June 6, 2008, 12:00 AM

Overstock files legal challenge to New York’s Internet sales tax

Overstock.com has followed Amazon.com’s lead in filing a lawsuit against a New York law that requires more retailers to collect sales tax on Internet orders.

Katie Evans

Managing Editor, International Research

Overstock.com has followed Amazon.com’s lead in filing a lawsuit against a New York law that requires more retailers to collect sales tax on Internet orders.

Overstock, in a legal complaint filed May 30 in the State Supreme Court of New York State against Gov. David Paterson, the state taxation department and its tax commissioner, contends that New York’s new sales tax law “violates the Commerce Clause of the U.S. Constitution, as well as the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution and the New York State Constitution.” Overstock has asked the court for a permanent injunction prohibiting the state from enforcing the law, which took effect June 1.

In the course of passing the current state budget, New York lawmakers modified the sales tax law to require retailers like Overstock and Amazon to collect sales tax because of their use of New York-based affiliate web sites for customer referrals. Up until now the retailers have been exempt from collecting sales tax in New York State as long as they maintained no physical presence in the state-an exemption also valid in other states that charge sales tax and upheld in 1992 by the U.S. Supreme Court.

But when New York modified its sales tax law in April, it said that online retailers did maintain a physical presence in the state if they sold to customers gained through ads placed on affiliate web sites and, therefore, were responsible for collecting sales tax from New York-based customers and remitting the tax to the state.

In its lawsuit, Overstock contends that it maintains no offices in New York, does not own or lease property in the state, and that none of its more than 800 employees works or resides there. Although Overstock says it has about 3,400 New York affiliates, its lawsuit also contends that it is “nearly impossible” for Overstock to show whether its affiliates, which it signs up through affiliate marketing services company LinkShare, are actually residents or businesses based in New York.

Overstock also contends in the lawsuit that the New York law is vague in key areas. A state-issued memo on the law, for example, indicates that sales gained through affiliate web sites are exempt from collecting sales tax if the affiliate does not support referrals to the retailer through “the use of flyers, newsletters, telephone calls or e-mails,” Overstock says in its suit. The New York State Department of Taxation has made that memo available online at www.tax.state.ny.us/pdf/memos/sales/m08_3s.pdf.

As reported earlier, Amazon filed a lawsuit similar to Overstock’s last month, and Overstock suspended its relationships with its New York affiliates. (See Amazon, Overstock act against New York law on sales tax.)

Overstock is No. 30 in the Internet Retailer Top 500 Guide; Amazon is No. 1.

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