New York Law Review

Tag: Due Process Clause

  • Amazon.com, LLC v. New York State Dept. of Taxation and Finance, 20 N.Y.3d 586 (2013): Upholding “Internet Tax” Based on Affiliate Solicitation

    Amazon.com, LLC v. New York State Dept. of Taxation and Finance, 20 N.Y.3d 586 (2013)

    A state tax on online retailers with no physical presence in the state is constitutional under the Commerce Clause and the Due Process Clause if the retailer has agreements with in-state residents who solicit business on their behalf for a commission, creating a sufficient nexus for taxation.

    Summary

    Amazon and Overstock challenged New York’s “Internet tax” arguing it violated the Commerce and Due Process Clauses. The law presumes online retailers solicit business in New York if they have commission-based agreements with New York residents who refer customers, resulting in over $10,000 in sales. The court upheld the statute, finding it constitutional on its face. The court reasoned that the in-state solicitation by affiliates creates a substantial nexus, and the presumption of solicitation is rational and rebuttable. The plaintiffs failed to prove the statute facially unconstitutional.

    Facts

    Amazon and Overstock, online retailers with no physical presence in New York, used “Associates” or “Affiliates” programs. These programs involved compensating New York residents for placing links on their websites that directed users to the retailers’ sites. If a customer made a purchase through the link, the resident received a commission. New York amended its Tax Law to include a provision (the “Internet tax”) presuming that sellers were soliciting business through independent contractors if they had such agreements with New York residents, and the cumulative gross receipts from these referrals exceeded $10,000 during the preceding four quarters.

    Procedural History

    Amazon and Overstock separately sued the New York State Department of Taxation and Finance, alleging that the Internet tax was unconstitutional on its face and as applied. The Supreme Court dismissed the complaints. The Appellate Division affirmed the dismissal of the facial challenges but reinstated the as-applied challenges. The plaintiffs then withdrew their as-applied challenges, and appealed the ruling on the facial challenges to the New York Court of Appeals.

    Issue(s)

    1. Whether the Internet tax violates the Commerce Clause by imposing an undue tax burden on interstate commerce.
    2. Whether the Internet tax violates the Due Process Clause by creating an irrational and irrebuttable presumption of solicitation of business within the state.

    Holding

    1. No, because active, in-state solicitation that produces a significant amount of revenue qualifies as demonstrably more than a “slightest presence” satisfying the substantial nexus requirement of the Commerce Clause.
    2. No, because there is a rational connection between compensating residents for referrals that result in purchases and the presumption that those residents will actively solicit other New Yorkers, and because the presumption is rebuttable.

    Court’s Reasoning

    The Court of Appeals held that the statute was constitutional on its face under both the Commerce Clause and the Due Process Clause.
    Regarding the Commerce Clause, the court acknowledged the Supreme Court’s emphasis on physical presence in Quill Corp. v. North Dakota as establishing the limits of state taxing authority. However, the court distinguished the case by finding that the New York statute addressed active solicitation by in-state residents. The court stated, “Active, in-state solicitation that produces a significant amount of revenue qualifies as ‘demonstrably more than a ‘slightest presence’ under Orvis.” The court noted that vendors are not required to pay these taxes out-of-pocket; they are collecting taxes that are unquestionably due.

    Regarding the Due Process Clause, the court found a rational connection between compensating residents for referrals and the presumption that they will actively solicit other New Yorkers. The court reasoned, “It is plainly rational to presume that, given the direct correlation between referrals and compensation, it is likely that residents will seek to increase their referrals by soliciting customers.” The court also found that the presumption was rebuttable. The Department of Taxation and Finance provided a method for rebutting the presumption through contractual prohibition of solicitation and annual certification by the affiliates.

    The court emphasized that plaintiffs had to demonstrate that the statute was facially unconstitutional. The court stated, “We will not strain to invalidate this statute where plaintiffs have not met their burden of establishing that it is facially invalid.”

  • Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85 (2003): New York’s ‘Convenience of the Employer’ Test Upheld

    Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85 (2003)

    A state’s “convenience of the employer” test for apportioning income of non-residents working partly within and partly outside the state does not violate the Commerce or Due Process Clauses when applied to a non-resident who works at home for their own convenience, not out of employer necessity.

    Summary

    A law professor residing in Connecticut challenged New York’s taxation of his entire salary, arguing that days worked at home should be allocated to Connecticut. New York applied the “convenience of the employer” test, taxing income based on work performed in New York unless the out-of-state work was a necessity for the employer. The New York Court of Appeals upheld the tax, finding that the professor’s choice to work from home was for his convenience, not a requirement of his employment, and that New York provided sufficient benefits to justify the tax. The court reasoned that allowing the professor to avoid New York taxes based on a personal choice would create an unfair advantage over New York residents.

    Facts

    The taxpayer, a law professor at Cardozo School of Law in New York City, resided in Connecticut. During the academic year, he commuted to New York three days a week to teach and meet with students. The other two days, and during sabbatical, he worked from his home in Connecticut, preparing examinations, writing recommendations, and conducting research. He sought to allocate a portion of his income to Connecticut, reflecting the days worked at home.

    Procedural History

    The New York State Department of Taxation and Finance issued notices of deficiency, asserting that the entire salary was subject to New York tax under the “convenience of the employer” test. The taxpayer contested the deficiencies, arguing violations of the Commerce and Due Process Clauses. An Administrative Law Judge and the Tax Appeals Tribunal rejected these claims. The taxpayer then commenced an Article 78 proceeding in the Appellate Division, which confirmed the administrative determination. The New York Court of Appeals granted leave to appeal and affirmed.

    Issue(s)

    Whether the application of New York’s “convenience of the employer” test to a non-resident law professor, resulting in New York’s taxation of salary earned on days worked at home for his own convenience, violates the Commerce Clause of the U.S. Constitution?

    Whether the application of New York’s “convenience of the employer” test to a non-resident law professor, resulting in New York’s taxation of salary earned on days worked at home for his own convenience, violates the Due Process Clause of the U.S. Constitution?

    Holding

    1. No, because the tax is fairly apportioned and does not unfairly burden interstate commerce. The taxpayer’s choice to work at home for personal convenience does not transform his employment into an interstate business activity.

    2. No, because the taxpayer has a sufficient “minimum connection” to New York due to his employment there, and the tax is rationally related to the benefits New York provides.

    Court’s Reasoning

    The court applied the four-part test from Complete Auto Transit, Inc. v. Brady, noting that the taxpayer only challenged whether the tax was fairly apportioned. A tax is fairly apportioned if it is internally and externally consistent. Internal consistency was conceded. External consistency requires that the tax fairly reflects the in-state component of the activity being taxed. The court reasoned that the professor’s teaching services were performed in New York, and his choice to work at home was for personal convenience. The court distinguished this case from cases involving interstate transportation, where the activity itself crosses state lines. The court stated, “The dormant Commerce Clause protects markets and participants in markets, not taxpayers as such” and found that the convenience test serves to equalize tax obligations between residents and non-residents.

    Regarding the Due Process Clause, the court found a sufficient connection between the taxpayer and New York due to his employment, satisfying the minimum connection requirement. The tax was also rationally related to the opportunities and benefits conferred by New York, such as employment opportunities and public services. The court quoted Wisconsin v. J.C. Penney Co.: “The simple but controlling question is whether the state has given anything for which it can ask return”.

    The court rejected the taxpayer’s argument that double taxation violated the constitution, stating, “The multiple taxation placed upon interstate commerce by such a confluence of taxes is not a structural evil that flows from either tax individually, but it is rather the accidental incident of interstate commerce being subject to two different taxing jurisdictions”.