Court Opinion

ID: 5487795
Source: CourtListenerOpinion
Date Created: 2022-01-10 02:19:04.002085+00
Date Added: 2024-06-11T08:33:42.771183
License: Public Domain

Smith, J. (dissenting).
The rules that govern this case are laid down in a series of United States Supreme Court decisions and are not in dispute. Under the Commerce Clause, a state may require an out-of-state retailer to collect use tax from in-state purchasers only if the retailer has a physical presence within the state (National Bellas Hess, Inc. v Department of Revenue of Ill., 386 US 753 [1967]; Quill Corp. v North Dakota, 504 US 298, 309-319 [1992]). The solicitation of customers for the retailer by in-state sales representatives counts as a physical presence, even where the sales representatives are independent contractors (Scripto, Inc. v Carson, 362 US 207 [1960]; Tyler Pipe Industries, Inc. v Washington State Dept. of Revenue, 483 US 232, 250-251 [1987]; cf. Matter of Orvis Co. v Tax Appeals Trib. of State of N.Y., 86 NY2d 165, 180 [1995]); but mere advertising by the out-of-state retailer in in-state media does not (see Quill, 504 US at 302-303 [North Dakota statute making tax obligation dependent on advertisements held invalid]). Thus, the majority correctly summarizes the law by saying that “if New York residents were merely engaged to post passive advertisements on their websites” no tax could be collected, but that a vendor who “is paying New York residents to actively solicit business in this state” may be required to remit tax (majority op at 596).
Our task here is to decide whether certain New York-based websites—Overstock’s “Affiliates” and Amazon’s “Associates”—are the equivalent of sales agents, soliciting business for Overstock and Amazon, or are only media in which Overstock and Amazon advertise their products. I think they are the latter.
The Overstock and Amazon links that appear on websites owned by New York proprietors serve essentially the same function as advertising that a more traditional out-of-state retailer might place in local newspapers. The websites are not soliciting customers for Overstock and Amazon in the fashion of a local sales agent. Of course the website owners solicit business for themselves; they encourage people to visit their websites, just as a newspaper owner would seek to boost circulation. But there is no basis for inferring that they are actively soliciting for the out-of-state retailers.
It does not make sense to envision a website owner trying to persuade members of the public, as a sales agent would, that Overstock and Amazon are high quality merchants that the public should want to do business with: persuasion of that sort *599does the website owner no good. A traditional sales agent—say, a vacuum cleaner salesman—would promote a particular brand of vacuum cleaner so that customers would order the product through him and he would get a commission. But no website owner promotes Overstock or Amazon for a similar reason, because everyone who wants to buy from either of those firms can go to the retailer’s website directly. It is true, as the majority mentions (majority op at 595), that certain kinds of website owners—churches and schools, for example—may ask their supporters to show their loyalty by using the website when they buy from Amazon, but that is not the same as soliciting business that Amazon would not otherwise get. In any event, a rule applicable to websites generally cannot be justified on the basis of the special characteristics of volunteer-supported organizations.
The statute at issue here tries to turn advertising media into an in-state sales force through a presumption. The statute says that a seller “shall be presumed to be soliciting business through an independent contractor or other representative” if it enters an agreement under which a New York resident “for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise” (Tax Law § 1101 [b] [8] [vi]). But of course a statutory presumption cannot by itself permit a state to do what the United States Constitution forbids. To presume that every website that has an agreement under which it carries an Overstock or Amazon link is a sales agent for Overstock or Amazon would be to nullify the rule that advertising in in-state media is not the equivalent of physical presence.
Read literally, the statute would reach essentially all Internet advertising that links to a seller’s website: it includes any agreement for referral of customers, by a link or otherwise, “for a commission or other consideration.” Since this literal reading would unquestionably render the statute unconstitutional, the Department of Taxation and Finance has adopted a narrowing construction, largely ignoring the words “or other consideration,” and applying the presumption only where the website receives a commission or similar compensation—i.e., where “the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link” (NY St Dept of Taxation & Fin Mem No. TSB-M-08[3]S at 2). The narrowing construction, in my view, does not save the statute.
It was no doubt true before the Internet existed that advertising was usually sold for a flat fee, while sales agents usually *600worked on commission, but that has changed. When an advertisement takes the form of a link on a website, it is easy, as well as efficient, for the advertiser to compensate the website on the basis of results. But the link is still only an ad. It seems quite unlikely, and the record contains no evidence, that compensation “based on the volume of completed sales” is an unusual way of charging for web advertising, or that such compensation is primarily associated with active solicitation on the seller’s behalf by the website owner.
A number of tests have been stated for deciding the validity of a statutory presumption. In People v Leyva (38 NY2d 160, 165-166 [1975]), we described certain United States Supreme Court cases as requiring “a rational connection between the facts which are proved and the one which is to be inferred with the aid of the presumption” (see Tot v United States, 319 US 463, 467-468 [1943]; United States v Romano, 382 US 136, 139-141 [1965]), and others as requiring a “substantial assurance that the presumed fact is more likely than not to flow from the proved fact on which it is made to depend” (Leary v United States, 395 US 6, 36 [1969]). New York, according to the Leyva case, “has exacted an even higher standard of rational connection,” one that “must assure ‘a reasonably high degree of probability’ that the presumed fact follows from those proved directly” (38 NY2d at 166, quoting People v McCaleb, 25 NY2d 394, 404 [1969]).
I do not think it necessary to decide here what test should apply to a presumption enacted by a state for the purpose of expanding its own power over interstate transactions (though I would think it should be a relatively demanding one); whatever the test is, this statute fails. To infer, from an agreement to put a link on a website and to compensate the website owner in proportion to the resulting sales, that the website owner is actively soliciting business for the seller “is so strained as not to have a reasonable relation to the circumstances of life as we know them” (Tot v United States, 319 US at 468).
I would therefore hold that the statute challenged in this litigation is invalid under the Commerce Clause.
Judges Graffeo, Read and Pigott concur with Chief Judge Lippman; Judge Smith dissents in an opinion; Judge Rivera taking no part.
In each case: Judgment appealed from and order of the Appellate Division brought up for review affirmed, with costs.