• by Wendy Davis  @wendyndavis, February 8, 2013

Amazon and Overstock are asking New York's highest court to overturn a law requiring some online retailers to collect sales tax.

The so-called "Amazon tax," passed in 2008, requires Web marketers that pay commissions to New York-based affiliates -- including other online companies -- to collect sales tax from consumers in the state. Amazon and Overstock filed suit days after the law was passed. They argue that the law unconstitutionally interferes with interstate commerce.

A trial judge upheld the law, but Amazon and Overstock appealed and the case reached New York's Court of Appeals this week.

Amazon and Overstock argue that New York can't require out-of-state retailers to collect sales tax unless they have a "substantial nexus" to the state, such as brick-and-mortar stores. They are relying on a 1992 U.S. Supreme Court decision that held that catalog companies need not collect sales tax from consumers unless they had outlets in the state.

The ecommerce companies contend that affiliate marketers -- including Web publishers that garner referral fees when visitors click on online ads -- don't constitute a sufficient in-state presence to justify the tax-collection requirement. The ecommerce companies argue that online retailers don't necessarily know when affiliate marketers are based in New York.

"Advertising alone is insufficient to give rise to a 'substantial nexus,' and the physical location of these third parties who post advertisements on their own websites is typically unknown and irrelevant to both the retailers and the individuals visiting these sites," they argue in their court papers.

The New York State Department of Taxation, which is defending the statute, argues that the law "restores a level playing field between brick-and-mortar stores and their Internet-only counterparts."

New York requires all state residents to pay sales tax on purchases. When online retailers don't collect the taxes, consumers are supposed to self-report the amount they owe -- but observers say the practice results in underpayment.

After New York's law went into effect, around 200 online retailers, including Overstock and Blue Nile, stopped working with affiliates in the state. Amazon didn't drop New York affiliates, but stopped working with affiliate marketers in North Carolina and Rhode Island, which also passed similar laws.

More recently, Amazon recently agreed to start collecting sales tax in California, Pennsylvania and other states. The company also reportedly intends to build warehouses in a host of states in order to offer same-day delivery. If it does so, those structures would be the type of physical presence that allows states to require sales-tax collection.