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Over the past year, click through nexus has dominated the sales and use tax professional community. While many believe this to be a "new" tax, the issue really boils down to whether certain online companies can be forced to collect sales and use tax in states in which they have no physical presence. In March 2013, New York's highest court ruled that it was acceptable for the state to make a law that required an online retailer to collect tax in its state based purely because New York based company received a commission for the in-state company's web site forced a potential customer to the out-of-state online retailer's site. There were actually two such cases, against Amazon and Overstock. Both companies believe that this ruling runs contrary to the Dormant Commerce Clause of the United States Constitution and prior United States Supreme Court rulings. Therefore, on August 23, 2013, both Amazon and Overstock filed a petition to ask the United States Supreme Court to hear the case.

For those readers who are part of the state and local tax (SALT) professional community, you know that it has been more than 20 years since the US Supreme Court handed down an opinion on sales and use tax. In fact, the highest Court in the land hasn't even accepted a sales and use tax case since that 1992 landmark opinion in Quill vs North Dakota (FULL CITE). These so called "Click-Through-Nexus" statutes are contrary to established precedent set by the US Supreme Court and create great instability in our electronic commerce marketplace. So this case is a very big potential deal for the state and local tax landscape in this country, as all old-school SALT professionals know. If you are one of those old SALT-y Dogs, you probably are most interested in the petitions for certiorari from Amazon and Overstock, which can be downloaded in PDF format at the end of this article.

For those readers who are not part of the SALT community, you probably know that if you buy an item online, particularly at, then Amazon does not charge tax if you happen to reside in one of those states where Amazon does not have a warehouse. You've probably read the myriad of newspaper articles over the last couple of years discussing how both states and brick-and-mortar companies have been crying foul on this topic. States want the revenue from taxes not collected and brick-and-mortar companies believe on-line companies have an advantage that tax does not have to be charged. Contrary to popular belief, tax is due in the purchaser's state irrespective of whether the seller charges the tax. Specifically, the customer owes the use tax if the seller is not required to collect the sales tax. The problem is that the states have trouble gathering enough information to go after their own law breaking citizens. So why do certain retailers charge tax and others don't? Why do some websites like charge tax in some states but not in others?

The issues surrounding whether a state can force an out of state company to collect sales tax on the state's behalf are complicated and represent a 80 year old battle being waged between the states and out of state companies in our court system. In other words, the internet may be the relatively new, but as the catalog companies of the 70's and 80's will tell you, this battle is far from new. Without getting into the complete history of the topic, let's look at the basics of what New York and these two on-line giants are fighting about.

The Constitution has what is known as the Commerce Clause. The Commerce Clause states that Congress alone has the power to regulate interstate commerce. This provision was placed in the Constitution because the founders of our country knew that the only way our country could grow and be economically viable as a single country is to allow commerce to flow freely between the states with as few burdens (and taxes) as reasonably possible. Our founders reasoned that the federal government would be more likely to make decisions for the good of the country compared to states that would only be looking out for the individual state's best interest. This concept has been extended over the years to mean that even if a state makes a law that interferes with interstate commerce and our federal congress has not spoken on the topic, then the law is still unconstitutional (aka Dorman Commerce Clause).

From a sales tax perspective, the effect of the Commerce Clause (and technically the Due Process Clause) means that a company must have some connection, some substantial tie with a state in order to require the company to charge and collect its state tax. Without the tie, known as nexus, any law a state makes to force a business to collect tax violates this notion of the dormant commerce clause and is usually found unconstitutional by our courts.

The law has evolved over the years and was most recently addressed in Quill v. North Dakota. In Quill, the mail order retailer only sent mail order catalogs into North Dakota to get North Dakota customers. Quill did not have any employees, any offices, any independent contractor, or any property (except for a disk) in North Dakota. In 1992, the United States Supreme Court laid down a bright line rule that without some "physical presence" in a state then a state law that required state tax collection violated the Constitution.

Since 1992, the states have been creating law after law trying to push the limits of the state's jurisdictional reach over out of state companies, often crossing the line. For example, many states have enacted laws that say three advertisements in a state during a year is enough for nexus, clearly ignoring the physical presence requirement of Quill. States have ruled that having something like a computer server in a state was the almighty "physical presence." Other states, such as New York, have drafted created laws that create a presumption of physical presence in a state if a company uses a state citizen's website to direct traffic to its site for sales. States argue that this is no different than having a physical salesman in a state which gives rise to nexus. Despite the changes in technology, namely the Internet, the United States Supreme Court has not heard a sales tax case since 1992, instead waiting on Congress to step in and address the issue. While it might be an understatement to say business has changed slightly since 1992, the battle between states and out of state vendors over sales tax remains virtually the same. Does the law impose an impermissible burden on interstate commerce?

With that background in mind, New York, like many states, drafted a law that said if an online retailer derives a certain level of sales from in state citizens' websites, then there is a presumption (effectively irrrebutable) that that company has nexus. This type of statute, known as "Click Through Nexus" has been implemented in several tax aggressive states. To illustrate the law, suppose a New York citizen creates a website. On the website, a viewer can click a link to go to to purchase a particular item. If a customer buys something from Amazon, then Amazon tracks the origination of the customer to the New Yorker's website and sends the owner of the website a referral fee. Amazon has no control of the website whatsoever. New York is arguing that if the website owner is in New York, then the website is acting as a paid sales agent and can assert nexus over Amazon, requiring it to collect tax. Online retailers claim this is merely advertising.

Online retailers such as Amazon and Overstock believed this law was unfair and challenged it in court. Unfortunately, they lost the case. Both cases were appealed to the highest court in New York, where the online retailers eventually lost. In short, a New York court determined that the New York law was constitutional. With nowhere left to turn in New York, Amazon and Overstock turned to the United States Supreme Court.

Due to the facts and procedure of this particular case, the only way to get in front of the Supreme Court is to politely ask the court to hear the case. While many parties believe their case is ground breakingly crucial, the Supreme Court only takes a relatively small portion of cases, only cases the Court deems to be important. Despite the importance in the countries exploding electronic commerce community, the Supreme Court has been potentially waiting on our federal legislature to take affirmative action on this topic, turning down every sales tax case laid before the Court over the last 21 years. In fact, the court implored Congress to act in the Quill opinion. After all its Congress' role to regulate interstate commerce, not the states' or the court's.

On August 23, 2013, and Overstock filed petitions for certiorari, which is the formal way of politely asking the Court to hear a case. In their Petitions, which can be downloaded below, both Amazon and Overstock implore the Supreme Court to hear the case because it is extremely important on a national level. If these types of laws are allowed, then states will unjustly burden interstate commerce by requiring companies to collect sales tax in every state instead of the state's simply collecting tax from their own (law breaking) citizens. Further, Amazon argues that the New York ruling is contradictory to prior cases dealing with the issue. The theme throughout the Petition seems to be that there has to be some physical presence of Amazon in New York for this law to fly and merely advertising is not enough. This is an accurate depiction of the law and I think Amazon is correct.

The important question is not whether Amazon or New York is right, all that matters is whether the Supreme Court will hear the case. Every year there is a sales or income tax nexus case that invites the Supreme Court to step up. However, ever year the Supreme Court declines. This case has a better shot than many because sooner or later the court will take a case. With big players such as Amazon and New York involved maybe the court will see the significance in this case and finally decide to take on the issue. On the other hand, the Supreme Court can continue to play its stubborn card and allow Congress to figure this issue out. Also in the background is the almost-passed Marketplace Fairness Act. The MSA had traction and would require many smaller internet retailers to collect tax in many jurisdictions, however, the law ultimately fell apart. Maybe the Supreme Court will view this as being close and it will remain hopeful that Congress can pull this together in the coming years. As a state and local tax practitioner, I am hopeful the Supreme Court steps up to the plate and takes this one.

Florida sales tax attorney; FL sales tax help; Florida sales tax expert; Florida Sales Tax Audit; Florida department of revenue attorneyAbout the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm the Law Offices of Moffa, Sutton, & Donnini, P.A. , based in Fort Lauderdale, Florida. Mr. Donnini's primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390. Please also visit his firm bio, blog, Facebook, and Twitter.



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