• by Wendy Davis  @wendyndavis, March 29, 2013

Siding against Amazon and Overstock, New York's highest court upheld a 2008 state law that requires some online commerce companies to collect sales tax from consumers in the state.

The so-called “Amazon Tax” applies to Web retailers who use in-state affiliates -- including online publishers that garner commissions when visitors make purchases after clicking on ads.

Amazon and Overstock challenged the law, arguing that they can't be required to collect sales tax without a "substantial nexus" to the state -- like brick-and-mortar stores. The companies relied on a 1992 U.S. Supreme Court ruling that catalog companies need not collect sales tax unless they had outlets in the state.

But in a decision issued on Thursday, New York's Court of Appeals ruled 4-to-1 that companies with in-state affiliate marketers have sufficient ties to New York to justify the tax-collection requirement. “If a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden,” the majority wrote.

The judges didn't define affiliates, but indicated that the term doesn't apply to publishers who merely post “passive advertisements.”

Judge Robert Smith dissented from the ruling. He said that he believed that online publishers who garner commissions through affiliate programs are “only media in which Overstock and Amazon advertise their products,” as opposed to the equivalent of sales agents.

Overstock said in a statement that it is considering an appeal to the U.S. Supreme Court.

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. Consumers currently must pay state sales tax on all purchases, including those made online, but many observers think that people under-report their online ecommerce activity.

The ruling upholding New York's law could encourage other states to pass similar laws, which potentially would lead other retailers to stop using affiliates, says Santa Clara University law professor Eric Goldman. “This opinion greenlights states to treat affiliates as traveling salespeople,” he says. “This case is almost certainly the end of the line for the 2000-2010 decade concept of affiliate programs.”

He adds that this situation could change if Congress empowers all states to require online retailers to collect tax. “Once everyone has a sales tax obligation, then maybe people will come back to affiliate programs.”

One law making its way through Congress, the Marketplace Fairness Act, would require most out-of-state retailers to collect tax from consumers. The Performance Marketing Association supports that bill, says the organization's general counsel, Gary Kibel.

He says the group believes that laws such as New York's aren't effective. “No significant additional tax revenue is being collected, because advertisers are simply cutting off their affiliates,” he says. “The individual state laws are not working for anyone.”

But the Direct Marketing Association opposes the Marketplace Fairness Act on the ground that it would impose too many administrative burdens on businesses by requiring them to comply with different tax rules, deadlines and forms in every state.

Amazon recently agreed to start collecting sales tax in California, Pennsylvania and other states. The company also reportedly intends to build warehouses in a number of states, where it will offer same-day delivery. In that case, the warehouses would be the type of physical presence that allows states to require sales-tax collection.