Avalara > Blog > Sales and Use Tax > Overstock, Amazon, affiliates and associates: Will debates about physical presence ever end? - Avalara

Overstock, Amazon, affiliates and associates: Will debates about physical presence ever end?


On March 28, 2013 the New York State Court of Appeals (their name for the highest court) ruled against Amazon and Overstock in their lawsuit against New York over a law that changed the definition of physical presence for sales tax purposes. In 2008 New York adopted a law revising the definition of a “vendor” to include

When the law was adopted, Amazon and Overstock (and countless others) had contracts with in-state New York entities that would “receive a percentage of the revenue from sales generated when a customer clicks on the Associate’s (Affiliate’s) link and completes a purchase.”  Amazon and Overstock challenged the law arguing that it violated the US Constitution’s dormant Commerce Clause and Due Process Clause.

The New York State Court of Appeals ruled that the law did not violate the physical presence requirement of the Commerce Clause as established in 1967 by the US Supreme Court in Bellas Hess. The Court of Appeals concluded that “world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated” and the ruling was based on the activity taken by in-state website owners for the benefit of out-of-state retailers.

According to the Court of Appeals “many websites are geared toward predominantly local audiences -- including, for instance, radio stations, religious institutions and schools—such that the physical presence of the website owner becomes relevant to Commerce Clause analysis.”  Concluding “that the physical presence of the website owner” is relevant the majority opined that “through these types of affiliation agreements, a vendor is deemed to have established an in-state sales force.”

Everyone familiar with the debate over the definition of nexus knows that an “in-state sales force” constitutes physical presence. Once the majority determined that the in-state affiliates created an “in-state sales force” it naturally followed they would determine that “the statute plainly satisfies the substantial nexus requirement. Active, in-state solicitation that produces a significant amount of revenue qualifies as “demonstrably more than a ‘slightest presence.’”

In other words, an in-state affiliate creates an obligation for the out-of-state seller to collect sales tax. Therefore, any retailer using an affiliate program in New York and not collecting must quickly decide whether to continue that program and start collecting sales tax or to end the program.  In addition, retailers who use an affiliate program in Arkansas, Connecticut, Georgia, Illinois, North Carolina, Pennsylvania, Rhode Island, and Vermont must decide whether the courts in those states will rule the same as the New York Court.

photo credit: wallyg via photopin cc


Avalara Author
Scott Peterson
Avalara Author Scott Peterson
Scott Peterson is the Vice President of U.S. Tax Policy and Government Relations for Avalara, Inc. In his role, Scott leads Avalara’s effort to be the first name in sales tax automation. Prior to joining Avalara Scott was the first Executive Director of the Streamlined Sales Tax Governing Board. For seven years Scott acted as the chief operating officer of an organization devoted to making sales tax simpler and more uniform for the benefit of business. Before joining Streamline Scott spent ten years as the Director of the South Dakota Sales Tax Division where he was responsible for the state sales and use tax, the state’s contractor’s excise tax, the sales and use tax for over two hundred cities, and the sales and use tax for four tribal governments.