January 30, 2009, 12:00 AM

Amazon and Overstock get booted out of court case over New York Internet sales tax

When it comes to paying the tax man in New York State, there’s no way out through the Internet, a New York judge has told Amazon and Overstock. The judge recently rejected the two retailers’ arguments that they should not have to abide by a new state law that requires them to process sales tax on sales garnered through affiliate web sites based in New York.

When it comes to paying the tax man in New York State, there’s no way out through the Internet, a New York State Supreme Court justice has told Amazon.com Inc. and Overstock.com Inc.

The two online retailers filed separate lawsuits against the state last year, charging that the Internet sales tax law it enacted in June was, among other things, invalid and unconstitutional. The law requires online retailers who do $10,000 or more a year in sales through New York-based affiliate web sites to collect and remit the state’s sales tax on sales to New York residents.

Affiliate web sites host links to e-retailers’ web sites and receive commissions on purchases stemming from consumers clicking on those links. For example, a New York-based ski club might host a link to the ski selection on Amazon.com and collect a small fee from each purchase.

Amazon and Overstock contend that, though they have connections with thousands of online affiliates in New York, that doesn’t directly tie them to any physical facilities in the state that would require them to process tax on sales to New York residents.

But the judge didn’t buy their arguments. “Amazon’s complaint must be dismissed in its entirety for failure to state a cause of action,” Justice Eileen Bransten said in a statement. “There is no basis upon which Amazon can prevail.”

Rejecting Overstock’s lawsuit, Bransten added, “There are no allegations in Overstock’s complaint that make it materially different from Amazon’s.”

Overstock says it is planning an appeal before the New York State Court of Appeals, the state’s highest court, and if necessary, the U.S. Supreme Court. “We don’t believe the New York court correctly applied the law, and we must now move this challenge to the next phase,” says president Jonathan E. Johnson.

Amazon has declined to comment on the dismissal.

paul@verticalwebmedia.com

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