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New York: Click-Through Nexus Ruled Constitutional by New York’s Highest Court



On March 28, New York’s highest court, the New York Court of Appeals, ruled that the state’s “click-through nexus” (Internet tax) law is constitutional. The law requires online retailers with no physical presence in New York, but who use in-state “affiliates”, to collect New York sales and use tax.
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Contact a CohnReznick tax professional to determine how this ruling will impact your tax position.


In, Inc. v. New York State Department of Taxation and Finance and, LLC, et al., v. New York State Department of Taxation and Finance, online retailers and (together, “the Retailers”), challenged the constitutionality of New York Tax Law Section 1101(b)(8)(vi), commonly referred to  as the “Amazon Tax.” Under this law, an out-of-state seller is deemed to be a sales tax vendor that is required to register for and collect state and local sales tax on all its taxable sales in New York State. This applies if an in-state entity is compensated for referring customers to a retailer and the retailer generates more than $10,000 in cumulative gross receipts during the preceding four quarterly sales tax periods. This presumption can be rebutted by the retailer by showing that the in-state entity did not engage in solicitation on the retailer’s behalf.

Both and sold taxable products through programs in which third parties (“Affiliates”) in New York earn commissions for placing links on their websites that direct the consumer from the Affiliates’ web site to the Retailers. Neither nor had any physical presence in New York. The Retailers challenged the statute’s constitutionality on the grounds that it violated both the Commerce Clause and the Due Process Clause of the United States Constitution. In a split decision, the New York Court of Appeals (“Court of Appeals” or “Court”) disagreed with the Retailers.

Commerce Clause:

The Retailers argued that the statute violated the Commerce Clause because it subjects online retailers to New York sales and use tax when they have no physical presence in the state. In order for a state tax to be constitutional under the Commerce Clause, the tax must meet all four of the following criteria:

  • Applies to an activity with a “substantial nexus” with the taxing state;
  • Is fairly apportioned between the states in which the activity occurs;
  • Does not discriminate against interstate commerce (the tax does not favor in-state businesses and discriminate against out-of-state businesses); and
  • Is fairly related to services provided by the taxing state.

The Retailers argued that, because they have no physical presence in New York, they do not have “substantial nexus” with the state. The Court of Appeals disagreed, holding that the Retailers [through [the Affiliate Agreements] are deemed to have established an “in-state sales force” and therefore have “substantial nexus.”

Due Process Clause:

To determine whether a tax is constitutional under the Due Process Clause, a court looks at the activities of the taxpayer subjected to the tax. If a taxpayer has purposefully directed activities towards a state, has sufficient contacts with the state, and derives benefit from that contact, a tax is constitutional under the Due Process Clause. Essentially, in order for the statutory presumption to be constitutionally valid, there must be a rational connection between the facts presumed and a fair opportunity for the taxpayer to rebut the presumption.

Here, the Retailers claimed that the statute was unconstitutional under the Due Process Clause “because the statutory presumption is irrational and essentially irrebuttable.”  The Court disagreed. 

The record reflected that, pursuant to the Retailers’ Affiliate agreements, New York residents are compensated for referrals that result in sales by the Retailer and, as the Affiliates are paid based on sales, “it is not unreasonable to presume that” Affiliates would reach out to New York contacts to solicit referrals. With respect to the Retailer’s ability to rebut the presumption of being subject to these provisions, the New York Department of Taxation and Finance set forth standards by which a taxpayer can successfully rebut the presumption.

Illinois Decision:

In 2012, an Illinois court ruled, in Performance Marketing Association, Inc. v. Hamer (Ill. Cir. Ct. (Cook County) Docket No. 2011-CH-26333, 5/7/2012), that a similar law was unconstitutional under the Commerce Clause. The Illinois court found that the taxpayer’s “click-through” affiliate relationship failed the substantial nexus requirement. The State of Illinois is currently appealing the decision. Note that the primary difference between the Illinois and New York statutes is that the New York statute allowed taxpayers to rebut the presumption of taxability, while the Illinois statute provided no such provision.  The facts and other statutory provisions in each case were otherwise nearly identical. Given this conflict, it is possible that this issue could be addressed by the U.S. Supreme Court.

Our View of the News
Today, it is extremely difficult for taxpayers and tax practitioners to identify when a taxpayer has a taxable presence in a jurisdiction when the taxpayer does not have a physical presence in such jurisdiction. In order to manage risk, taxpayers must continually assess their business operations in the various jurisdictions in which they have customers, especially in situations where the taxpayer does not itself have a physical presence.

For more information, please visit our State and Local Tax webpage and contact Patrick Duffany, State and Local Tax Practice Leader, at 860-368-3607.

Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used, by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing, or recommending to another party any tax related matters.

This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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