On December 6, 2013, the U.S. Supreme Court denied the petitions for certiorari filed in Overstock.com, Inc. v. New York State Department of Tax and Finance, and Amazon.com, LLC v. New York State Department of Tax and Finance. The petitioners in those cases, Overstock.com and Amazon.com, wanted the Court to consider whether New York’s “click-through nexus statute” violated the U.S. Constitution’s Due Process Clause and Commerce Clause.
New York’s “click-through nexus” statute, the first of its kind in the United States, presumes “nexus” (for sales tax purposes) for certain out-of-state, online retailers. For purposes of the statute, an Internet retailer is defined as a “vendor” that actively encourages website owners who are residents of New York state to advertise for the Internet retailer in return for a sales commission resulting from the followed link. The statute goes on to state that a presumption of taxability of Internet retailers exists when the Internet retailer generates more than $10,000 annually through such referrals.
Amazon.com and Overstock.com challenged the constitutionality of the click-through nexus statute in the New York state courts. However, the New York Court of Appeals found the statute to be constitutional. The New York high court did not find that the statute violated either the U.S. Constitution’s Commerce Clause, or the Due Process Clause.
The U.S. Supreme Court’s denial of certiorari in this case demonstrates a lost opportunity for the court to clarify the constitutionality of click-through nexus statutes as there is currently a state split on the constitutionality of such a law. Although the New York Court of Appeals found the state’s click-through nexus statute to be constitutional, on October 18, 2013, the Illinois Supreme Court found in Performance Marketing Association, Inc. v. Hamer that Illinois’ click-through nexus statute is preempted by the U.S. Constitution’s Supremacy Clause because the Internet Tax Freedom Act prohibits discriminatory state taxes on electronic commerce.
Without the guidance of the U.S. Supreme Court on the legality of state click-through nexus statutes, many states may feel that the Court’s denial of certiorari in Overstock.com, Inc. v. New York State Department of Tax and Finance and Amazon.com, LLC v. New York State Department of Tax and Finance may cause many states to pass their own versions of the law, and join the twelve states that have already enacted them (e.g., Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Minnesota, Missouri, North Carolina, Rhode Island, and Vermont). Such legislation has already been proposed in states such as: Florida, Hawaii, Indiana, Massachusetts, Michigan, Mississippi, Oklahoma, and Utah.
Furthermore, it is now up to Congress to consider the breadth of state click-through statutes. However, such action will probably not happen anytime soon. Recently, the U.S. Senate passed the Marketplace Fairness Act (MFA), which would require remote sellers, including Internet retailers, to collect state sales tax. Since the Senate passed the MFA in May, however, the bill was moved to the House Judiciary Committee of the U.S. House of Representatives, and has not made any further progress to date. Without federal guidance, and a patchwork of varying state laws, there will probably be little uniformity in the scope of click-through nexus laws in the near future.
Because many firm clientele are providers of communications services, including Hosted VoIP services and other cloud-based offerings that are often sold via the Internet, it bears mentioning that – in general – a provider of a communication service that is billed to an in-state address and also originates calls within the state is likely to be subject to state and local taxes on communications services. Whether via a sales tax or special tax on communications, the “click-through” affiliate nexus concept is largely irrelevant to the determination of whether a state or local government possesses sufficient legal basis to impose taxes on the communications provider. Many taxing jurisdictions throughout the U.S. currently possess legal authority to impose taxes on VoIP and other communications services, even those provided by out-of-state retailers with little to no physical presence, but have refrained from enforcement due to more generalized uncertainties about litigation exposure arising from unsettled questions of law. Decisions, like the Supreme Court’s denial of cert., may embolden state and local governments to enforce the rules on their books, as the denial of cert. signals the Court’s unwillingness to step into the debate and question the judgment of state and local governments when it comes to taxation.
Our firm will continue to monitor judicial and legislative proceedings related to click-through nexus laws. If you would like further guidance regarding your business’s obligations under click-through nexus laws, or have questions on other Communications Taxes and Fees issues, please feel free to contact Allison D. Rule at email@example.com.