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NAW News

Legal Update

- May 2013

New York High Court Upholds Law Compelling Remote Internet Sellers to Collect Tax on New York Sales

In 2008, New York was the first state to amend its sales tax law to include a “click-through nexus provision,” which basically deems an out-of-state Internet seller to be soliciting sales in New York (and thus required to collect and remit the state sales tax on sales to New York customers) if: (1) a New York resident representative refers potential customers to the Internet seller by a link on the resident’s website or otherwise; and (2) the resident receives a commission from the Internet seller on sales resulting from buyers following the link. This presumption can be rebutted if the resident representative’s contract with the Internet seller prohibited any sales solicitation in the state and, in fact, no such activity occurred. Following New York, click-through nexus laws have been enacted in Arkansas, California, Connecticut, Georgia, Illinois, North Carolina and Rhode Island.

The New York law provides that an out-of-state seller “…shall be presumed to be soliciting business [in New York] through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller.” The purpose of this law is clear—to require this remote Internet seller to collect sales tax on sales made to New York residents and remit the tax to New York.

Shortly after passage, Amazon.com and Overstock.com challenged the law on constitutional grounds. On March 28, 2013, the New York Court of Appeals, the state’s highest court, ruled that the law is constitutional on its face, with one justice dissenting. (Amazon.com and Overstock.com v. New York State Department of Taxation and Finance). The law does not violate the Commerce Clause because the taxpayers have a sufficient presence (nexus) in New York because “economic activities are performed in New York by the seller’s employees or on its behalf.” The court found that the New York website owners affiliated with the sellers were in effect an in-state sales force that satisfied the Commerce Clause minimum in-state presence requirement, as articulated by the U.S. Supreme Court in Quill v. North Dakota (1992). Of note is the court’s statement that “no one disputes that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites,” as opposed to the Internet seller paying these residents to actively solicit business in the state.

The court also rejected the taxpayers’ argument that the law violates the Due Process Clause. In-state presence is not required for due process. Rather, the focus is whether the seller has purposely directed its activities toward the forum state and whether, based on those activities, it is reasonable to require the seller to collect taxes for that state. The taxpayers’ use of a “brigade” of affiliated New York-based websites to solicit sales and be compensated with a commission on such sales satisfied the due process test, according to the court.

Overstock.com is considering an appeal to the U.S. Supreme Court, noting in its public statement that an Illinois state trial court has ruled that a similar Illinois law violates the Commerce Clause and conflicts with the Supreme Court’s decision in Quill v. North Dakota. That ruling is on appeal.

NLRB to Ask for U.S. Supreme Court Review in the Noel Canning Case

The National Labor Relations Board (NLRB), in consultation with the U.S. Department of Justice, has asked the U.S. Supreme Court to review its loss in Noel Canning v. NLRB, in which the U.S. Court of Appeals for the DC Circuit ruled that recent Presidential appointments to NLRB were unconstitutional and invalid. The petition for certiorari is was filed on April 25, 2013. Now the Court will decide whether or not to review the court of appeals decision.

This garden-variety labor law case is shaping up as a major separation-of-powers decision. If affirmed by the Supreme Court, the likely effect of Noel Canning would be a shift toward increased Senate control over the appointment of government officials and a decrease in the frequency of presidential recess appointments.


On January 25, 2013, the Court of Appeals for the D.C. Circuit unanimously ruled that President Obama’s attempt to appoint three members to the National Labor Relations Board in January 2012 as “recess” appointees violated the U. S. Constitution because the Senate was not in recess when the appointments were made. (Noel Canning v. National Labor Relations Board, No. 12-1115). This decision invalidates the attempt to avoid the Senate confirmation process by purported recess appointments of Board members Sharon Block, Richard Griffin and Terence Flynn. It also potentially puts all Board actions taken since January 3, 2012, and possibly earlier, in legal jeopardy.

The appeals court decision may be viewed at:

The ruling leaves the Board with only one validly appointed member, Chairman Mark Gaston Pierce, and his term of office ends in August 2013. It is anticipated that Board members Block and Griffin will continue to act and make decisions until all avenues of appeal are exhausted. However, without a quorum (at least three validly appointed members), the Board is without the legal authority to act or make decisions. Effectively, this decision calls into question the NLRB’s authority to make decisions until such time as a constitutionally-appointed quorum of members can be established or the decision is modified or reversed.

The court was reviewing an NLRB decision that employer Noel Canning violated the National Labor Relations Act. That decision was issued on February 8, 2012 by three Board members, two of whom (Block and Flynn) were unlawfully appointed by the President, according to the court’s ruling.

In voiding the putative “recess” appointments, the court declared on a 3-0 vote:

“[T]he President made his three appointments to the Board on January 4, 2012, after Congress began a new session on January 3 and while that new session continued. Considering the text, history and structure of the Constitution, these appoints were invalid from their inception. Because the Board lacked a quorum of three members when it issued its decision in this case on February 8, 2012, its decision must be vacated.”

Consequences of the Decision

All decisions the Board made during the time that the court has ruled they lacked the required quorum are now subject to challenge pending the outcome of appeals. Although the Board announced its intention to continue acting despite the court ruling, they do so under a “cloud” and all decisions made subsequent to the decision will similarly be subject to challenge. According to a recent Wall Street Journal article, at least 87 companies and 3 labor unions have cited the Noel Canning decision, and argued that the agency’s actions against them should be voided or blocked since the NLRB (or its regional offices) lacked legal authority to act. Employers have argued that at least 10 of the NLRB regional directors lack legal authority because they were installed by an unconstitutionally appointed NLRB, calling into question the validity of decisions by those regional directors.