News and Insights

New York Court of Appeals Upholds Online Retailer Nexus

Tax Development Apr 02, 2013

On March 28, 2013, in a consolidated opinion for the cases of, LLC v. New York State Department of Taxation and Finance and, LLC v. New York, the New York Court of Appeals (“Court”) upheld a provision of New York law, under which out-of-state retailers that advertise online may be required to collect the state’s sales tax.Under the challenged provision, N.Y. Tax Law § 1101(b)(8)(vi), out-of-state retailers that compensate New York residents for referring potential customers to the retailer via an online advertising link are presumed to be soliciting business in the state and required to collect New York sales tax. For this presumption to apply, a seller’s New York gross receipts derived from these arrangements must have exceeded ten thousand dollars for the preceding four quarterly periods. and claimed that the nexus provision failed to satisfy the substantial nexus requirement of the Commerce Clause of the U.S. Constitution, under which a seller must have a physical presence in a state before it can be required to collect sales tax. The Court rejected this claim, stating that the presence of deemed sales representatives in the state would be sufficient to meet this requirement. The plaintiffs further argued that the provision violated due process by creating an irrational and effectively irrebuttable presumption of in-state solicitation. The Court observed that the New York State Department of Taxation and Finance had provided a means by which an out-of-state seller could rebut this presumption by showing 1) that its agreements with in-state online advertisers prohibited the advertisers from engaging in any solicitation activities in New York and 2) that each such advertiser certified annually that the advertiser had not engaged in any such solicitation activities. Based on this, and on its finding that the presumption created by the nexus provision was rational, the Court rejected the plaintiffs’ due process challenge and upheld N.Y. Tax Law § 1101(b)(8)(vi).


Jeremiah T. Lynch