Amazon.com, LLC, et al., Appellants,v.New York State Department of Taxation and Finance, et al., Respondents.

Brief

N.Y.February 6, 2013

To Be Argued By: Randy M. Mastro Time Requested: 20 Minutes New York County Clerk’s Index No. 601247/08 Court of Appeals State of New York AMAZON.COM LLC and AMAZON SERVICES LLC, Plaintiffs-Appellants, -against- NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE; ROBERT L. MEGNA, in his Official Capacity as Commissioner of the New York State Department of Taxation and Finance; and THE STATE OF NEW YORK, Defendants-Respondents. REPLY BRIEF OF PLAINTIFFS-APPELLANTS Randy M. Mastro Oliver M. Olanoff GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, NY 10116-0193 Telephone: (212) 351-4000 Facsimile: (212) 351-4035 Julian W. Poon (Admitted pro hac vice) Kahn A. Scolnick (Admitted pro hac vice) GIBSON, DUNN & CRUTCHER LLP 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: (213) 229-7000 Facsimile: (213) 229-7500 Attorneys for Plaintiffs-Appellants AMAZON.COM LLC and AMAZON SERVICES LLC September 20, 2012 CORPORATE DISCLOSURE STATEMENT In compliance with Rule 500.1(f) of the Rules of Practice for the Court of Appeals of the State of New York, Plaintiffs-Appellants state that the following parent, and/or subsidiaries exist: The parent company of Amazon.com LLC and Amazon Services LLC is Amazon Corporate LLC. Amazon.com LLC has the following subsidiaries: (a) AF Retail Services LLC and (b) AmazonFresh LLC. Amazon Services LLC has no subsidiaries. The ultimate parent of Amazon.com LLC and Amazon Services LLC is Amazon.com, Inc. Amazon.com, Inc. has no parent corporation, and no public entity owns more than 10% or more of Amazon.com, Inc.’s stock. i TABLE OF CONTENTS Page PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 5 I. The Statute Violates Due Process on Its Face. ......................................... 5 A. Contrary to the State’s Contention, Advertising Alone Triggers the Statutory Presumption. ............................................... 5 B. The State’s Attempts to Demonstrate the Supposed Rationality of the Statute Fail. ........................................................ 7 1. The State Ignores the Statute’s Plain Language and Relies on an Illogical “Incentive.” ........................................... 7 2. The State Relies on a Baseless and Artificial Distinction Between “Traditional” Advertising and Affiliate Advertising. ............................................................................ 11 3. The State’s Proposed Rationality Standard Ignores the Applicable Case Law. ............................................................. 13 C. The State Ignores the Effectively Irrebuttable Nature of the Presumption. ........................................................................... 15 D. The State’s Burden-Shifting Argument Is Erroneous. .................. 18 II. The Statute Violates the Commerce Clause on Its Face. ........................ 20 A. The State Does Not and Cannot Show that the Affiliate Marketing Arrangement Creates a Substantial Nexus. ................. 20 B. The State’s Benefit/Burden Argument Is Not an Element of the “Substantial Nexus” Inquiry. .............................................. 24 TABLE OF CONTENTS (continued) Page ii C. The State Attempts to Eviscerate the “Significantly Associated” Requirement of Substantial Nexus. .......................... 25 III. The State’s Proposed Standard for Facial Constitutional Challenges Ignores the Relevant Precedents. ......................................... 29 A. Notwithstanding the State’s Argument, Facial Challenges Require Courts to Discern How the Plain Language of a Statute Will Be Applied in Practice. ..................... 29 B. The State’s Proposed “No Set of Circumstances” Formulation Does Not Govern Amazon’s Facial Challenges. .................................................................................... 33 C. The State’s Discussion of As-Applied Challenges Has No Bearing on This Appeal. ......................................................... 36 D. The State Wrongly Suggests that Courts Should Avoid Considering Facial Challenges. .................................................... 38 IV. Even Under the “No Set Of Circumstances” Formulation, the Statute Would Still Be Unconstitutional on Its Face. ............................. 40 CONCLUSION ........................................................................................................ 42 TABLE OF AUTHORITIES Page(s) iii Cases Am. Psych Sys. Inc. v. Options Indep. Practice Ass’n, Inc., 643 N.Y.S.2d 901 (N.Y. Sup. 1996) ........................................................... 11 Amazon v. N.Y. Dep’t of Tax’n and Fin., No. 601247/08 (N.Y. App. Div. Sept. 9, 2009) ........................................... 28 Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320 (2006)..................................................................................... 40 Borders Online, LLC v. State Bd. of Equalization, 129 Cal. App. 4th 1179 (Cal. Ct. App. 2005) .............................................. 27 Citizens United v. Federal Election Commission, 130 S. Ct. 876 (2010) ................................................................................... 37 City of Chicago v. Morales, 527 U.S. 41 (1999) ................................................................................. 18, 33 Cohen v. State, 94 N.Y.2d 1, 698 N.Y.S.2d 574 (1999) ................................................. 32, 33 County Court of Ulster County v. Allen, 442 U.S. 140 (1979)............................................... 4, 9, 13, 29, 30, 31, 34, 38 Direct Mktg. Ass’n v. Huber, No. 10-cv-01546, 2012 WL 1079175 (D. Colo. Mar. 30, 2012) ................ 25 Doe v. City of Albuquerque, 667 F.3d 1111 (10th Cir. 2012) ................................................................... 33 Felt & Tarrant Manufacturing Company v. Gallagher, 306 U.S. 62 (1939) ....................................................................................... 23 TABLE OF AUTHORITIES (continued) Page(s) iv Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138 (2010) ................................................................................. 39 Gonzales v. Carhart, 550 U.S. 124 (2007)..................................................................................... 29 Hensler v. City of Davenport, 790 N.W.2d 569 (Iowa 2010) ...................................................................... 16 Huey v. Sipprell, 49 A.D.2d 1006, 374 N.Y.S.2d 73 (4th Dep’t 1975) .................................... 8 In re 31/32 Lexington Assocs. v. Tax Appeals Tribunal, 258 A.D.2d 684, 685 N.Y.S.2d 329 (3d Dep’t 1999) ................................. 19 In re Casse, 70 N.Y.2d 589, 523 N.Y.S.2d 423 (1987) ....................................... 13, 14, 16 In re Garner v. N.Y. State Dep’t of Corr. Servs., 10 N.Y.3d 358, 859 N.Y.S.2d 590 (2008) ................................................... 41 In re Grace, 37 N.Y.2d 193, 371 N.Y.S.2d 715 (1975) ................................................... 19 In re Kean, 177 N.Y.S. 789 (N.Y. Sur. 1919) ................................................................ 19 In re Koffler, 51 N.Y.2d 140, 432 N.Y.S.2d 872 (1980) ................................................... 10 Lavine v. Milne, 424 U.S. 577 (1976)..................................................................................... 15 Leary v. United States, 395 U.S. 6 (1969) ......................................................................... 4, 14, 31, 34 TABLE OF AUTHORITIES (continued) Page(s) v Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 756 N.Y.S.2d 108 (2003) ................................................... 38 MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007)..................................................................................... 38 Mobile, Jackson, & Kansas City Railroad Company v. Turnipseed, 219 U.S. 35 (1910) ....................................................................................... 14 Moran Towing Corp. v. Urbach, 99 N.Y.2d 443, 757 N.Y.S.2d 513 (2003) ................................................... 35 Nat’l Bellas Hess, Inc. v. Dep’t of Rev., 386 U.S. 753 (1967)..................................................................................... 36 Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566 (2012) ................................................................................. 34 National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977)............................................................................... 23, 28 Norton v. Dep’t of Revenue, 340 U.S. 534 (1951)..................................................................................... 19 Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502 (1990)..................................................................................... 30 Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 630 N.Y.S.2d 680 (1995) ................................. 19, 21, 22, 27 People v. Leyva, 38 N.Y.2d 160, 379 N.Y.S.2d 30 (1975) ..................................................... 34 People v. Nelson, 69 N.Y.2d 302, 514 N.Y.S.2d 197 (1987) ................................................... 33 TABLE OF AUTHORITIES (continued) Page(s) vi People v. Stuart, 100 N.Y.2d 412, 765 N.Y.S.2d 1 (2003) ..................................................... 36 Performance Mktg. Ass’n v. Hamer, No. 2011 CH263333, 2011 WL 1986181 (Cook County, Ill. Cir. Ct. May 11, 2012) ............................................................................. 7, 24 Pullman Co. v. Knott, 235 U.S. 23 (1914) ....................................................................................... 30 Quill Corp. v. North Dakota, 504 U.S. 298 (1992)................................................. 3, 4, 5, 21, 24, 33, 35, 39 Scripto, Inc. v. Carson, 362 U.S. 207 (1960)............................................................. 13, 20, 21, 24, 26 Speiser v. Randall, 357 U.S. 513 (1958)..................................................................................... 16 St. Tammany Parish Tax Collector v. BarnesandNoble.com, 481 F. Supp. 2d 575 (E.D. La. 2007) .................................................... 23, 27 Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560 (1975)..................................................................................... 22 Trump v. Chu, 65 N.Y.2d 20, 489 N.Y.S.2d 455 (1985) ..................................................... 19 Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483 U.S. 232 (1987)............................................................... 3, 13, 26, 27, 28 United States v. Raines, 362 U.S. 17 (1960) ....................................................................................... 33 United States v. Romano, 382 U.S. 136 (1965)............................................................................... 12, 13 TABLE OF AUTHORITIES (continued) Page(s) vii United States v. Salerno, 481 U.S. 739 (1987)........................................................................... 4, 33, 40 Vlandis v. Kline, 412 U.S. 441 (1973)..................................................................................... 15 W. & Atl. R.R. v. Henderson, 279 U.S. 639 (1929)................................................................... 14, 15, 17, 20 Wash. State Grange v. Wash. State Rep. Party, 552 U.S. 442 (2008)............................................................................... 29, 36 World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286 (1980)..................................................................................... 18 Statutes N.Y. Penal Law § 70.85 ......................................................................................... 41 N.Y. Tax Law § 1101(b)(8)(vi) ..................................................................... 6, 8, 19 N.Y. Tax Law § 12(c) ............................................................................................ 24 Other Authorities Advisory Opinion, N.Y. Dep’t of Tax’n and Fin., No. S920309A, 1992 WL 179778 (May 15, 1992) ..................................... 28 Black’s Law Dictionary 63 (9th ed. 2009) .............................................................. 6 Bruce C. Brown, The Complete Guide to Affiliate Marketing on the Web: How to Use and Profit from Affiliate Marketing Programs 37 (2009) ........................................................................................................ 9 http://en.wikipedia.org/wiki/Coupon#Internet_coupons (last visited Sept. 19, 2012) ............................................................................................. 12 TABLE OF AUTHORITIES (continued) Page(s) viii Richard H. Fallon, Jr., Fact and Fiction About Facial Challenges, 99 Calif. L. Rev. 915, 941-42 (2011) ............................................................... 39 Rosalind Gardner, Make a Fortune Promoting Other People’s Stuff Online: How Affiliate Marketing Can Make You Rich 49 (2007) ........................................................................................................... 10 1 PRELIMINARY STATEMENT All the rhetoric in the State’s brief cannot change the fact that the Statute forces out-of-state retailers with no physical presence in the State to collect sales and use taxes, in violation of the Due Process Clauses of the United States and New York Constitutions, and the Commerce Clause of the United States Constitution. The State’s overarching defense of the Statute is based on a misapprehension of the law applicable to facial challenges. The State also attempts to erect barriers to this Court’s review of a plainly unconstitutional taxation scheme-arguing, for example, that “great deference” is due the Legislature and that facial challenges are “disfavored.” Respondents’ Brief (“RB”) 4-5. On the merits, though, the State ignores decades of United States Supreme Court and other precedent imposing due process limitations on statutory presumptions such as the one at issue here. The State also misconstrues the relevant Commerce Clause authorities by attempting to diminish the “substantial nexus” requirement-a requirement that limits the State’s taxing reach to only those retailers who have an actual “physical presence” in the State and whose in-state activity is “significantly associated” with their ability to do business there. Although the State concedes that mere advertising is insufficient to create a “substantial nexus” (RB 57-58), the State claims that mere advertising does not trigger the presumption. That is wrong. The plain language of the Statute, on its 2 face, broadly ensnares any sort of compensated “direct or indirect referral” to the retailer, which necessarily includes advertising. The DTF’s informational memoranda confirm that advertising alone-contracting with a third party to post advertising links for payment by commission-triggers the presumption. The State also argues that the statutory presumption is rational because Affiliate Marketing1 creates an “incentive” that leads in-state advertisers to solicit customers directly on behalf of out-of-state retailers, whenever the advertisers are paid by commission. RB 44. This ignores the text of the Statute and the reality of how the Internet actually works-e-commerce is a high-volume enterprise, and in the real world, advertisers try to make more money by increasing traffic to their websites. But as the State’s own authorities confirm, the chance to earn a commission on the sale of a DVD would not ordinarily incentivize an advertiser to spend time or energy “soliciting” potential customers on the retailer’s behalf. Yet the statutory presumption takes the place of evidence that these solicitation activities are, in fact, occurring. And because the presumption is effectively irrebuttable, with the retailer required to come forward with rebuttal evidence from witnesses whom the retailer cannot control, the effect of the presumption amounts 1 Affiliate Marketing is an advertising strategy utilized by Internet retailers whereby independent third-party “affiliates” receive compensation (under a variety of compensation models) for posting advertisements on their own websites that link visitors to the retailers’ websites. See Amazon’s Opening Brief (“AOB”) 10- 13. 3 to dispositive proof (without any actual evidence) that a retailer is actively soliciting New York sales through a network of in-state entities targeting New York customers through phone calls, in-person referrals, and the like. This regime violates due process. The State also admits that advertising in New York does not give rise to a “substantial nexus” with the State. Quill Corp. v. North Dakota, 504 U.S. 298, 313-14 (1992); RB 57; R.829. Yet because the Statute imposes tax-collection obligations on out-of-state retailers who do nothing more than advertise in New York, the State tries to blur the “bright-line” rule of “substantial nexus,” which serves to prevent undue burdens on interstate commerce that stem from a web of inconsistent and overlapping taxation obligations. Quill, 504 U.S. at 317- 18. This “bright-line” rule exists, regardless of whether a particular jurisdiction argues (as the State does here) that compliance with its unconstitutional tax- collection requirement would not be particularly difficult for retailers. In addition, the Court should reject the State’s invitation to do away with one of the key criteria for assessing substantial nexus-namely, whether the particular activities are “significantly associated” with the retailer’s ability to establish and maintain a market in the taxing state. Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483 U.S. 232, 249-50 (1987). 4 Furthermore, contrary to the State’s contention, this Court should not depart from the long-standing practice of the U.S. Supreme Court of applying the relevant substantive constitutional tests governing Amazon’s facial due process and Commerce Clause challenges-not the generic and inapposite “no set of circumstances” (“NSC”) formulation associated with United States v. Salerno, 481 U.S. 739 (1987). The State does not dispute, and thus concedes, that the NSC formulation has rarely, if ever, been the controlling test in facial constitutional challenges decided by the U.S. Supreme Court, and it has never been used in the types of facial due process and Commerce Clause challenges asserted here. Applying the relevant substantive standards here does not mean “abandon[ing]” the distinction between facial and as-applied challenges or improperly resorting to “speculation,” as the State suggests. RB 3, 4, 19, 21, 51. To the contrary, Amazon relies on a long line of Supreme Court and other decisions that (a) do not apply the NSC formulation to facial challenges, and (b) require courts to determine the facial validity of a statute based on its plain language and likely impact in accordance with “common experience” in the real world. See, e.g., Leary v. United States, 395 U.S. 6, 33-35 (1969); Quill, 504 U.S. at 313 n.6, 315. For example, in County Court of Ulster County v. Allen, 442 U.S. 140 (1979), the Supreme Court explained that a “presumption’s constitutional 5 validity is logically divorced from [the particular facts of the case] and based on the presumption’s accuracy in the run of cases.” Id. at 159. Finally, as Amazon argued in its Opening Brief, the Statute is unconstitutional across the board and thus fails even under the inapposite NSC formulation. The State offers no response to this argument. In sum, when analyzed under the appropriate standards, it is clear the Statute, on its face, violates both due process and the Commerce Clause. This Court should therefore reverse the First Department’s decision and order judgment entered in Amazon’s favor on its facial constitutional challenge. ARGUMENT I. The Statute Violates Due Process on Its Face. A. Contrary to the State’s Contention, Advertising Alone Triggers the Statutory Presumption. The State concedes that advertising alone is insufficient to give rise to a “substantial nexus” under the Commerce Clause. RB 27, 57-61; see also Quill, 504 U.S. at 302, 304, 313 n.6. Nonetheless, the State erroneously claims that “[m]ere advertising does not trigger the presumption.” RB 57 (emphasis added). The State appears to rely almost exclusively on the fact that “[t]he Statute does not refer to advertising,” id. at 58 (emphasis added), as well as the language of the First TSB-M, which states that “an agreement to place an advertisement does not give rise to the presumption described above.” R.826 (emphasis added); RB 58. 6 Regardless of whether the Legislature inserted the specific term “advertising” into the statutory text though, there can be no dispute that the Statute on its face ensnares advertising by in-state websites that, for any “consideration,” “directly or indirectly refer[] potential customers, whether by a link on an internet website or otherwise, to the seller.” N.Y. Tax Law § 1101(b)(8)(vi). By definition, referring potential customers to a seller, for consideration, qualifies as advertising. See, e.g., Black’s Law Dictionary 63 (9th ed. 2009) (defining “advertising” as “[t]he action of drawing the public’s attention to something to promote its sale”). The First TSB-M does define “advertisement” artificially to exclude the specific type of advertising at issue here. R.826. This is mere semantics though. The First TSB-M confirms that posting links in exchange for compensation by commission-which the State elsewhere admits constitutes mere advertising, RB 57; R.826, 829-is by itself sufficient to trigger the presumption. R.826; see also Overstock.com, Inc. v. New York State Department of Taxation and Finance et al., New York County Clerk Index No. 107581/08, Record at 147 (“Overstock Record”) (legislative history of the Statute, referring to the presumption as applying to websites that “advertise for the internet retailer” (emphasis added)); Overstock Record at 145 (similar). And the State itself concedes that the 7 presumption applies when the retailer simply contracts with the AA for the placement of advertising links. RB 57. The fact that mere advertising is enough to invoke the presumption lies at the heart of the due process problem here because absent the presumption, the mere placement of an advertising link (however compensated) would indisputably be insufficient to create a “substantial nexus.” AOB 22-23; R.829.2See Performance Mktg. Ass’n v. Hamer, No. 2011 CH263333, 35, 2011 WL 1986181 (Cook County, Ill. Cir. Ct. May 11, 2012) (facially invalidating a similar statute requiring retailers to collect taxes based on posting advertising links on third-party websites, but without the presumption as in the New York Statute, on the ground that advertising activity does not create a “substantial nexus”). B. The State’s Attempts to Demonstrate the Supposed Rationality of the Statute Fail. 1. The State Ignores the Statute’s Plain Language and Relies on an Illogical “Incentive.” The State admits that it would be irrational to presume solicitation where a retailer pays its advertisers a flat fee (because there is no supposed “incentive” for the advertisers to solicit). See RB 59 (arguing that with a “flat-fee compensation 2 The State itself recognizes, in “Example 6” of the First TSB-M, that if an out- of-state retailer were able to prove (the impossible negative) that its advertisers do nothing more than post advertising links-i.e., the advertisers do not also refer potential customers “through the use of flyers, newsletters, telephone calls, or emails”-then the State may not impose tax-collection obligations on the retailer. R.829. 8 model,” the “advertisers are paid principally to disseminate information about a retailer or its products”). But the Statute on its face applies to advertisements posted “for a commission or other consideration,” N.Y. Tax Law § 1101(b)(8)(vi) (emphasis added), which would necessarily include, for example, flat-fee arrangements. Thus, rather than address the Statute as written on its face, the State relies on the Statute as interpreted in its litigation-driven TSB-Ms, under which the Statute (at least for the time being) applies only where the advertisers are paid by commissions.3 Specifically, the State claims that solicitation through in-person visits, etc., is the “intended and actual consequence” of Affiliate Advertising when advertisers are paid by commissions because this model allegedly creates a unique 3 The State claims that the statutory phrase “or other consideration” can refer only to specific types of commissions-such as “a percentage of sales proceeds in the form of store credit or payment in kind”-and that Amazon’s reading of the Statute would render the term “commission” superfluous. RB 60. In fact, the State’s reading renders the term “or other consideration” superfluous: there would be no need to list specific types of commissions because the presumption would already cover all “commission” payments. Well-settled rules of construction mandate that the term “or other consideration” can “not be limited in scope” only to other commissions. Huey v. Sipprell, 49 A.D.2d 1006, 1006, 374 N.Y.S.2d 73, 74 (4th Dep’t 1975) (construing the statutory phrase “case workers and other social service personnel,” and finding that the language “other social service personnel should not be limited in scope to caseworkers” (internal quotation marks omitted) (emphasis added)). Notably, the Statute also applies to referrals to a retailer via a “link on an internet Web site or otherwise,” N.Y. Tax Law § 1101(b)(8)(vi) (emphasis added), and the State admits that the phrase “or otherwise” in that context is not limited only to types of Internet-based referrals. See, e.g., R.58-59. 9 “incentive” to solicit sales on a retailer’s behalf. RB 42, 44.4 Yet the State’s own authorities disprove this argument. “[K]nock[ing] on every door in your neighborhood, and offer[ing] to pay each person a dollar to enter your site . . . is not realistic” and doing so would result in “little if any increase in Web site traffic.” Bruce C. Brown, The Complete Guide to Affiliate Marketing on the Web: How to Use and Profit from Affiliate Marketing Programs 37 (2009) (emphasis added) (cited in RB 45 n.9). Instead, the State’s authorities confirm that the only plausible incentive that Affiliate Marketing could create is for the advertiser to try to increase traffic to its own website-for instance, using search-engine optimization technology; trying to design a more eye-catching website; or creating unique, compelling content in an effort to attract as many visitors as possible (from anywhere in the world). AOB 27-28. See Brown, supra, at 39 (“It is important to recognize that driving 4 The State points to supposed “incentives” created by Affiliate Marketing and speculates about how advertisers would likely react to those incentives. See, e.g., RB 43-44. Yet the State also claims that Amazon cannot “speculat[e]” about how the Statute would apply in practice. Id. at 21. Not only is the State’s position inherently contradictory, it is also wrong. As discussed below (see infra Section III.A), the U.S. Supreme Court’s facial due process and Commerce Clause jurisprudence analyzes these claims based on “common experience” and how the challenged statute is likely to impact the mine run of cases. See Allen, 442 U.S. at 171. 10 traffic to your Web site is critical to the success of an affiliate program.”).5 The State does not and cannot claim those sorts of website-traffic-generating activities are the constitutional equivalent of solicitation for Commerce Clause purposes. Among other reasons, such activities are not a “personal petition to a particular individual to do a particular thing.” In re Koffler, 51 N.Y.2d 140, 146, 432 N.Y.S.2d 872, 875 (1980) (defining “solicitation” as such and contrasting that with mere “advertising,” which is “the calling of information to the attention of the public, by whatever means”). Further, as courts have repeatedly recognized, the Internet is not “merely an extension of [retailers’] local presence,” RB 62-63, and the fact that some websites might have a more particularized geographic focus does not show that this reaches the kind or quantity of in-state solicitation that the Commerce Clause requires. AOB 30-31. The State gives hypothetical examples of “local” entities (restaurants, schools, religious institutions) that might conduct certain “local” activities over the Internet. RB 63. But these are not examples of Affiliate 5 See also id. at Foreword (“[T]he most successful affiliates provide trustworthy, engaging sites for their visitors that include unique content and relevant affiliate offers.”); Rosalind Gardner, Make a Fortune Promoting Other People’s Stuff Online: How Affiliate Marketing Can Make You Rich 49 (2007) (cited in RB 45 n.9) (encouraging affiliates to promote the website, not simply the product). 11 Marketing-and they say nothing about the advertisers at issue here and what sorts of activities they are engaging in beyond posting links.6 As a result, the State’s purported “incentive scheme” is not grounded in the text of the Statute or the stuff of common experience. The statutory presumption is unconstitutionally irrational. 2. The State Relies on a Baseless and Artificial Distinction Between “Traditional” Advertising and Affiliate Advertising. The State attempts to defend the rationality of its presumption by claiming that traditional advertisers are compensated by a flat fee based on “passive display[s] of information,” whereas advertisers in an Affiliate Marketing arrangement are paid based on the advertisement’s “success rate” and are thus more likely to engage in solicitation. RB 59. Even accepting the State’s purported distinction (which ignores the plain language of the Statute) for the sake of argument, the distinction does not withstand scrutiny. With both “traditional” and Affiliate advertising, the advertisements are designed to generate “as much business as possible,” RB 1, and advertisers are 6 Similarly, the State’s reference to “AmazonLocal” (RB 63) has no bearing on this case. AmazonLocal is not directly owned by Amazon.com LLC or Amazon Services LLC, the Plaintiffs in this case, does not share a direct parent with them, and is an entirely separate legal entity. See Am. Psych Sys. Inc. v. Options Indep. Practice Ass’n, Inc., 643 N.Y.S.2d 901, 902 (N.Y. Sup. 1996). The activities of AmazonLocal are irrelevant to the affiliate-based advertising activities at issue here; the State does not even suggest that AmazonLocal’s activities could give rise to a “substantial nexus” for Plaintiffs (which they cannot). 12 compensated for promoting retailers’ products based directly or indirectly on the “success rate” of the advertisements. Commercials during a Super Bowl cost exponentially more than commercials at 2:00 a.m. on an ordinary Tuesday because advertisements cost more when they reach a greater audience (and thus are more likely to result in a greater number of completed sales). For the same reason, billboard space costs more in Times Square than along Route 90 near Seneca Falls, and fashion-related advertisements are more expensive in Vogue than in Road & Track. And so-called traditional advertisements target specific demographics during specific times-e.g., beer companies advertise during a baseball game, whereas Internet-dating websites advertise on Valentine’s Day-precisely because the retailers can count on a higher “success rate” among those demographics during those times.7 Consequently, the State’s purported distinction between “traditional” and Affiliate Advertising lacks “a reasonable relation to the circumstances of life as we know them.” United States v. Romano, 382 U.S. 136, 139 (1965).8 7 In addition, with traditional advertising over the Internet, retailers use “coupon codes” to track the “success rate” of their advertisements. A retailer can tell which advertiser referred a particular customer depending on which “coupon code” the customer entered. See http://en.wikipedia.org/wiki/Coupon#Internet_coupons (last visited Sept. 18, 2012) (“Marketers can use different codes for different channels [or] groups in order to distinguish response rates.”). 8 The State cites Amazon’s “School Rewards” program as supposed evidence of in-state solicitation. RB 44-45. But in evaluating a mandatory presumption, as in 13 3. The State’s Proposed Rationality Standard Ignores the Applicable Case Law. The State is wrong that presumptions may be upheld “[d]espite [an] imperfect fit” as long as there is “some rational basis.” RB 46. In Romano, the United States Supreme Court rejected this very idea and struck down a presumption because the fact established (presence at a still) “tells us only that the defendant was there and very likely played a part in the illicit scheme”-but it did not necessarily follow “that [the defendant] was engaged in one of the specialized functions connected with possession” (the fact presumed). 382 U.S. at 141. Similarly, an advertiser’s compensated placement of a link on a website says nothing about what other specific activities the advertiser might be engaged in to promote sales for the retailer-if any-beyond the posting of that link. The State’s cases do not support its claim that only “some” minimal basis is needed in order to uphold a statutory presumption. In In re Casse, 70 N.Y.2d 589, 523 N.Y.S.2d 423 (1987), a horse trainer was presumed to be responsible for this case, “the analysis of the presumption’s constitutional validity is logically divorced from [the facts particular to the challenger] and based on the presumption’s accuracy in the run of cases.” Allen, 442 U.S. at 159-60. In any event, the State identifies only a handful of such advertisers who participate in the School Rewards program. R.1167. These advertisers are not engaging in the type of local sales-support activities on which courts have insisted in order to find a “substantial nexus” for Commerce Clause purposes. See Scripto, Inc. v. Carson, 362 U.S. 207, 210-11 (1960). Moreover, these advertisers’ activities are in no way “significantly associated with [Amazon’s] ability to establish and maintain a market” in New York. Tyler Pipe, 483 U.S. at 250-51; see infra Section II.C. 14 administering a drug to a horse if it was established that (a) the trainer was the horse’s pre-race trainer and (b) the horse was given the drug within a prescribed time period. 70 N.Y.2d at 595, 523 N.Y.S.2d at 426. The established facts “connected logically to the ultimate fact” that the trainer was responsible for the drug because the trainer had an obligation to oversee the condition of the horse at all times. Id. Here, by contrast, based on “common experience,” there is no logical connection between compensated advertising and active in-state solicitation. Leary, 395 U.S. at 33, 48-52. Mobile, Jackson, & Kansas City Railroad Company v. Turnipseed, 219 U.S. 35 (1910), is also distinguishable because it did not involve an evidentiary presumption sufficient to prove liability (or taxability) by a preponderance of the evidence, like the presumption at issue here, but rather was a “mere temporary inference of fact.” Id. at 43; see also W. & Atl. R.R. v. Henderson, 279 U.S. 639, 643-44 (1929) (distinguishing Turnipseed by contrasting it with a presumption that “creates an inference that is given effect of evidence to be weighed against opposing testimony, and is to prevail unless such [opposing] testimony is found by the jury to preponderate”).9 9 The State also mischaracterizes the effect of the presumption here by claiming its “only legal consequence . . . is to require one party rather than another to produce evidence of the dispositive facts in the first instance.” RB 47 (citing Turnipseed, 219 U.S. at 43). Unlike Turnipseed, which dealt with “merely a 15 Further, Lavine v. Milne, 424 U.S. 577 (1976), is irrelevant because it involved statutory eligibility for a welfare benefit, not the imposition of a tax burden. Id. at 583 (“[A]s with other eligibility requirements, the applicant rather than the State” bears the burden of establishing the welfare benefit).10 In addition, unlike Lavine, where the welfare applicant already possessed the information necessary to rebut the presumption, retailers here must rely on information and evidence in the possession of independent third parties. See id. at 585 (“[A]n applicant’s motive [for quitting a job] should be best known by the applicant himself.”). C. The State Ignores the Effectively Irrebuttable Nature of the Presumption. The State does not and cannot deny that unless a retailer has a fair opportunity to rebut the presumption, the Statute violates due process. See, e.g., Vlandis v. Kline, 412 U.S. 441, 446 (1973); W. & Atl. R.R., 279 U.S. at 642 (rebuttable presumption violates due process if it “operates to deny a fair temporary inference of fact [i.e., negligence] that vanished upon the introduction of opposing evidence,” W. & Atl. R.R., 279 U.S. at 644, the presumption here serves as dispositive proof of in-state solicitation because it must be rebutted by a preponderance of evidence demonstrating the absence of solicitation (which is impossible to prove). 10 The Court in Lavine described the statutory scheme as “the normal assumption that an applicant is not entitled to benefits unless and until he proves his eligibility.” Id. at 584. By contrast, in the context of taxation, the law places the initial burden on the State to prove that the tax may lawfully be imposed in the first instance. See infra Section I.D. 16 opportunity to repel it”); Casse, 70 N.Y.2d at 595, 523 N.Y.S.2d at 425; Hensler v. City of Davenport, 790 N.W.2d 569, 586-87 (Iowa 2010). The State claims, however, that the presumption here is facially constitutional simply because it recites on its face that it “may be rebutted.” RB 51 (citation and internal quotation marks omitted). The State’s argument is nonsensical. If the test to determine the facial constitutionality of statutory presumptions were that simple, legislatures could easily circumvent the restraints of the Due Process Clause by adding into the law a post hoc fig leaf stating that the presumption “may be rebutted.” The State makes no attempt in its brief to explain how, in practice, a retailer could prove an impossible negative-namely, that potentially thousands of independent advertisers not under the retailer’s control are not taking affirmative (or even accidental) steps to solicit sales to New Yorkers on the retailer’s behalf. See Speiser v. Randall, 357 U.S. 513, 526 (1958) (“How can a claimant . . . possibly sustain the burden of proving the negative of these complex factual elements? In practical operation, therefore, this procedural device must necessarily produce a result which the State could not command directly.”). The State claims only that retailers are “better informed” than the State in terms of the advertisers’ “identities and activities” (RB 49), but even if that were true, it does not follow that it would be constitutionally permissible to impose these obligations on the retailers. The relevant question is whether the retailers have a “fair opportunity” to 17 rebut the presumption, W. & Atl. R.R., 279 U.S. at 642, not whether retailers are in a better position than the State to discern the relevant facts. The State also relies on the so-called safe harbor provision, RB 51-53, while ignoring the many reasons why this safe harbor is anything but safe. AOB 38- 45.11 The State’s only response is that this Court supposedly cannot consider these arguments because a facial challenge must ignore whether a presumption is actually rebuttable “in practice.” RB 52. As explained below, however, this Court can and should consider whether retailers have a fair opportunity to rebut the presumption “in practice,” see infra Section III.A, and the State admits that the validity of the presumption depends on “‘the stuff of actual experience.’” RB 41 (citation omitted). Finally, the State suggests that Amazon’s examples of the “types” of solicitation that the Statute presumes to be taking place-posting flyers, knocking on doors, making phone calls, etc.-are under-inclusive because the precise “form” of solicitation need not accord “with any previously approved model.” RB 37. 11 Likewise, the State claims that Amazon “presumably monitor[s] and enforce[s]” provisions in its contracts with advertisers and can therefore prohibit the advertisers from soliciting. RB 53. Even assuming that Amazon does actively monitor and enforce its contracts with third-party advertisers, an advertiser’s violation of one of these other contractual limitations does not carry the same consequences as an advertiser’s violation of the safe harbor provision-the latter exposes a retailer to tax-collection obligations (and potential civil and criminal penalties) on all of its New York sales, including sales to customers who were not referred through the Affiliate Marketing arrangement. See R.832. 18 But these examples are drawn from the list of specific examples provided by the State’s own TSB-M. See R.831 (“distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending emails”). The fact that other as-yet-undefined activities could, in the State’s view, also constitute “solicitation” further demonstrates the manifestly unfair nature of the presumption and the dilemma that retailers face in trying to rebut it. Due process precludes such an inherently unpredictable and arbitrary scheme.12 D. The State’s Burden-Shifting Argument Is Erroneous. Although the State acknowledges that “shifting” a burden may be constitutionally suspect, RB 48, the State maintains that the presumption here “merely clarifies what has always been the case: the taxpayer bears the burden of showing that it had no duty to collect (or pay) a tax.” RB 47-50. The State is mistaken. The Statute places the burden on out-of-state retailers to prove that none of their potentially thousands of in-state advertisers is soliciting business on the 12 See, e.g., City of Chicago v. Morales, 527 U.S. 41, 56 (1999) (striking down statute as violative of due process where it “leaves the public uncertain as to the conduct” it reaches (citation and internal quotation marks omitted)); World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297 (1980) (noting that due process “gives a degree of predictability to the legal system that allows potential defendants to structure their primary conduct with some minimum assurance as to where that conduct will and will not render them liable to suit”). 19 retailers’ behalves. N.Y. Tax Law § 1101(b)(8)(vi). But prior to the Statute’s enactment, the State would have borne the initial burden of proving “whether taxpayer’s affairs were subject to the taxing statute at all.” In re Grace, 37 N.Y.2d 193, 196, 371 N.Y.S.2d 715, 718 (1975); see also In re Kean, 177 N.Y.S. 789, 790 (N.Y. Sur. 1919) (“[T]he state has the burden of proving that property is subject to tax.” (citation omitted)).13 Only when, unlike here, it is “undisputed that the taxpayer’s income is subject to the taxing statute” at all would the taxpayer bear the burden of proving an exemption from the tax statute. Grace, 37 N.Y.2d at 196, 371 N.Y.S.2d at 718. The statutory presumption thus allows the State to escape this initial burden because it serves as dispositive evidence that a retailer is soliciting sales in the State (i.e., that the retailer’s affairs are subject to the taxing statute). 13 In arguing that the burden has not shifted, the State also relies on inapposite authorities discussing a taxpayer’s burden of proof in demonstrating that a tax is discriminatory. See Trump v. Chu, 65 N.Y.2d 20, 25, 489 N.Y.S.2d 455, 459 (1985); In re 31/32 Lexington Assocs. v. Tax Appeals Tribunal, 258 A.D.2d 684, 685, 685 N.Y.S.2d 329, 331 (3d Dep’t 1999). In addition, the State cites this Court’s statement in Orvis that an out-of-state retailer had not met its burden to demonstrate “immunity” from tax-collection obligations. RB 49; see Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 178, 630 N.Y.S.2d 680, 687 (1995). But the “immunity” language in Orvis was a reference to Norton v. Dep’t of Revenue, 340 U.S. 534 (1951), which held that when a corporation has “submitted itself to the taxing power of the State, it can avoid taxation on some [in-state] sales only by showing that particular transactions are disassociated from the local business and interstate in nature.” Id. at 537. These sorts of burdens are wholly inapposite here. 20 In any event, even if the State were correct that the taxpayer bears the initial burden of proving it has no duty to collect the tax (contrary to the case law), the presumption here is still unconstitutional because it denies the challenger a “fair opportunity” to rebut the presumed facts. W. & Atl. R.R., 279 U.S. at 642. II. The Statute Violates the Commerce Clause on Its Face. A. The State Does Not and Cannot Show that the Affiliate Marketing Arrangement Creates a Substantial Nexus. The Statute on its face imposes tax-collection obligations on out-of-state retailers that have no physical presence in the State. While the State cites many of the same Commerce Clause decisions that Amazon discussed in its Opening Brief, the State ignores Amazon’s analysis of these cases and the reasons why they are either distinguishable or support Amazon’s arguments. In sharp contrast to the companies and in-state representatives in Scripto, Orvis, and the other Commerce Clause cases on which both parties rely, out-of-state retailers that use Affiliate Marketing do not necessarily have any physical presence in the State, nor do their advertisers necessarily have any role in the sales transaction. In Scripto, the company’s representatives actively engaged in in-state solicitation. There, an out-of-state retailer had hired a team of “salesm[e]n” that traveled throughout the taxing state and were “actively engaged in [the state] as . . . representative[s] of [the company] for the purpose of attracting, soliciting, and obtaining [in-state] customers.” Scripto, Inc. v. Carson, 362 U.S. 207, 209 (1960). 21 Those salesmen served as in-person middlemen for the out-of-state company, taking each customer’s order and conveying it to the company, even occasionally “accept[ing] a check” and forwarding it with the customer’s order. Id. at 209-10. With Affiliate Marketing, however, it is undisputed that the advertisers may not have any role whatsoever in the sales transaction, including never accepting payments on the retailer’s behalf. Accordingly, while the salesmen in Scripto and the advertisers at issue in this case are both paid on commission (a fact that played no part in the Court’s reasoning or holding in Scripto) and do not work exclusively for the retailers, any similarity between them ends there.14 The State’s reliance on Orvis (RB 29) is also misplaced because there, the retailer (Orvis)’s business in New York was “generally accomplished” through its salespeople’s direct solicitation of, and visits to, retail stores in the State. Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 179-80, 630 N.Y.S.2d 680, 687 (1995). This Court also found a substantial nexus for another out-of-state retailer (VIP) whose employees traveled repeatedly to the State. Those “visits [and] assurances to prospective customers that [the employees] would make such visits 14 The State claims that Amazon improperly relies on “untested” factual assertions to support its facial Commerce Clause challenge (RB 37), but as explained below (see infra Section III.A), the U.S. Supreme Court’s facial Commerce Clause jurisprudence necessarily depends on drawing upon common experience to analyze likely potential scenarios and how the law may impact interstate commerce. See Quill, 504 U.S. at 313 n.6, 315. 22 enhanced sales and significantly contributed to VIP’s ability to establish and maintain” a local market. Id. at 181, 630 N.Y.S.2d at 688. The arrangement in Orvis bears little resemblance to Affiliate Marketing because it would not be rational to infer that in-state advertisers are directly soliciting or visiting New York customers on behalf of retailers. Further, the State does not dispute that, in an Affiliate Marketing arrangement, the advertisers’ activities do not significantly contribute to the out-of-state retailer’s ability to maintain a New York market. See infra Section II.C. Indeed, the State’s cases only underscore the absence of a “physical presence” inherent in the arrangement between out-of-state retailers and their advertisers. In Standard Pressed Steel Co. v. Washington Department of Revenue, 419 U.S. 560 (1975), the out-of-state company had a full-time employee who was permanently located in the taxing state. Id. at 561. That employee “made possible the realization and continuance of valuable contractual relations between [the out- of-state company] and Boeing,” which accounted for a majority of the company’s business in the state. Id. at 562. But with Affiliate Marketing, in-state advertisers are not employees of the retailers, and there is no reason to think that they necessarily have any role in the sales transaction or make possible the “realization and continuance” of any relationship between the retailers and their New York customers. 23 National Geographic Society v. California Board of Equalization, 430 U.S. 551 (1977), and Felt & Tarrant Manufacturing Company v. Gallagher, 306 U.S. 62 (1939), are similarly unhelpful to the State. In National Geographic, the Supreme Court found a substantial nexus based on the out-of-state company’s physical presence in the taxing state: the company maintained offices there, and it was the responsibility of employees in those offices to “solicit advertising” for the company’s monthly magazine. 430 U.S. at 554 n.2. There is no suggestion here that the activities of advertisers, individually or collectively, are the constitutional equivalent of putting “offices” in the State. Id. And in Felt & Tarrant Manufacturing Company, the company had hired sales agents who were required by contract to “devote [their] entire time and attention to soliciting orders” within the taxing state. 306 U.S. at 65. Also, unlike the Affiliate Marketing arrangement between out-of-state retailers and their advertisers here, the company in Felt had established a physical presence in the state by leasing two offices for use by the sales agents. Id. at 64-65. Finally, courts have squarely rejected the State’s argument that Internet advertisers “closely parallel” traditional traveling salespeople. See, e.g., St. Tammany Parish Tax Collector v. BarnesandNoble.com, 481 F. Supp. 2d 575, 581-82 (E.D. La. 2007) (finding substantial nexus to be lacking even though the Internet retailer earned commissions from the brick-and-mortar stores’ sales, 24 because, among other reasons, the stores did not take orders on the Internet retailer’s behalf); see also Hamer, 2011 WL 1986181 (facially invalidating, under the Commerce Clause, a similar statute that based tax-collection obligations on “commission” payments to third parties to post advertisements on behalf of out-of- state retailers). Consequently, the activities of the advertisers are not constitutionally sufficient to create a “substantial nexus” with the State.15 B. The State’s Benefit/Burden Argument Is Not an Element of the “Substantial Nexus” Inquiry. The State attempts to side-step the relevant “substantial nexus” analysis by speculating whether the Statute imposes “onerous costs” or an “unfair burden” on out-of-state retailers. RB 29-31. These are not relevant considerations under the Commerce Clause’s “substantial nexus” test though. Indeed, the U.S. Supreme Court has imposed the substantial nexus requirement as a “bright-line rule” on the states, regardless of the specific burdens imposed on individual retailers by a state’s tax regime. Quill, 504 U.S. at 314, 317-18; see also Scripto, 362 U.S. 210- 15 Advertising is not solicitation, regardless of the number of different advertisers used or the quantity of advertisements displayed. See, e.g., N.Y. Tax Law § 12(c). That some retailers may have “thousands” of advertising relationships (RB 33) does not somehow transform the nature of the advertisers’ activities into constitutionally sufficient solicitation. Either Affiliate Marketing amounts to “solicitation” or it does not-regardless of how many advertisers a retailer uses. 25 11. The Court reasoned that out-of-state retailers who lack a “substantial nexus” are beyond the reach of the state’s taxing authority; a state’s attempts to impose tax-collection obligations on such retailers necessarily “unduly burden interstate commerce.” Quill, 504 U.S. at 313. Even if it were appropriate to consider the specific burdens imposed on out- of-state retailers here (and it is not), the Statute indisputably imposes extraordinary costs and burdens that could potentially overlap or be inconsistent with other obligations imposed “by the Nation’s 6,000-plus taxing jurisdictions.” Id. at 313 n.6. The Statute effectively leaves retailers who lack a “substantial nexus” with three options: (1) collect taxes on New York sales notwithstanding the clear limits of the Commerce Clause; (2) expend considerable time and money trying to develop the evidence needed to rebut the presumption, which would be impossible to do in practice; or (3) terminate all advertising activities in the State that could possibly be deemed a “referral” and thereby risk triggering the presumption. Each of these options imposes burdens that “are inextricably related in kind and purpose to the burdens condemned in Quill.” Direct Mktg. Ass’n v. Huber, No. 10-cv- 01546, 2012 WL 1079175, at *8 (D. Colo. Mar. 30, 2012); AOB 48. C. The State Attempts to Eviscerate the “Significantly Associated” Requirement of Substantial Nexus. The State claims there is no “constitutional rule” that, in order to create a substantial nexus, the activities of in-state advertisers must be “significantly 26 associated” with the retailer’s ability to do business in the State. RB 34. But the “significantly associated” requirement is well settled. See Tyler Pipe, 483 U.S. at 250. The State’s arguments to the contrary misstate the holding of Tyler Pipe and ignore the scores of other authorities expressly applying this requirement. In every U.S. Supreme Court case in which a substantial nexus was predicated on the activities of a retailer’s in-state representatives, those activities were necessary to the retailer’s ability to do business in the taxing State. See, e.g., Tyler Pipe, 483 U.S. at 249-50 (in-state sales representatives “acted daily” to supply “virtually all” of Tyler Pipe’s “critical information” regarding “the Washington market,” helping to improve in-state “name recognition, market share, goodwill, and individual customer relations”); Scripto, 362 U.S. at 209 (in-state salesmen were out-of-state retailer’s local conduit and the retailer’s primary means of “attracting, soliciting and obtaining” local customers). While the “significantly associated” language in Tyler Pipe originally came from a Washington state regulation, the U.S. Supreme Court made crystal clear that it deemed the “significantly associated” requirement to be a federal constitutional limitation on a state’s jurisdiction to tax out-of-state entities: As the Washington Supreme Court determined, “the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” The court found this standard was satisfied because Tyler’s “sales representatives perform any local activities necessary for maintenance 27 of Tyler Pipe’s market and protection of its interests . . . .” We agree that the activities of Tyler’s sales representatives adequately support the State’s jurisdiction to impose its wholesale tax on Tyler. Tyler Pipe, 483 U.S. at 250-51 (citations omitted) (emphasis added). Indeed, courts since Tyler Pipe have routinely cited the decision in applying the “significantly associated” test as a key criterion for establishing nexus under the dormant Commerce Clause. See, e.g., BarnesandNoble.com, 481 F. Supp. 2d at 578; Borders Online, LLC v. State Bd. of Equalization, 129 Cal. App. 4th 1179, 1996 (Cal. Ct. App. 2005) (“The question is whether the record satisfies the remainder of the test, i.e., that the activities performed by Borders on its behalf were ‘“significantly associated with [Online’s] ability to establish and maintain”’ its California market.” (emphasis added) (citing Tyler Pipe, 483 U.S. at 250)). In Orvis, although this Court did not explicitly cite Tyler Pipe, the Court found a substantial nexus where the retailer’s in-state representatives “significantly contributed to [the retailer’s] ability to establish and maintain a market for the computer hardware and software it sold in New York.” 86 N.Y.2d at 180, 630 N.Y.S.2d at 688 (emphasis added); see also id. at 179-80, 630 N.Y.S.2d at 687 (business in New York was “generally accomplished” through direct in-state solicitation). In fact, the State itself previously acknowledged and expressly relied on the “significantly associated” requirement in its First Department briefing, referring to 28 this requirement as “the crucial factor governing nexus.” Brief for Defendants- Respondents at 46, Amazon v. N.Y. Dep’t of Tax’n and Fin., No. 601247/08 (N.Y. App. Div. Sept. 9, 2009).16 Even the DTF has recognized this test in its prior administrative decisions. See Advisory Opinion, N.Y. Dep’t of Tax’n and Fin., No. S920309A, 1992 WL 179778, at *3 (May 15, 1992) (explaining that Tyler Pipe’s “significantly associated” requirement demonstrated “the importance played by a company’s activities related to establishing a market for its goods in determining whether that company has a nexus with the state”). The State also attempts to conjure up a “conflict” between Tyler Pipe’s “significantly associated” requirement and the U.S. Supreme Court’s decision in National Geographic, 430 U.S. at 560. RB 34. But in National Geographic, which predated Tyler Pipe by ten years, the company’s activities in California plainly helped the organization establish and maintain its business in California, and therefore demonstrably would have satisfied Tyler Pipe’s “significantly associated” test. Nat’l Geographic, 430 U.S. at 556 (National Geographic 16 The State argued: “The Statute is also fully consistent with Tyler Pipe[], in which the Supreme Court explained that the crucial factor governing nexus is whether the activities performed in this state on behalf of the taxpayer are significantly-associated with the taxpayer’s ability to establish and maintain a market in this state for the sales.” Id. (internal quotation marks omitted). 29 “maintain[ed] two offices in the State” and its employees in those offices “solicit[ed] . . . advertising copy in the range of $1 million annually.”).17 III. The State’s Proposed Standard for Facial Constitutional Challenges Ignores the Relevant Precedents. A. Notwithstanding the State’s Argument, Facial Challenges Require Courts to Discern How the Plain Language of a Statute Will Be Applied in Practice. The State claims that Amazon is “forbidden to rely on speculation” to demonstrate the facial invalidity of the Statute. RB 21-22, 38. But Amazon is hardly invoking far-fetched or “worst-case” scenarios, unmoored from reality and common experience, to demonstrate the Statute’s unconstitutionality. Id.18 To the 17 The State suggests in a footnote that “1.5% of Amazon’s New York sales” (actually, the amount of sales referred to Amazon through the in-state advertisers at issue is less than 1.5%, R.198-99), would satisfy the “significantly associated” test. RB 34 n.5. Again, this appeal concerns only the facial validity of the Statute, not the Statute’s application to Amazon. See Allen, 442 U.S. at 159. Moreover, regardless of the absolute dollar amount represented by less than 1.5% of Amazon’s sales, this still means that more than 98.5% of Amazon’s New York sales have nothing to do with its Affiliate Marketing. Thus, it defies common sense to claim that the advertisers are “significantly associated” with Amazon’s ability to establish and maintain a New York market. 18 E.g., Wash. State Grange v. Wash. State Rep. Party, 552 U.S. 442, 450, 454- 55 (2008) (rejecting a challenge premised “not on any facial requirement of [the statute], but on” the “mere possibility” of an unconstitutional application based on “sheer speculation” and “imaginary cases” that have “simply no basis” in the most likely course of events (emphases added)); Gonzales v. Carhart, 550 U.S. 124, 168 (2007) (rejecting facial challenge because challengers “have not demonstrated that the Act would be unconstitutional in a large fraction of relevant cases” and declining to “‘consider every conceivable situation which might possibly arise’” (citation omitted) (emphases added); Ohio v. Akron Ctr. for Reprod. Health, 497 30 contrary, and as described above, Amazon’s facial claims are premised on the natural and probable impact of the Statute on out-of-state retailers utilizing Affiliate Marketing in New York. As a practical matter, the tests devised by the Supreme Court for addressing Amazon’s due process and Commerce Clause challenges necessarily involve some measure of empirical-or experience-based-analysis of a law’s likely effect. For instance, the Court employs an “experience”-based analysis in facial due process challenges to presumptions, in which “the presumption’s constitutional validity is logically divorced from [the particular facts of the case] and based on the presumption’s accuracy in the run of cases.” Allen, 442 U.S. at 159-60 (emphasis added). In Leary, for example, the Court looked to “common experience” to determine “whether it can be said with substantial assurance that one in possession of marihuana is more likely than not to know that his marihuana was illegally imported.” 395 U.S. at 33-34, 46. Recognizing that “determination of the presumption’s constitutionality is ‘highly empirical,’” id. at 38 (citation omitted) (emphasis added), the Court hypothesized about whether most marijuana users U.S. 502, 514 (1990) (rejecting challenge premised on the “mere possibility” of a single, “rare case” application of the statute, because a facial challenge cannot stand on “worst-case analysis that may never occur” (emphases added)); Pullman Co. v. Knott, 235 U.S. 23, 26 (1914) (“[a statute] is not to be upset upon hypothetical and unreal possibilities” (emphasis added)). 31 would actually be “aware of the level of importation and [would] have deduced that their own marihuana was grown abroad.” Id. at 46 (emphases added).19 As the Court later explained, in Leary, “[d]espite the fact that the defendant was well educated and had recently traveled to a country that is a major exporter of marihuana to this country, the Court found the presumption of knowledge of importation from possession irrational . . . not because Dr. Leary was unlikely to know the source of the marihuana, but instead because ‘a majority of possessors’ were unlikely to have such knowledge.” Allen, 442 U.S. at 160 n.17 (emphases added). Similarly, as explained above, for facial challenges under the Commerce Clause, the Court in Quill hypothesized about three scenarios demonstrating how a use tax such as “North Dakota’s . . . might unduly burden interstate commerce” and further analyzed the likely consequences for our free-flowing system of interstate commerce if every taxing jurisdiction adopted a similar regulation. 504 U.S. at 313 n.6. 19 The Court considered five potential scenarios in which a possessor might learn about the source of his marijuana, Leary, 395 U.S. at 47, theorized-based on “common experience”-in each case that a possessor likely would not learn of the origin, id. at 48-52, and concluded that the government failed to support the presumption by establishing with “substantial assurance that at least a majority of marihuana possessors have learned of the foreign origin of their marihuana.” Id. at 52. 32 As these cases amply demonstrate, consideration of the probable or foreseeable applications of a statute is part and parcel of the facial constitutional analyses employed in Allen/Leary and Quill. Indeed, the NSC formulation itself- while not applicable here, see infra at Section III.B-explicitly relies on speculation about potential applications of a challenged statute. See, e.g., Cohen v. State, 94 N.Y.2d 1, 8, 698 N.Y.S.2d 574, 576 (1999) (challenge fails if the court is able to identify even a single “conceivable application” of a law in which it would be constitutional).20 Even the State purports to invoke “common sense and experience” in attempting to demonstrate the rationality of the statutory presumption at issue. RB 62; see also id. at 63 (speculating about the hypothetical activities of “religious institutions,” “schools,” etc., occurring over the Internet).21 Thus, consistent with U.S. Supreme Court precedent, this Court should consider Amazon’s facial challenges based on the Statute’s likely applications in the real world, not in a vacuum divorced from common sense and reasoned 20 The State relies heavily on Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61 (1994), but the Court in that case rejected a facial claim precisely because the challenger had asked the Court to ignore the undisputed and most “probable” application of a regulation and instead consider worst-case scenarios. Id. at 69, 75-76. The Court declined to “rest [its] decision on consequences that . . . are by no means predictable.” Id. at 69 (emphasis added). 21 The State also has not identified any instances in which Amazon’s analysis of the Statute conflicts with “the plain meaning that its unambiguous language clearly expresses,” RB 25, notwithstanding this conclusory assertion in the State’s brief. 33 experience. See Quill, 504 U.S. at 313 n.6, 315; Allen, 442 U.S. at 159-60; Leary, 395 U.S. at 33-34.22 B. The State’s Proposed “No Set of Circumstances” Formulation Does Not Govern Amazon’s Facial Challenges. Throughout its brief, the State relies on versions of the NSC formulation- whether from Salerno, 481 U.S. at 745, or Cohen, 94 N.Y.2d at 8, 698 N.Y.S. at 576-while disregarding the irreconcilability of this test with the U.S. Supreme Court’s actual practice in deciding facial constitutional challenges. Indeed, the State does not dispute that NSC plays no role in most facial challenges decided by the Court. See Morales, 527 U.S. at 54 n.22; see also Doe v. City of Albuquerque, 667 F.3d 1111, 1124 (10th Cir. 2012); AOB 50-54. Nor does the State dispute that the Court resolves facial challenges “simply by applying the relevant constitutional test to the challenged statute without attempting to conjure up whether or not there is a hypothetical situation in which application of the statute might be valid.” City 22 In addition, because the First Department reversed the lower court on Amazon’s as-applied claims and remanded those claims (A-46), this is not a case where it can be said that the Statute is “plainly constitutional” as applied to Amazon, such that this Court could avoid a facial inquiry entirely. See, e.g., United States v. Raines, 362 U.S. 17, 21-22, 26 (1960); People v. Nelson, 69 N.Y.2d 302, 308, 514 N.Y.S.2d 197, 199 (1987) (rejecting vagueness challenge where defendants lacked standing because their “actions . . . are plainly within the ambit of the statute,” and declining to “consider the possibility that the statute may be vague as applied in other hypothetical situations” because “a vagueness challenge must be addressed to the facts before the court” (citations omitted) (emphases added)). 34 of Albuquerque, 667 F.3d at 1124 (emphasis added) (collecting cases). Underscoring this point, the Supreme Court addressed a facial challenge just this past Term by applying the traditional Commerce Clause test without reference to the NSC formulation. See Nat’l Fed’n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566, 2587 (2012). The State has no response to Amazon’s argument that the NSC formulation is completely incompatible with the traditional constitutional tests applied to facial due process challenges involving statutory presumptions. See Leary, 395 U.S. at 33, 36 (asking whether, based on “common experience,” “it can at least be said with substantial assurance that [a statutorily] presumed fact is more likely than not to flow from the proved fact on which it is made to depend” (emphasis added)); Allen, 442 U.S. at 158-59; People v. Leyva, 38 N.Y.2d 160, 165-66, 379 N.Y.S.2d 30, 34 (1975); AOB 55-57.23 In addition, as the State apparently concedes, the NSC formulation conflicts with the tests traditionally applied in Commerce Clause cases. In fact, the Supreme Court has never applied NSC in a facial Commerce Clause challenge. 23 The State is wrong that Amazon cannot rely on Leyva because it is a criminal case and the “civil” Statute at issue here does “not merit such heightened scrutiny.” RB 41-42 n.7. The Statute indisputably subjects retailers to both civil and criminal penalties for non-compliance. See AOB 3, 41; N.Y. Tax Law §§ 1145, 1817. Additionally, the Appellate Division applied Leyva in the decision below (see A-31), and Leyva, in any event, nowhere suggests that the standards for civil and criminal statutory presumptions differ. See 38 N.Y.2d 160, 79 N.Y.S.2d 30. 35 AOB 58; see, e.g., Quill, 504 U.S. at 313 n.6, 319 (striking down North Dakota’s use tax on its face based on its potential for a variety of unconstitutional applications).24 And the State is simply wrong that determining the constitutionality of a state tax law is “incompatible with a facial challenge” because it “is fundamentally a line-drawing question that depends on ‘a case-by- case evaluation of the actual burdens imposed by particular regulations or taxes.’” RB 24 n.4 (quoting Quill, 504 U.S. at 315). In fact, that is the precise opposite of Quill’s holding, which addressed a dormant Commerce Clause challenge on its face by rejecting a “case-by-case” analysis and expressing a clear preference for the “bright-line” physical-presence test the Court reaffirmed. Quill, 504 U.S. at 24 As Amazon argued in its Opening Brief, to the extent this Court applied the NSC formulation in resolving the Commerce Clause claims in Moran Towing Corp. v. Urbach, 99 N.Y.2d 443, 757 N.Y.S.2d 513 (2003), the Court should revisit this aspect of its decision because it is incompatible with the U.S. Supreme Court’s Commerce Clause jurisprudence. AOB 61-63. Nowhere in its brief does the State suggest otherwise. Moreover, Moran Towing is also distinguishable because there, the Court rejected a facial challenge on the ground that the statute could be applied constitutionally to “a [hypothetical] New York corporation, with offices in the state, employing New York citizens and conducting business in the state.” Moran Towing, 99 N.Y.2d at 451, 757 N.Y.S.2d at 518. Here, however, as the State does not dispute, New York already was able-prior to the Statute’s enactment-to impose tax-collection obligations on out-of-state entities with offices or employees in the State, or if there was some “additional connection” with the State to satisfy the substantial nexus requirement. AOB 63-65 (citing N.Y. Tax Law § 1101(8)(i)(B), (C)(I), (C)(II)). Thus, unlike Moran Towing, the Statute here can be applied only to out-of-state entities lacking a substantial nexus. Id. 36 314-15, 317-18 (citing Nat’l Bellas Hess, Inc. v. Dep’t of Rev., 386 U.S. 753, 758 (1967)). C. The State’s Discussion of As-Applied Challenges Has No Bearing on This Appeal. Rather than confront Amazon’s arguments and authorities directly, the State mischaracterizes them and accuses Amazon of seeking to “evade the ‘substantial burden’” of mounting a facial challenge by conflating the standards for facial and as-applied claims. RB 19. Yet Amazon nowhere suggests that this Court should “abandon” the distinction between these two types of constitutional challenges. Indeed, every case that Amazon cites in its Opening Brief involved a facial challenge, see AOB 50-54, and Amazon explicitly asks the Court to apply these tests to the Statute on its face-not as applied to Amazon, see AOB 54-63. To be sure, there are important differences between facial and as-applied challenges. As-applied claims seek to invalidate a particular application of a statute to a particular challenger, based on the immediate facts established by and specific to the challenger. See People v. Stuart, 100 N.Y.2d 412, 421, 765 N.Y.S.2d 1, 8 (2003); see also Wash. State Grange, 552 U.S. at 457-58. A facial challenge, by contrast, seeks to invalidate a statute in toto based on a constitutional deficiency apparent on the statute’s face-without reference to the particular circumstances of the challenger. See, e.g., Milhelm Attea, 512 U.S. at 69, 77-78; Stuart, 100 N.Y.2d at 421, 765 N.Y.S.2d at 8 (“a facial challenge requires the court 37 to examine the words of the statute on a cold page and without reference to the defendant’s conduct” (emphasis added)). Amazon unambiguously asks this Court to adjudge the Statute’s facial validity as applied to Internet retailers generally- not as applied only to Amazon. The State also cites Citizens United v. Federal Election Commission, 130 S. Ct. 876, 893 (2010), to suggest that the distinction between facial and as-applied challenges is “instructive and necessary.” RB 20. But the State fails to put this quotation in context. Citizens United actually emphasized that “the distinction between facial and as-applied challenges is not so well defined that it has some automatic effect or that it must always control the pleadings and disposition in every case involving a constitutional challenge.” 130 S. Ct. at 893 (emphasis added). Indeed, this distinction is “instructive and necessary [because] it goes to the breadth of the remedy employed by the Court, not what must be pleaded in a complaint.” Id. (holding that Citizens United did not “waive” its right to a facial remedy even though it preserved only an as-applied challenge, because parties cannot “prevent[] the Court from considering [facial] remedies if those remedies are necessary to resolve a claim” (emphasis added)). Further, the State is wrong to suggest that Amazon is somehow constrained in its ability to pursue facial challenges following the voluntary discontinuance of its as-applied challenges. As the U.S. Supreme Court has made clear, because the 38 Statute creates a “mandatory” presumption, see supra Section I.B, a facial challenge is appropriate. See Allen, 442 U.S. at 158-59 (“In this situation, the Court has generally examined the presumption on its face to determine the extent to which the basic and elemental facts coincide.”).25 Thus, there are important differences between facial and as-applied challenges-i.e., whether a court considers facts specific to a statute’s application to a particular challenger, or whether it considers the statute’s probable impact in the aggregate as written. But Amazon does not ask the Court to abandon this distinction, nor does the distinction have anything to do with the proper resolution of this appeal. D. The State Wrongly Suggests that Courts Should Avoid Considering Facial Challenges. The State also attempts to avoid this Court’s scrutiny by suggesting that facial challenges are disfavored. See RB 20-23. Regardless of whether this is true, however, the pattern and practice of the U.S. Supreme Court (and lower 25 The State also appears to make a ripeness argument in claiming that Amazon’s “pre-enforcement” facial challenge is subject to a different facial constitutional standard. RB 23. But the First Department properly rejected the State’s ripeness argument, A-35-41, and the State did not challenge that ruling. See also MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 128-29 (2007) (ripeness “do[es] not require a plaintiff to expose himself to liability before bringing suit to challenge . . . the constitutionality of a law threatened to be enforced”); Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 321, 756 N.Y.S.2d 108, 110-11 (2003). 39 courts) since Salerno demonstrate that courts routinely consider facial challenges. Amazon’s Opening Brief, for example, cites dozens of the leading U.S. Supreme Court decisions rendered over the last 25 years, each of which was resolved on a facial basis. See AOB 51-54. In fact, empirical research demonstrates that most statutory challenges addressed by the Supreme Court since 1987 (i.e., since Salerno) have been decided on a facial-rather than as-applied-basis, and that facial challenges enjoy a higher rate of success than do as-applied challenges. See Richard H. Fallon, Jr., Fact and Fiction About Facial Challenges, 99 Calif. L. Rev. 915, 941-42 (2011). The State also claims that many cases cited by Amazon “are at most silent on whether the constitutional claims are being analyzed on a facial or as-applied basis.” RB 24-25. The State evidently misses the point. Amazon explained that “the Supreme Court regularly strikes down statutes on their face without discerning the facial or as-applied nature of the challenge and without applying any iteration of the NSC formulation.” AOB 53 (emphasis added). Although the Supreme Court often does not state explicitly that it is undertaking a facial analysis, the facial nature of the claims in these cases is unmistakable. See, e.g., Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138, 3151-54 (2010) (facially voiding board tenure restrictions in the Sarbanes-Oxley Act of 2002 under Article II of the U.S. Constitution); Quill, 504 U.S. at 313 n.6 40 (addressing whether a state tax-“on its face”-imposes a collection duty on vendors who do not satisfy Bellas Hess’s traditional “physical presence” rule). Importantly, the State does not dispute the facial nature of a single case cited by Amazon. IV. Even Under the “No Set Of Circumstances” Formulation, the Statute Would Still Be Unconstitutional on Its Face. Finally, Amazon explained that even under the NSC formulation, the Statute is still facially unconstitutional in all of its applications because it can be applied only to those retailers who lack a “substantial nexus” with the State. AOB 63-65. The Statute applies only to a class of out-of-state retailers whose tangential connection with New York customers had never before subjected these retailers to tax-collection obligations-that is, retailers who do not maintain a place of business in New York and who do not solicit business here with in-state employees or representatives sufficient to create a “substantial nexus.” Therefore, “no set of circumstances exists under which the [Statute] would be valid,” Salerno, 481 U.S. at 745, because this class of retailers is entirely outside the State’s constitutional taxing authority and yet forced to collect taxes under the Statute. The State concedes the point by not even addressing this argument in its brief.26See In re 26 For this reason, the State’s reliance on Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320 (2006), is misplaced. In that case, unlike here, “[o]nly 41 Garner v. N.Y. State Dep’t of Corr. Servs., 10 N.Y.3d 358, 361, 859 N.Y.S.2d 590, 592 (2008) (noting that failing to raise an argument in a brief is “tantamount to an abandonment of that issue”), superseded by statute on other grounds, N.Y. Penal Law § 70.85. a few applications” of the parental notification statute were problematic, so the Court refused to invalidate the statute in its entirety. Id. at 331. CONCLUSION The Statute is unconstitutional on its face because it relies on an irrational, effectively irrebuttable presumption that forces out-of-state Internet retailers to collect taxes on their New York sales, despite their lack of a "substantial nexus" with the State, in violation of the Due Process Clauses of the New York and United States Constitutions, and the Commerce Clause of the United States Constitution. This Court should therefore reverse the First Department's decision. Dated: September 20,2012 Respectfully submitted, Randy M. Mastro Oliver M. Olanoff GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, NY 10116-0193 Telephone: (212) 351 -4000 Facsimile: (21 2) 351 -4035 Julian W. Poon (Admitted pro hac vice) Kahn A. Scolnick (Admitted pro hac vice) GIBSON, DUNN & CRUTCHER LLP 333 South Grand Avenue Los Angeles, CA 90071-3197 Telephone: (213) 229-7000 Facsimile: (213) 229-7500 Attorneys for Plaintiffs-Appellants AMAZON. COM LLC and AMAZON SERVICES LLC 42