presumption with countervailing evidence.68
Nineteen years later, the Court, in Western & Atlantic Railroad v. Henderson,69 distinguished Turnipseed and the Mississippi statute. In Henderson, the deceased had been killed when the truck he was driving collided with a train. Under those circumstances, a Georgia statute created a presumption "against the [railroad] company" and imposed liability "unless the company shall make it appear that their agents have exercised all ordinary and reasonable care and diligence."70
Emphasizing the prima facie nature of the presumption created by the Mississippi statute,71 the Henderson Court characterized that statute as "creat[ing] merely a temporary inference of fact that vanished upon the introduction of opposing evidence."72 In contrast, the Georgia law violated due process because it "create[d] an inference that is given effect of evidence to be weighed against opposing testimony and is to prevail unless such testimony is found by the jury to preponderate."73 In contemporary terminology, the Mississippi presumption was sustained against due process challenge because it merely placed on the railroad the burden of production, a burden that could be satisfied by introducing minimal evidence to support the railroad's position.74 In contrast, the Georgia statute was declared unconstitutional because it imposed on the railroad the heavier burden of persuasion.75
There is debate about whether Henderson is still good law,76 and in dicta the Court has suggested that it may no longer follow Henderson.77 However, for purposes of New York's Amazon law, the New York courts can sidestep this issue since, as I discuss in the next section,78 the law, on its face, can be construed to fall within the protection of Turnipseed as creating a rational, prima facie inference that the out-of-state Internet seller has an opportunity to rebut by producing minimal evidence on its behalf.
New York's Amazon Law Can Be Construed to Be Constitutional
On its face, New York's Amazon law can be construed to pass muster under both the commerce and due process clauses of the U.S. Constitution. However, the department's administrative gloss on the new statute is constitutionally infirm insofar as the department imputes to Amazon and other out-of-state sellers their New York associates' unauthorized solicitation activity. To preserve the constitutionality of the Amazon law, New York's courts should disregard that administrative overreaching.
The New York statute comports with the dormant commerce clause test of physical presence that emerges from Scripto, Tyler Pipe, and Quill. It builds on the preexisting provisions of the New York sales and use tax statute that implement the commerce clause physical presence rule for nexus. Consistent with that rule, New York imposes vendor status and the consequent obligation to collect New York taxes only on sellers with physical presence in that state.
Per Scripto and Tyler Pipe, agency principles govern the determination of in-state physical presence. Thus, if an employee, independent contractor, or other agent solicits on behalf of an Internet seller in New York, that solicitation is imputed to the seller. In that case, the seller is, for dormant commerce clause purposes, deemed present in New York because of the solicitation undertaken at its direction by its New York agent. New York, accordingly, imposes on the seller the obligation to collect New York sales and use taxes. The seller, because of the New York solicitation activity of its agent, is analogous to the selling firms in Scripto and Tyler Pipe, deemed for dormant commerce clause purposes to be physically present in the taxing state because of the in-state solicitation done on their behalf by independent contractors.
The innovative feature of New York's Amazon law is the presumption the statute creates that the New York associates of Amazon (and of other out-of-state Internet sellers) undertake solicitation on behalf of Amazon and similar sellers. Absent that solicitation, the only connections between those New York associates and Amazon are the Web links that permit Internet shoppers to reach Amazon via the associates' Web sites. Per Quill, those connections do not give rise to commerce clause nexus between New York and Amazon or other out-of-state Internet sellers. Associates' Web links, by themselves, are analogous to the "catalogs and flyers, advertisements in national periodicals, and telephone calls"79 by which the out-of-state firm in Quill sought business in North Dakota without establishing physical presence in that state.
The Amazon law embraces that analogy by stating that a Web link between a New York associate and an Internet seller, by itself, does not constitute physical presence in New York for the seller for dormant commerce clause purposes. A Web link, standing alone, is treated as similar to the catalogs, magazine ads, and telephone calls which the out-of-state retailer in Quill could direct into North Dakota without constituting physical presence in that state. It requires more — namely, in-state solicitation by a New York associate — for that associate to trigger tax nexus between New York and the Internet seller with whom the associate is affiliated.
New York's Amazon law creates a statutory presumption of solicitation if agreements exist between an Internet seller and its New York associates under which those associates receive commissions for sales coming to the seller via links with the associates' Web sites. If there are such agreements,80 and if the Internet seller's receipts from New York sales under such agreements total more than $10,000 over the preceding 12 months,81 the statute presumes that the New York associates have gone beyond their Web links and have engaged in the kind of in-state solicitation on behalf of the seller that, under Scripto and Tyler Pipe, creates in-state physical presence and thus commerce clause nexus between the state and the seller.
The constitutional inquiry thus becomes whether that statutory presumption satisfies the requirements of due process. The answer is a qualified yes because the New York courts can construe the Amazon law to ensure the presumption's constitutionality, whether the statutory presumption is interpreted as imposing a burden of production or, instead, as imposing a burden of persuasion.
The most direct way the New York courts can sustain the constitutionality of the Amazon law's statutory presumption is to interpret it like the Mississippi presumption upheld in Turnipseed, namely as prima facie evidence that imposes the burden of production on Amazon (or other Internet seller) to present minimal proof that its New York associates do not engage in the kind of in-state solicitation that occurred in Scripto and Tyler Pipe. So construed, the presumption created by the Amazon law passes muster under the two criteria established in Turnipseed: rationality and rebuttability. It is rational for New York to postulate the existence of some in-state solicitation when an Internet seller's associate-generated sales exceed a numerical threshold. Moreover, the seller is afforded the opportunity to rebut the presumption of in-state solicitation created by those sales. Under this approach to the statute, the presumption established by the Amazon law "create[s] merely a temporary inference of fact"82 — the prima facie existence of solicitation-based tax nexus between New York and the seller — "that vanishe[s] upon the introduction of opposing evidence"83 by the seller to meet its burden of production.
Amazon could readily satisfy that burden of production and thereby make the presumption of associates' in-state solicitation "vanish." Under its existing agreement with its associates, those associates cannot use Amazon's image "in an offline promotion or other offline manner (e.g., in any printed material, mailing or other document)."84 Arguably, that contractual language already proscribes Amazon's associates from engaging in solicitation activity that would constitute physical presence in New York on Amazon's behalf.
In any event, Amazon reserves the right to unilaterally alter its agreement with its associates.85 Amazon could easily amend that standard form agreement to make explicit what is already implicit in them: Associates can do no more than establish Web links with Amazon; that is, they cannot also undertake in-state solicitation like the solicitation activity of the independent contractors in Scripto and Tyler Pipe.
In short, Amazon and other out-of-state Internet sellers can readily satisfy the burden of production under the Amazon law by introducing the agreements with their in-state affiliates. Insofar as those agreements forbid New York associates from engaging in activity that goes beyond their Web links, Amazon and other Internet sellers will satisfy the burden of production imposed by the Amazon law and thus negate the statutory presumption that their associates solicit for them within New York.
In apparent recognition of the ease with which Amazon and other Internet sellers can contractually prohibit their New York associates from undertaking in-state solicitation, the department contends that, in addition to issuing such contractual prohibitions, Amazon and other Internet sellers must also obtain annual certifications from their associates, confirming that such associates do not solicit in New York.86 Under the Turnipseed standard, the department is overreaching. Once Amazon (or another Internet seller) produces contracts that forbid New York associates from soliciting for Amazon in the state, its burden of production has been satisfied and the prima facie presumption of in-state solicitation "vanishes."87 Under Turnipseed, New York can ask for no more via a statutory presumption.
In any event, Amazon and other Internet sellers can readily comply with the department's additional requirement that they obtain annual certifications of nonsolicitation from their associates. Amazon, as earlier noted, reserves the right to unilaterally set the terms of its associates program.88 Amazon already requires associates to accept its e-mail about the program.89 It would not be difficult for Amazon (or another Internet retailer) to require its associates to certify annually by return e-mail or by Internet communication that such associates undertake no solicitation on behalf of Amazon in New York.
At this point, the constitutional infirmity of the department's approach to the Amazon law becomes manifest. In informal guidance, the department states that even if Amazon (or another out-of-state Internet seller) prohibits in-state solicitation contractually and even if Amazon obtains annual certifications from its New York associates confirming such nonsolicitation, the department will nevertheless assert vendor status against Amazon if "the Department subsequently determines that any of the resident representatives are actually engaging in solicitation activities in New York State."90
Consider in that context a single rogue associate who is contractually prohibited from undertaking New York solicitation for Amazon and who has confirmed to Amazon his compliance with that prohibition. Suppose that, deliberately or inadvertently, that associate nevertheless engages in prohibited solicitation in New York. In that case, the department will impute that unauthorized solicitation to Amazon and will accordingly assert Amazon's obligation as a vendor to collect sales and use tax on all its New York sales. Neither the statute nor the department's administrative pronouncements cut any slack for de minimis solicitation in New York or for an out-of-state Internet seller's good-faith efforts to prevent such New York solicitation on its behalf.
The department's position is inconsistent with the agency rationales of Scripto and Tyler Pipe. Those decisions declare that, for dormant commerce clause purposes, an otherwise out-of-state seller is physically present in the taxing state if the seller's agent solicits in that state on the seller's behalf. In contrast, the department infers in-state physical presence from an associate's ultra vires acts that deliberately flout prohibitions on solicitation imposed by the Internet seller and that contradict the New York associate's assurances to the seller that he honors those prohibitions on solicitation. The department does not explain how unauthorized solicitation that the out-of-state Internet seller forbids is properly imputed to the seller — nor, under Scripto or Tyler Pipe, is such an explanation possible.
Under basic principles of agency, an agent's actions are imputed to the principal only if the agent has actual or apparent authority for those actions. Neither form of authority exists if Amazon (or another out-of-state seller) publicly91 prohibits its New York associates from soliciting in the state.92
Thus, to preserve the constitutionality of the Amazon law, New York's courts must disregard the department's informal administrative position insofar as the department would attribute in-state presence to an out-of-state seller that has explicitly forbidden solicitation on its behalf. If Amazon (or another out-of-state Internet seller) prohibits associates' solicitation activity and receives associates' assurances of compliance with that prohibition, per Scripto, Tyler Pipe, and principles of agency, Amazon is not physically present in New York as a result of associates' unauthorized activity. There is no agency when there is no authority.
The courts should construe the Amazon law to ensure its constitutionality.93 The department's position impairs the law's constitutionality by imputing to out-of-state Internet sellers New York activities such sellers have explicitly forbidden. The courts should reject that administrative position to protect the law's compliance with the nexus case law under the dormant commerce clause, namely Scripto and Tyler Pipe.
Disregard of the department's administrative construction of the Amazon law is also appropriate since that construction has been advanced only informally. The department's views have not been embodied in a formal regulation adopted after notice and public comment.94 Rather, the department has propounded its position through less formal guidance, as departmental TSB- Ms.95 The department acknowledges that these informal pronouncements are purely "informational"96 and have no "legal force or effect."97
Moreover, the department's position — it will impute to out-of-state Internet sellers unauthorized activity of their New York associates — is inconsistent with the New York statute itself. The statute, reflecting Scripto, Tyler Pipe, and their agency underpinnings, classifies a seller as a New York vendor when the seller "solicits business . . . by employees, independent contractors, agents or other representatives"98 in New York. Under the statute, it is the seller that must solicit through its agent. The department, however, would deem an out-of-state seller to be a New York vendor when solicitation is undertaken not by the seller but by an unauthorized New York resident purporting to act on the seller's behalf but without the right to do so.
The analysis is largely the same if Henderson is no longer good law. In that case, the Amazon law can be construed to comply with the due process clause even if the statute is interpreted as imposing on the out-of-state seller the burden of persuasion. If Amazon (or another out-of-state seller) contractually forbids its New York associates from soliciting in New York and obtains annual confirmations from each of those associates that it honors that ban on solicitation, Amazon will have met its burden of persuasion under the new law and will thereby overcome the statutory presumption of physical presence and vendor status.
If the department counters with an example of a New York associate who solicits in the Empire State despite a contractual ban on solicitation and the associate's annual confirmation of its compliance with that ban, that solicitation would be an ultra vires act, undertaken by the associate in violation of the principal's direct order to the contrary. Such unauthorized solicitation is the opposite of the in-state agents' authorized representation of the sellers in Scripto and Tyler Pipe. Again, a basic principle of agency controls: A New York resident is not an agent of an out-of-state seller when the resident engages in publicly unauthorized activity.
In short, the New York courts can construe the Amazon law in a manner that sustains the statute's constitutionality, provided that the courts reject the department's overreaching interpretation of the law. The most constitutionally secure construction of the Amazon law is to interpret it as imposing a minimal burden of production like the Mississippi statute at issue in Turnipseed. So construed, the Amazon statute passes constitutional muster under the commerce and due process clauses. Even if the new Amazon law is interpreted as imposing a heavier burden of persuasion on Internet sellers, those sellers can readily overcome that burden, negating the presumption of in-state physical presence by forbidding their affiliates from soliciting on their behalf and by routinely confirming that nonsolicitation. However, the department's informal administrative gloss on the statute is constitutionally infirm. Scripto, Tyler Pipe, and their agency underpinnings do not permit New York to attribute in-state physical presence to an out-of-state seller from solicitation activity that the seller has publicly forbidden since there is no agency without either actual or apparent authority.
New York's Amazon Law Is Unwise as a Matter of Tax Policy
While New York's Amazon law can be construed to be constitutional, the law will raise no revenue so construed. Indeed, it is likely that the Amazon law, in New York or in any other state that follows New York's lead, will impose a net cost on state coffers by inducing out-of-state Internet sellers to terminate their associates programs in that state.
The evident purpose of New York's Amazon law is to force Amazon and other out-of-state Internet sellers to collect from New York purchasers use taxes on their Internet sales. However, as discussed, Amazon and other out-of-state Internet sellers can overcome the presumption of vendor status created by the Amazon law by contractually forbidding their New York associates from soliciting on their behalf in the Empire State. Without authorized solicitation in that state, Amazon (and any other out-of-state Internet sellers like it) lacks agency-based presence in New York and thus is not a vendor for New York tax purposes because it fails the physical presence test required for commerce clause nexus to New York.
So construed, the Amazon law imposes nuisance costs on Amazon and its peers, which must scrutinize their agreements with their associates, make sure that those agreements forbid solicitation by those associates, and must confirm with these associates that they are not soliciting in New York. However, at the end of the day, New York gains no tax revenue from that exercise since Amazon and other out-of-state Internet vendors without physical presence in New York need not collect use taxes on sales to New York purchasers when their associates are forbidden to solicit within New York.
In apparent recognition of that reality, the department, by its administrative pronouncements, sets up Amazon and other out-of-state Internet sellers for a game of gotcha: Even if Amazon prohibits its New York associates from soliciting on its behalf, and even if these associates confirm their nonsolicitation, the department reserves the right to assert vendor status against Amazon if a single rogue associate violates that prohibition and engages in unauthorized solicitation in the Empire State on behalf of Amazon (or another out-of-state Internet seller).
As discussed, the department's gotcha game lacks a constitutional basis since an associate who engages in prohibited solicitation in New York lacks actual or apparent authority to act on behalf of Amazon (or other out-of-state seller), unlike the agents in Scripto and Tyler Pipe who undertook in-state solicitation at the behest of their out-of-state principals. Nevertheless, the department's position and the risk of being caught in this game will deter out-of-state Internet sellers from having associates in New York.
In response to that risk, Amazon has terminated its associates program in Rhode Island and North Carolina.99 While I can only speculate as to why Amazon continues its associates program in New York, I surmise that Amazon has, in the face of New York's law, continued that program to maintain its standing to challenge that law. At some point, it will make sense for Amazon and other Internet retailers to terminate their affiliates programs in New York. Continuing them leaves them at risk for the department's assertion of vendor status based on the unauthorized activities of a single rogue associate and consequent liability for use tax on all sales to New York customers.
When an out-of-state Internet seller terminates its associates program in a state that has adopted an Amazon law, the state receives no new use taxes. In light of that termination, it is beyond cavil that the out-of-state Internet seller has no in-state physical presence and thus, per Quill and the dormant commerce clause, cannot be obligated to collect use tax. Moreover, the now-terminated associates no longer receive the sales commissions that they had previously obtained from the out-of-state seller through its associates program. Consequently, those former associates pay less state income taxes since their incomes are lower. The result — no use tax, but lower income taxes — makes no sense for the state's fisc.
As a matter of policy, Amazon and other out-of-state Internet sellers should be required to collect use tax from all their purchasers. Conventional, bricks-and-mortar retailers located in a particular state and Internet sellers with physical presence in that state, for example, a warehouse, must, by virtue of their physical nexus to the state, collect tax from their in-state purchasers. In contrast, out-of-state Internet sellers sell the same goods to consumers in the state on an effectively tax-free basis. That discrepancy is neither fair nor efficient.
However, unilateral efforts like New York's Amazon law do more damage than good and will, in the final analysis, simply cause out-of-state Internet sellers to terminate their associates programs in the states adopting statutes like the Amazon law. By constitutional design, obtaining federal legislation is a difficult process. It is, however, the proper way to impose a nationwide solution to the sales and use tax problems created by the Internet.
On its face, New York's Amazon statute can be construed to survive constitutional scrutiny since it only creates a rebuttable presumption of in-state physical presence on the part of out-of-state Internet sellers by presuming that New York affiliates solicit on the sellers' behalf. That presumption can be applied by New York's courts so as to comply with the requirements of due process.
In contrast, the department's informal administrative interpretation of New York's Amazon law is constitutionally flawed. That interpretation goes beyond the text of the statute and generates serious constitutional problems by imputing the in-state activity of an affiliate to an out-of-state Internet seller even if the seller has prohibited the affiliate from soliciting and the affiliate has agreed to that ban. Ultra vires acts by an unauthorized New York resident cannot be imputed to the out-of-state seller that proscribes those acts. There is no agency if there is no authority.
As a matter of tax policy, the Amazon law is unwise. At best, the law will raise no revenue, but it will impose an unnecessary burden on businesses selling goods into New York. More likely, the law will lose revenue for New York as Internet sellers respond to the law by terminating their New York affiliate programs and thus end the commission income on which such affiliates previously paid state income taxes.
By constitutional design, obtaining federal legislation is difficult. Nevertheless, the states should not proceed unilaterally in the fashion of New York's Amazon law. Rather, they should continue to press Congress for a federal statute that obligates Internet sellers to collect use taxes on behalf of the states into which they sell.
1 The Appellate Division of the New York Supreme Court (First Dept.) heard oral arguments in this case on October 29, 2009. This court is New York's intermediate appeals tribunal, just below the state's highest court, the Court of Appeals. Parallel litigation is being pursued by Overstock.com Inc. See Jeffrey S. Reed, "New York Supreme Court Hears Oral Argument in Amazon, Overstock Appeals," State Tax Notes, Nov. 9, 2009, p. 369, Doc 2009-24045, or 2009 STT 209-17 .
2 NY CLS Tax Law section 1101(b)(8)(vi).
3 The core of these efforts is the Streamlined Sales Tax Project. Walter Hellerstein, Kirk J. Stark, John A. Swain, and Joan M. Youngman, State and Local Taxation: Cases and Materials (9th ed. 2009) at 781; Richard D. Pomp and Oliver Oldman, State and Local Taxation (5th ed. 2005) at 6-47.
4 N.Y. CLS Tax Law section 1101(b)(8)(vi).
5 N.C. Gen. Stat. section 105-164.8(b)(3).
6 R.I. Gen. Laws section 44-18-15(a)(2).
7 Amazon.com LLC v. New York State Department of Taxation and Finance, 23 Misc. 3d 418, 877 N.Y.S.2d 842 (New York County 2009). New York's trial court is denoted the Supreme Court while New York's highest court is the Court of Appeals. (For the decision, see Doc 2009-641 or 2009 STT 8-16 .)
8 See, e.g., Brief of the Tax Foundation as Amicus Curiae in Support of Plaintiffs-Appellants (Sept. 9, 2009) (Doc 2009-20553 or 2009 STT 177-17 ); Brief of Amicus Curiae Performance Marketing Alliance in Support of Plaintiffs-Appellants (Sept. 2, 2009) (Doc 2009-20244 or 2009 STT 174-3 ).
9 Cf. Edward A. Zelinsky, "New York's 'Convenience of the Employer' Rule Is Unconstitutional," State Tax Notes, May 19, 2008, p. 553, Doc 2008-9044 , or 2008 STT 98-18 .
10 Id. at notes 102 and 103 and accompanying text.
11 I discuss these cases in a broader, historical context in Edward A. Zelinsky, "Rethinking Tax Nexus and Apportionment: Voice, Exit, and the Dormant Commerce Clause," 28 Va. Tax Rev. 1 (2008).
12 362 U.S. 207 (1960).
13 483 U.S. 232 (1987).
14 504 U.S. 298 (1992).
15 Scripto, 362 U.S. 207 at 209.
19 Id. at 211.
21 Id. at 211-212.
22 Tyler Pipe, 483 U.S. 232 at 249.
25 Id. at 251.
26 Quill, 504 U.S. 298 at 302.
29 Id. at 312.
30 Id. at 313.
31 Id. at 314-315.
32 Criticism I disagree with. Zelinsky, supra note 11.
33 See notes 39 through 47, infra, and accompanying text.
34 NY CLS Tax Law section 1105(a).
35 NY CLS Tax Law sections 1110(a) and 1118(7).
36 NY CLS Tax Law sections 1131(1), 1132(a), 1133(a), and 1137.
37 NY CLS Tax Law section 1101(b)(8)(i)(C)(I).
38 Hellerstein et al., supra note 3, at 722. It is, moreover, well established that if an otherwise out-of-state seller has physical presence in a state from a particular activity in that state, the state can impose use collection duties on the seller for all of the seller's sales into the state, including sales unrelated to the activity establishing such in-state presence. National Geographic Society v. California Board of Equalization, 430 U.S. 551, 562 (1977) (California "offices that solicit advertising for" the society's magazine "provide . . . sufficient nexus to justify [California's] imposition upon the Society of the duty to act as collector of the use tax" regarding mail order sales into California unrelated to those offices).
39 NY CLS Tax Law section 1101(b)(8)(vi).
42 Taxpayer Guidance Division, Office of Tax Policy Analysis, New York State Department of Taxation and Finance, "New Presumption Applicable to Definition of Sales Tax Vendor," TSB-M-08(3)S (May 8, 2008).
43 Id. at Example 2.
44 If a seller has a physical presence in a state, the state can impose on the seller the duty to collect use taxes on all the seller's sales in that state. See National Geographic Society, supra note 38.
45 Supra note 42, at Example 6.
46 Taxpayer Guidance Division, Office of Tax Policy Analysis, New York State Department of Taxation and Finance, "Additional Information on How Sellers May Rebut the New Presumption Applicable to the Definition of Sales Tax Vendor as Described in TSB-M-08(3)S," TSB-M-08(3.1)S (June 30, 2008).
47 Id. at 2 (despite an out-of-state seller's agreements with its New York affiliates that they will not solicit and affiliates' confirmations that they are not soliciting, the department will impose vendor status on the out-of-state seller if "the Department subsequently determines that any of the resident representatives are actually engaging in solicitation activities in New York State") (emphasis added).
48 See notes 86 through 98, infra, and accompanying text.
49 Amazon Associates operating agreement, updated as of October 26, 2009, available at https://affiliate-program.amazon.com/.
50 Id. at section 1.
56 Id. at section 2.
57 Id. at sections 3, 4, 5, and 6.
58 Id. at section 8.
59 Id. at section 9 (parenthetical in original).
60 Id. at sections 1, 9, and 12.
61 Id. at section 13.
62 Id. at section 2.
64 Brief amicus curiae Performance Marketing Alliance, supra note 8.
65 219 U.S. 35 (1910).
66 Id. at 41 (quoting section 1985 of the Mississippi Code of 1906).
67 Id. at 43.
69 279 U.S. 639 (1929).
70 Id. at 640 (quoting section 2780 of the Georgia Civil Code).
71 Id. at 643.
72 Id. at 643-644.
73 Id. at 644.
74 Christopher B. Mueller and Laird C. Kirkpatrick, Evidence Under the Rules: Text, Cases, and Problems (2008) at 676 ("To say a party bears the burden of producing evidence is to say she runs the risk of losing automatically (on motion for judgment as a matter of law, before or after the verdict) if she does not offer sufficient evidence to enable a reasonable person to find in her favor") (parenthetical in original).
75 Id. at 677 ("To say that a party bears the burden of persuasion (or risk of nonpersuasion) is to say that she can win only if the evidence persuades the trier of the existence of the facts that she needs in order to prevail").
76 See, e.g., Leo H. Whinery, "The Uniform Rules of Evidence (1999): Presumptions and Their Effect," 54 Okla. L. Rev. 553, 557-559 (2001) ("preferred view [is] that in civil cases there are no constitutional limitations in employing presumptions to cast on the opponent the burden of persuasion of the nonexistence of the presumed fact").
77 In Lavine v. Milne, 424 U.S. 577, 585 (1976), the Court observed that, in civil cases, "the locus of the burden of persuasion is normally not an issue of federal constitutional moment." However, before this observation, the Lavine Court decided that the New York statute challenged in that case did not shift any burden onto the applicants. Id. at 584. This rendered the Court's subsequent observation about the burden of persuasion unnecessary to resolution of the case. Moreover, the Lavine Court did not identify or discuss Henderson. Finally, there is the Court's important qualifier in Lavine: "normally." In short, while Lavine erodes Henderson, Lavine did not directly overrule Henderson.
78 See notes 79 through 98, inclusive, infra, and accompanying text.
79 Quill, 504 U.S. at 302.
80 NY CLS Tax Law section 1101(b)(8)(vi).
82 Henderson, 279 U.S. at 643-644.
83 Id. at 644.
84 Amazon Associates operating agreement, updated as of October 26, 2009, at section 9 (parenthetical in original).
85 Id. at section 13.
86 Taxpayer Guidance Division, supra note 46.
87 Henderson, 279 U.S. at 644.
88 Amazon Associates operating agreement, updated as of October 26, 2009, at section 13.
89 Id. at section 2.
90 Taxpayer Guidance Division, supra note 46 (emphasis added).
91 The Amazon Associates operating agreement is publicly available at https://affiliate-program.amazon.com/.
92 See restatement of the law, third, agency (2006) at sections 2.01 (for the agent to have actual authority, "the agent [must] reasonably believe, in accordance with the principal's manifestations to the agent, that the principal wishes the agent so to act"), 2.03 (apparent authority exists only "when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal's manifestations"), 8.09(1) ("an agent has a duty to take action only within the scope of the agent's actual authority"), and 8.09(2) ("an agent has a duty to comply with all lawful instructions received from the principal").
93 Evans v. United States, 504 U.S. 255, 275 (1992) ("statutes are to be construed so that they are constitutional") (Kennedy, J., concurring); FGL & L Property Corp. v. City of Rye, 66 N.Y.2d 111, 120 (1985) ("statutes are to be construed so as to avoid constitutional issues if such a construction is fairly possible").
94 NY CLS St. Admin. P. Act section 202.
95 There is much controversy today over the degree of deference the courts should give to tax regulations and long-standing administrative pronouncements of the tax collector. However, the department's administrative gloss on the Amazon law is a new position which has not been subject to the rigors of the formal regulation adoption process. Accordingly, that gloss deserves no deference since the department's gloss, advanced recently and informally, is also constitutionally infirm. For recent commentary on the issue of deference to tax regulations, see Vorris J. Blankenship, "The Validity of Tax Regulations — The Third Circuit Adrift," 121 Tax Notes 454 (Oct. 27, 2008); Mark E. Berg, "Judicial Deference to Tax Regulations: A Reconsideration in Light of National Cable, Swallows Holding, and Other Developments," 61 Tax Law. 482 (2008); Randall Jackson, "Courts' Deference to IRS Regulations Elicits Strong Reaction," (Sept. 15, 2008).
96 20 NYCRR section 2375.6(a)(1) (TSB-Ms "are informational statements").
97 20 NYCRR section 2375.6(c) ("technical memoranda do not have legal force or effect").
98 NY CLS Tax Law section 1101(b)(8)(i)(C)(I).
99 Amazon Associates operating agreement, at section 1.
END OF FOOTNOTES
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