• by Wendy Davis  @wendyndavis, January 14, 2009

A New York court has rejected Amazon's challenge to a new law requiring some online retailers to pay sales tax on purchases by state residents.

In the decision, made public Tuesday, state court Judge Eileen Bransten ruled that New York could legally require Amazon to collect tax because the online retailer uses affiliates within the state to generate sales.

"Amazon chooses to benefit from New York associates that are free to target New Yorkers and encourage Amazon sales, all the while earning money for Amazon in return for which Amazon pays them commissions," Bransten wrote.

The judge also dismissed a challenge to the law by retailer Overstock.com.

The measure, signed by New York Gov. David Paterson last year, requires Web retailers that use in-state affiliates to collect New York sales tax. The bill was largely seen as targeting Amazon.com, and was informally called "the Amazon tax."

Amazon and Overstock filed a suit seeking to have the law declared invalid. They argued that a 1992 U.S. Supreme Court decision prohibited states from forcing retailers to collect sales tax unless they had a physical presence in those states.

But the New York argued that Web retailers' in-state affiliates, including other Web publishers that garner referral fees, constituted a sufficient presence in New York.

The measure, engineered by former Gov. Eliot Spitzer, was expected to bring in at least $50 million to New York last year alone.

Recently, Paterson proposed taxing iTunes downloads to help close a state budget gap.