Overstock.com Challenges NY Online Sales Tax

Online retailer joins Amazon in questioning constitutionality of controversial new law.

Overstock.com is the latest online retailer to challenge New York's controversial new online sales tax. The measure requires Internet retailers to collect and pay New York sales tax even if the retailer has no physical presence in the state.

In a May 30 lawsuit, Overstock, based in Utah, claims the new law is unconstitutional under both New York and federal constitutional provisions, including due process clauses under both constitutions and the commerce clause of the U.S. Constitution as well. Amazon filed a similar lawsuit May 2.

In both cases, New York claims the retailers owe the sales tax since both Overstock and Amazon have affiliates in the state who link to the companies. In approving the new law promoted by former Gov. Eliot Spitzer and signed by current Gov. David Patterson, New York hopes to generate up to $50 million a year in online sales taxes.

Last month, Overstock notified more than 3,400 New York-based affiliate advertisers that as of June 1, they could no longer provide advertising for Overstock because of the new law. The Overstock lawsuit seeks an injunction halting the application of the new law, which went into effect June 1, and asks the court to declare the law unconstitutional.

"I am confident of our position in the suit," Mark Griffin, Overstock.com general counsel, said in a statement. "The applicable United States Supreme Court cases on the question of whether the state can collect taxes under these circumstances make it clear that New York cannot constitutionally require Overstock.com to collect these taxes."

A 1992 Supreme Court decision said online buyers do owe sales tax but the court also ruled the current patchwork of more than 7,500 nationwide taxing authorities make it too difficult, confusing and complex for retailers to collect the tax. States, the court urged, need to simplify the process.

In 2000, a number of states organized the STTP (Streamlined Sales Tax Project) with a goal of drafting laws that would allow states to collect sales taxes on online and catalogue sales. Since then, 15 states have joined the SSTP, but four of the largest states - California, Texas, Florida and New York - have declined to participate.

Congressional approval of the STTP will ultimately be required for a nationwide collection system for online sales taxes. While bills have been introduced in Congress to accomplish that, lawmakers have not moved on the issue.

The New York law requires any retailer generating at least $10,000 in revenue from New York affiliates to collect New York sales tax.

"We love New York," said Patrick Byrne, Overstock.com chairman and chief executive officer. "But, we had to choose our New York customers over the New York tax collector armed with an unconstitutional statute."

In its lawsuit, Amazon maintains that simply because "some independently operated, New York-based Web sites post advertisements with links to Amazon and are compensated for these advertisements," the new law requires Amazon to "collect New York sales and use taxes on all of its sales to New Yorkers or face hefty civil and criminal penalties."