Amazon.com, LLC, et al., Appellants,v.New York State Department of Taxation and Finance, et al., Respondents.BriefN.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. BRIEF OF PLAINTIFFS-APPELLANTS Randy M. Mastro Oliver M. Olanoff GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York 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 May 21, 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. TABLE OF CONTENTS Page i PRELIMINARY STATEMENT ............................................................................... 1 STATEMENT OF THE ISSUES............................................................................... 7 STATEMENT OF JURISDICTION.......................................................................... 8 STATEMENT OF FACTS ........................................................................................ 9 I. Amazon’s Internet Retail Business. ...................................................... 9 II. Amazon’s Affiliate Marketing Strategy. ............................................. 10 III. New York Has Not Previously Subjected Out-of-State Internet Retailers to Tax-Collection Obligations Because Such Retailers Lack the Requisite Physical Presence. ................................................ 13 IV. The Statute. .......................................................................................... 14 V. The State Attempts to Remedy the Statute’s Constitutional Infirmities with Litigation-Driven “Informational” Memoranda. ...... 15 VI. Procedural History. .............................................................................. 18 ARGUMENT ........................................................................................................... 20 The Statute Violates Due Process On Its Face. ................................... 21 I. A. The Statute Amounts to an Impermissible End-Run Around the Commerce Clause’s “Substantial Nexus” Requirement. ............................................................................. 21 B. There is No Rational Connection Between the Fact Proven and the Fact Presumed. ................................................. 25 C. The Presumption is Effectively Irrebuttable and Not Universally True. ...................................................................... 34 TABLE OF CONTENTS (continued) Page(s) ii The Statute Violates The Commerce Clause On Its Face. .................. 41 II. A. The Statute Impermissibly Targets Out-of-State Retailers that Do Not Engage in Continuous Local Solicitation. ............ 41 B. The Statute Targets Activities Performed for Out-of-State Retailers that Are Not “Significantly Associated” with Those Retailers’ Ability to Maintain a New York Market. ...... 44 C. The Statute Violates the Quill Bright-Line Physical Presence Rule, Which Rests on Sound Considerations of Constitutional Principle and Public Policy. .............................. 47 The First Department Applied the Wrong Legal Standard To III. Decide Amazon’s Facial Constitutional Claims. ................................ 49 A. The “No Set of Circumstances” Test is Not the Universal Standard for Deciding All Facial Constitutional Challenges. ................................................................................ 50 B. In Practice, Courts Do Not Generally Apply the “No Set of Circumstances” Test to Facial Challenges. .......................... 52 C. Traditional Due Process and Commerce Clause Jurisprudence—Not Salerno—Provides the Framework for Analyzing Amazon’s Facial Constitutional Claims. ........... 54 1. Salerno Did Not Change the Test for Facial Constitutional Challenges Under the Due Process Clause. ............................................................................ 55 2. Salerno Did Not Change The Test for Facial Constitutional Challenges Under the Commerce Clause. ............................................................................ 58 TABLE OF CONTENTS (continued) Page(s) iii Even Under The “No Set Of Circumstances” Test, The Statute IV. Would Still Be Unconstitutional On Its Face. ..................................... 63 CONCLUSION ........................................................................................................ 66 TABLE OF AUTHORITIES Page(s) iv Cases Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997) .......................................................... 31, 46, 47 Ashcroft v. ACLU, 535 U.S. 564 (2002) ............................................................................................. 30 Bailey v. Alabama, 219 U.S. 219 (1911) ............................................................................................. 24 Buchwald v. Univ. of N.M. Sch. of Med., 159 F.3d 487 (10th Cir. 1998) .............................................................................. 57 C & A Carbone, Inc. v. Clarkstown, 511 U.S. 383 (1994) ............................................................................................. 58 Carlson v. Reed, 249 F.3d 876 (9th Cir. 2001) ................................................................................ 57 Caterpillar Inc. v. N.H. Dep’t of Revenue Admin., 741 A.2d 56 (N.H. 1999) ...................................................................................... 61 Caterpillar, Inc. v. Comm’r of Revenue, 568 N.W.2d 695 (Minn. 1997) ............................................................................. 61 Catlin v Sobol, 93 F.3d 1112 (2d Cir. 1996) ................................................................................. 57 Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010) ........................................................................................... 53 City of Chicago v. Morales, 527 U.S. 41 (1999) ........................................................................................ 51, 52 Cleveland Bd. of Educ. v. LaFleur, 414 U.S. 632 (1974) ............................................................................................. 35 TABLE OF AUTHORITIES (continued) Page(s) v Cnty. Court of Ulster Cnty. v. Allen, 442 U.S. 140 (1979) ...................................................................... 5, 25, 34, 55, 56 Commonwealth v. Clayton, 684 A.2d 1060 (Pa. 1996) .................................................................................... 57 Commonwealth v. Sattazahn, 631 A.2d 597 (Pa. Super. Ct. 1993) ..................................................................... 57 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) ........................................................................................ 5, 21 Conoco, Inc. v. Taxation & Revenue Dep’t, 931 P.2d 730 (N.M. 1996) .................................................................................... 61 Direct Mktg. Ass’n v. Huber, No. 10-cv-01546, 2012 WL 1079175 (D. Colo. Mar. 30, 2012) ......................... 48 Doe v. City of Albuquerque, 667 F.3d 1111 (10th Cir. 2012) ..................................................................... 50, 55 Excellus Health Plan, Inc. v. Serio, 2 N.Y.3d 166, 777 N.Y.S.2d 422 (2004) ............................................................. 33 Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939) ............................................................................................... 45 Gen. Trading Co. v. State Tax Comm’n, 322 U.S. 335 (1944) ............................................................................................. 45 Gonzales v. Raich, 545 U.S. 1 (2005) ................................................................................................. 61 Gov’t of the V.I. v. Parrilla, 7 F.3d 1097 (3d Cir. 1993) ................................................................................... 56 TABLE OF AUTHORITIES (continued) Page(s) vi Hensler v. City of Davenport, 790 N.W.2d 569 (Iowa 2010) ....................................................................... 29, 35 In re Rademaker’s Estate, 2 N.Y.S.2d 309 (N.Y. Sur. 1938) ......................................................................... 64 Janklow v. Planned Parenthood, 517 U.S. 1174 (1996) ........................................................................................... 52 Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance, 505 U.S. 71 (1992) ........................................................................................ 60, 61 Leary v. United States, 395 U.S. 6 (1969) .................................................................................... 29, 55, 56 Lewis v. Grinker, 965 F.2d 1206 (2d Cir. 1992) ............................................................................... 33 Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 756 N.Y.S.2d 108 (2003) ........................................................... 33 Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954) ............................................................................................. 22 Moran Towing Corp. v. Urbach, 99 N.Y.2d 443 N.Y.S.2d 513 (2003) .............................................................. 7, 62 Morgan v. Shirley, 958 F.2d 662 (6th Cir. 1992) ................................................................................ 56 N.Y. Life Ins. Co. v. State Tax Comm’n, 80 A.D.2d 675, 436 N.Y.S.2d 380 (1st Dep’t), aff’d sub nom., Metro. Life Ins. Co. v. State Tax Comm’n, 55 N.Y.2d 758, 447 N.Y.S.2d 245 (1981) .......... 33 TABLE OF AUTHORITIES (continued) Page(s) vii Nat’l Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753 (1967) .................................................................. 2, 6, 17, 22, 43, 59 New Energy Co. v. Limbach, 486 U.S. 269 (1988) ............................................................................................. 58 Or. Waste Sys., Inc. v. Dep’t of Envir. Quality, 511 U.S. 93 (1994) ............................................................................................... 60 Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 630 N.Y.S.2d 680 (1995) .................................................... 45, 46 Overstock.com, Inc. v. New York State Department of Taxation and Finance et al., New York County Clerk Index No. 107581/08 ................................................... 20 Owens v. State, 724 A.2d 43 (Md. 1999) ....................................................................................... 57 People v. Bing, 76 N.Y.2d 331, 559 N.Y.S.2d 474 (1990) ........................................................... 62 People v. Kirkpatrick, 32 N.Y.2d 17, 343 N.Y.S.2d 70 (1973) ............................................................... 29 People v. Leyva, 38 N.Y.2d 160, 379 N.Y.S.2d 30 (1975) ................................ 5, 25, 26, 32, 34, 56 People v. Taylor, 9 N.Y.3d 129, 848 N.Y.S.2d 554 (2007) ...................................................... 55, 62 People v. Terra, 303 N.Y. 332 (1951) ............................................................................................ 25 TABLE OF AUTHORITIES (continued) Page(s) viii Performance Mktg. Ass’n v. Hamer, No. 2011 CH 263333 (Cook County Circuit Court, May 11, 2012) ............ 24, 47 Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ................................ 1, 2, 6, 17, 22, 41, 43, 47, 49, 58, 59, 60 Register.com, Inc. v. Verio, Inc., 356 F.3d 393 (2d Cir. 2004) ................................................................................. 39 Reno v. ACLU, 521 U.S. 844 (1997) ...................................................................................... 30, 37 Robinson v. City of Seattle, 10 P.3d 452 (Wash. Ct. App. 2000) .............................................................. 55, 61 Roe v. Meese, 689 F.Supp. 344 (S.D.N.Y. 1988) ........................................................................ 64 Scripto, Inc. v. Carson, 362 U.S. 207 (1960) ...................................................................... 6, 22, 27, 42, 45 Speiser v. Randall, 357 U.S. 513 (1958) ................................................................................ 23, 38, 65 St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F. Supp. 2d 575 (E.D. La. 2007) ................................................................... 43 State v. Gerardi, 677 A.2d 937 (Conn. 1996) .................................................................................. 57 State v. James, 315 S.W.3d 440 (Tenn. 2010) .............................................................................. 57 Tot v. United States, 319 U.S. 463 (1943) ...................................................................................... 25, 56 TABLE OF AUTHORITIES (continued) Page(s) ix Tyler Pipe Indus., Inc. v. Wash. State Dep’t of Revenue, 483 U.S. 232 (1987) ............................................................ 5, 6, 22, 27, 42, 44, 45 United States v. Arizona, 295 U.S. 174 (1935) ............................................................................................. 64 United States v. Gainey, 380 U.S. 63 (1965) ........................................................................................ 27, 28 United States v. Kim, 884 F.2d 189 (5th Cir. 1989) ................................................................................ 57 United States v. Romano, 382 U.S. 136 (1965) .......................................................................... 25, 28, 29, 33 United States v. Salerno, 481 U.S. 739 (1987) .................................................................. 6, 8, 51, 55, 62, 64 United States v. Stevens, 130 S. Ct. 1577 (2010) ............................................................................ 33, 50, 51 Vlandis v. Kline, 412 U.S. 441 (1973) .................................................................................. 5, 34, 57 Voyeur Dorm, L.C. v. City of Tampa, 265 F.3d 1232 (11th Cir. 2001) ............................................................................ 31 W. Atl. R.R. v. Henderson, 279 U.S. 639 (1929) ................................................................................ 29, 33, 35 W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994) ............................................................................................. 58 Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442 (2008) ................................................................................ 50, 51, 65 TABLE OF AUTHORITIES (continued) Page(s) x Washington v. Glucksberg, 521 U.S. 702 (1997) ...................................................................................... 51, 52 Whirlpool Props., Inc. v. Director, Div. of Taxation, 26 A.3d 446 (N.J. 2011) ....................................................................................... 62 Yahoo! Inc. v. La Ligue Contre La Racisme et L’Antisemitisme, 433 F.3d 1199 (9th Cir. 2006) .............................................................................. 30 Statutes Ill. Comp. Stat. 105/2 (2011) ................................................................................... 26 N.Y. Tax Law § 12(c)(2) .................................................................................. 15, 24 N.Y. Tax Law § 1101............................................................................................... 39 N.Y. Tax Law § 1101(8)(i)(C)(I) ............................................................................. 73 N.Y. Tax Law § 1101(b)(8)(i)(C)(I) ................................................................... 1, 14 N.Y. Tax Law § 1101(b)(8)(iv) ............................................................................... 35 N.Y. Tax Law § 1101(b)(8)(vi) .......................................................... 2, 3, 17, 43, 48 N.Y. Tax Law § 1131(1) ................................................................................... 14, 71 N.Y.C.P.L.R. 5601(b)(1) ......................................................................................... 10 Other Authorities Charlie Bit My Finger, Wikipedia, http://en.wikipedia.org/wiki/Charlie_Bit_My_Finger (last visited May 20, 2012) ..................................................................................................................... 34 TABLE OF AUTHORITIES (continued) Page(s) xi David L. Franklin, Facial Challenges, Legislative Purpose, and the Commerce Clause, 92 Iowa L. Rev. 41 (2006) .................................................... 69 Fallon, Jr., Fact and Fiction, 99 Calif. L. Rev. ................................................. 59, 69 Michael C. Dorf, Facial Challenges to State and Federal Statutes, 46 Stan. L. Rev. 235 (1994) ............................................................................................... 56 Richard H. Fallon, Jr., As-Applied and Facial Challenges and Third-Party Standing, 113 Harv. L. Rev. 1321 (2000) ............................................................ 59 Richard H. Fallon, Jr., Fact and Fiction About Facial Challenges, 99 Calif. L. Rev. 915, 919 (2011) ....................................................................................... 59 Regulations 20 N.Y.C.R.R. § 526.15 .................................................................................... 35, 40 20 N.Y.C.R.R. § 2375.6(c) ...................................................................................... 37 1 PRELIMINARY STATEMENT On its face, New York Tax Law Section 1101(b)(8)(vi) (the “Statute”) creates an unconstitutional tax regime. The Statute forces out-of-state Internet retailers that advertise in the State, such as Amazon.com LLC and Amazon Services LLC (collectively, “Amazon”), to collect New York sales and use taxes— in direct violation of the Commerce Clause of the United States Constitution. The State attempts to camouflage this unconstitutional expansion of taxing power through an irrational and effectively irrebuttable evidentiary “presumption” that cannot withstand scrutiny under the Due Process Clauses of the United States and New York Constitutions. The Commerce Clause prohibits states from imposing tax-collection obligations on out-of-state retailers that lack a “substantial nexus” with the taxing jurisdiction because they have no “physical presence” there. Quill Corp. v. North Dakota, 504 U.S. 298, 313–14 (1992). Before the Statute’s enactment, New York complied with the Commerce Clause’s bright-line limitation, requiring only those “vendors” who affirmatively “solicit[ed] business” in the State through “employees, independent contractors, agents or other representatives” to collect New York sales and use taxes. N.Y. Tax Law § 1101(b)(8)(i)(C)(I). Advertising did not trigger tax-collection obligations because, as the U.S. Supreme Court has 2 repeatedly held, advertising alone is insufficient to give rise to a “substantial nexus.” Quill, 504 U.S. at 302, 304, 313 n.6; accord Nat’l Bellas Hess, Inc. v. Dep’t of Revenue, 386 U.S. 753, 754–55, 758 (1967). But four years ago, the State enacted the so-called Amazon tax (the Statute) in an effort to circumvent that constitutional prohibition. The Statute provides that a seller of taxable goods “shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident . . . directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller[.]” N.Y. Tax Law § 1101(b)(8)(vi). Accordingly, the Statute allows the State to presume that an out-of-state retailer has “solicit[ed]” business in the State merely because it pays a New York resident for referring (“directly or indirectly”) customers to the retailer by internet link “or otherwise.” Id. The Statute purports to be rebuttable with “proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution.” Id. Amazon, like many other out-of-state Internet retailers, uses “Affiliate Marketing” as part of its advertising strategy. As relevant here, these retailers compensate some independent New York residents for posting advertisements on 3 their websites, and these advertisements function as “links” to the retailers’ websites. By virtue of the Statute, Amazon and other Internet retailers who employ this type of marketing are now presumed to have engaged in constitutionally sufficient (for Commerce Clause purposes) “solicitation” of New York customers and, thus, must collect New York sales and use taxes on all of their sales to New Yorkers, or else face serious civil and criminal penalties. As noted above, however, advertising alone is insufficient to give rise to a “substantial nexus,” and the physical location of these third parties who post advertisements on their own websites is typically unknown and irrelevant to both the retailers and the individuals visiting these sites. And no solicitation by the retailers occurs on these third-party websites. Yet rebutting this irrational statutory presumption would require out-of-state retailers somehow to account for the independent activities of thousands of websites and individuals over which the retailers have no control—a practical impossibility that renders the presumption effectively irrebuttable. Thus, the Statute violates both the Commerce Clause (because its presumption imposes tax-collection obligations on out-of-state retailers who lack a “substantial nexus” with the State) and the Due Process Clause (because it accomplishes this end-run around the Commerce Clause through an impermissible evidentiary presumption). 4 On appeal from the trial court’s dismissal of Amazon’s constitutional claims, the First Department recognized that this case has “far-reaching ramifications because of the exponential expansion of cyberspace in general, and commerce over the Internet in particular.” A-12. The court nonetheless upheld, as facially constitutional, a scheme that transforms what is concededly an ordinary advertising relationship into dispositive proof of in-state solicitation—in violation of longstanding Due Process and Commerce Clause doctrine. The First Department’s decision rests on several significant, reversible errors of law. First, the court overlooked the Statute’s critical due process defects. In particular, the Statute allows the New York State Department of Taxation and Finance (“DTF”) to presume that when Internet retailers compensate New York residents to post advertisements on their websites, those independent third parties then undertake the sort of in-state solicitation activities that would be sufficient in kind and degree to give rise to a “substantial nexus” between the retailers and the State. The presumption is irrational because there is not a “reasonably high degree of probability” connecting the fact proved (i.e., posting advertisements on a third- party’s websites, which, under the Commerce Clause, is insufficient to impose tax- collection obligations on out-of-state retailers) to the fact presumed (i.e., these third parties engaging in “continuous local solicitation” activities on the retailers’ 5 behalf that are “significantly associated” with the retailers’ ability to do business in the State, Tyler Pipe Indus., Inc. v. Wash. State Dep’t of Revenue, 483 U.S. 232, 250 (1987)). See Cnty. Court of Ulster Cnty. v. Allen, 442 U.S. 140, 158–59 (1979); People v. Leyva, 38 N.Y.2d 160, 166, 379 N.Y.S.2d 30, 34–35 (1975). Second, the First Department erroneously concluded that out-of-state Internet retailers that lacked a “substantial nexus” would be able to rebut the presumption. Yet a retailer using Affiliate Marketing would have no meaningful ability to do so in practice. Given the nature of the advertising relationships with the third parties who post advertising links on their own websites, retailers cannot possibly collect sufficient evidence to prove by a preponderance of the evidence the lack of any in-state solicitation (which includes a variety of as-yet-undefined activities) on their behalf by any of the potentially thousands of independent third parties not under those retailers’ control. This kind of irrebuttable presumption violates the Due Process Clause. Vlandis v. Kline, 412 U.S. 441, 452 (1973). Third, the First Department erroneously upheld the imposition of tax- collection obligations on out-of-state Internet retailers that lack a “substantial nexus” with New York, in violation of the Commerce Clause. See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). A substantial nexus exists only if the out-of-state retailer has a “physical presence” in the taxing state, such as real 6 estate, employees, or sales representatives engaged in “continuous local solicitation.” Quill, 504 U.S. at 308, 314; Tyler Pipe, 483 U.S. at 249–50, Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960). Yet the Statute imposes tax-collection obligations on out-of-state Internet retailers with no physical presence in New York based solely on the fact that these retailers advertise on websites that “indirectly refer[] potential customers” to the retailer—even though such advertising does not give rise to the requisite “substantial nexus.” Quill, 504 U.S. at 302, 304, 313 n.6; Nat’l Bellas Hess, 386 U.S. at 754–55, 758. Finally, the First Department imposed an erroneously stringent standard to Amazon’s facial challenges by applying the so-called “no set of circumstances” (“NSC”) test associated with United States v. Salerno, 481 U.S. 739 (1987), instead of simply applying the relevant underlying constitutional standards applicable to facial Due Process and Commerce Clause challenges. A-23. But Salerno was not a Due Process or Commerce Clause decision, and a review of the U.S. Supreme Court’s decisions both before and after Salerno demonstrates clearly that NSC is not the generally applicable standard for these types of facial challenges. Indeed, the U.S. Supreme Court has never applied NSC to the sort of Due Process or Commerce Clause challenges raised here. Accordingly, and consistent with the U.S. Supreme Court’s and this Court’s actual practice, this 7 Court should analyze whether the Statute on its face violates due process by determining whether the presumed facts “more likely than not” flow from the proven ones, and whether the statute is effectively irrebuttable. The Court should also assess whether the Statute violates the Commerce Clause by asking whether it forces out-of-state retailers to collect and remit taxes absent a “substantial nexus” with the State. These are the appropriate constitutional tests, rather than the unduly narrow, one-size-fits-all NSC language from Salerno.1 Consequently, this Court should reverse the lower court’s judgment, declare the Statute unconstitutional on its face under the Due Process Clauses of the U.S. and New York Constitutions, and the Commerce Clause of the U.S. Constitution, and order summary judgment entered in Amazon’s favor on these claims. STATEMENT OF THE ISSUES 1. Do the Due Process Clauses of the U.S. and New York Constitutions prevent New York from enacting an irrational, effectively irrebuttable statutory presumption triggered by nothing more than an out-of-state retailer 1 This Court has previously discussed the NSC formulation in the context of a facial Commerce Clause challenge, see Moran Towing Corp. v. Urbach, 99 N.Y.2d 443, 757 N.Y.S.2d 513 (2003), but the Court should revisit this aspect of that decision. See infra Argument, Section III. And as explained more fully below (infra Argument, Section IV), even if this Court were to apply the NSC analysis to Amazon’s facial constitutional claims, which it should not, the Statute is unconstitutional in all of its applications and the Court should therefore still strike it down on its face. 8 advertising in the State, and designed to circumvent the bright-line rules of the Commerce Clause by forcing that retailer to collect and remit taxes despite the lack of a “substantial nexus” with the State? 2. Does the Commerce Clause of the U.S. Constitution prevent New York from enacting a Statute that imposes tax-collection obligations on out-of-state retailers who lack a “substantial nexus” with the State? 3. Did the First Department err in applying the NSC formulation associated with United States v. Salerno, 481 U.S. 739 (1987), rather than the traditional constitutional tests that courts (including the U.S. Supreme Court) have applied before and after Salerno when assessing the sort of facial Due Process and Commerce Clause challenges raised here? STATEMENT OF JURISDICTION Under CPLR 5601(d): An appeal may be taken to the court of appeals as of right from a final judgment entered in a court of original instance . . . where the appellate division has made an order on a prior appeal in the action which necessarily affects the judgment . . . and which satisfies the requirements of [CPLR 5601(b)(1)] except that of finality. Id. Here, following the First Department’s non-final order affirming dismissal of Amazon’s facial claims, Amazon’s Stipulation of Discontinuance in the Supreme Court resolved all outstanding issues in that court, and therefore rendered the First 9 Department’s order ripe for review. Moreover, this appeal “directly involve[s] the construction of the constitution of the . . . United States,” as it concerns the facial constitutionality of the Statute. See CPLR 5601(b)(1). Consequently, this case falls squarely within the requirements of CPLR 5601(d), and this Court has jurisdiction over this appeal. STATEMENT OF FACTS I. Amazon’s Internet Retail Business. It is undisputed that Amazon.com LLC and Amazon Services LLC (“Amazon”) have no physical presence in New York—no property, no offices, no employees. And there are no solicitation activities performed by Amazon or on its behalf in New York that are significantly associated with Amazon’s ability to generate sales to customers located in New York. R.22. New York residents order products from Amazon solely through Amazon’s website (www.Amazon.com), and they place their orders only through Amazon. R.25–27. Products sold by Amazon are shipped directly to the customer from fulfillment centers located out- of-state; the only contact customers have with Amazon is via Internet, telephone, mail, or e-mail. R.25–26. 10 II. Amazon’s Affiliate Marketing Strategy. Online retailers are able to compensate advertisers based on the success of their online advertisements. Like many other Internet-based companies, Amazon uses Affiliate Marketing (among other methods) to advertise its products and services. Affiliate Marketing is a “highly efficient approach to advertising in e- commerce, which has allowed thousands of entities that fell below the threshold of traditional advertising to become electronic advertisers on the Internet.” Brief for Performance Marketing Alliance as Amicus Curiae Supporting Plaintiffs- Appellants at 2, Amazon.com, LLC v. N.Y. State Dep’t of Taxation & Fin., 81 A.D.3d 183, 913 N.Y.S.2d 129 (1st Dep’t 2010) (Nos. 1525, 1538) (Attached as Exhibit 1, to the Addendum Containing Unreported Decision and Amicus Filing). Under Amazon’s version of Affiliate Marketing—called the “Associates Program”—Amazon pays commissions to hundreds of thousands of independent third parties located around the world to advertise the website Amazon.com on their own websites. R.26, R.850–60. Thousands of these third parties have provided Amazon with New York addresses. R.27. These third parties typically enroll in Amazon’s Associates Program through an automated process by submitting an application electronically via Amazon’s website. R.26, R.850. If the application is accepted, Amazon grants the third party 11 a revocable license to place one or more of a variety of different Amazon.com advertising links on that party’s website. R.26, R.850. But Amazon does not control the activities or content of these third-party websites, other than requiring them to promise not to “misrepresent or embellish” the relationship between themselves and Amazon. R.857. Nor does Amazon require exclusivity; thus, many (if not most) of the third-party websites that advertise Amazon.com also display other companies’ advertisements. R.715. In many ways, Affiliate Marketing is similar to traditional advertising in broadcast media. See Brief for Performance Marketing Alliance as Amicus Curiae at 6–7. As with print, television, and radio advertisers, third parties who display the Amazon advertising links on their websites have no role in the sales transaction. R.26–27. Nor do they solicit or consummate sales on Amazon’s behalf (and they are not authorized to act as Amazon’s agents). R.25–27. In fact, “other than publishing the advertiser’s ad on its website, the [third party] has no direct involvement in the sales and marketing process.” Brief for Performance Marketing Alliance as Amicus Curiae at 6. Amazon pays fees to the third parties in exchange for posting the advertisements on their websites, and these fees depend on an advertisement’s success rate. Specifically, Amazon compensates these third parties on a “pay-per- 12 purchase” basis, which means that Amazon pays them only if a visitor to the third- party’s website clicks on the Amazon advertisement, taking the visitor to Amazon.com, and then makes a purchase directly from Amazon. R.27. With Affiliate Marketing, Amazon and other Internet retailers have no way of ascertaining what, if any, independent business activities any of the third party advertisers might undertake from day to day, let alone what activities all of them undertake over the course of a year. R.714–15. Likewise, Internet retailers have no ability to monitor the activities of each third party’s employees. R.714–15. These entities operate their own websites for a wide variety of different purposes and display a vast array of different content, and thus any two given websites displaying advertisements typically will be operated in a substantially different fashion from one another. R.715.2 In addition, the very nature of the “World Wide Web” means that visitors to these third parties’ websites by definition are not limited to New York residents—and visitors typically would neither know nor care whether the website operator is a “resident” of Albany, Anchorage, or Amsterdam. 2 Compare R.723 (www.concurringopinions.com, a law professors’ blog about legal topics, advertising the book “Understanding Privacy” – for sale on Amazon.com), with R.727–28 (www.soundtrackcollector.com, the website for an online community of people interested in movie soundtracks, providing various information about the film “An American Haunting,” and listing several links where its score is available for purchase, including Amazon.com, iTunes.com, and eBay.com). 13 The Amazon advertisements on these third parties’ websites typically have links enabling visitors to “click through” to Amazon’s website. R.26. These links function as advertisements either for Amazon.com or for specific products available on Amazon.com. R.714–15. Once a visitor to a third party’s website clicks through to Amazon.com using the advertising links, any purchase made by that visitor takes place solely through Amazon, all customer inquiries are handled only by Amazon, and all products are shipped directly to the consumer by Amazon, its corporate affiliates, or other sellers without any involvement of the third party or its website. R.26–27. III. New York Has Not Previously Subjected Out-of-State Internet Retailers to Tax-Collection Obligations Because Such Retailers Lack the Requisite Physical Presence. The Statute requires “every vendor of tangible personal property or services” to collect taxes on New York sales. N.Y. Tax Law § 1131(1) (emphasis added). A “vendor” includes, among other things, any “person who solicits business . . . by employees, independent contractors, agents or other representatives.” Id. § 1101(b)(8)(i)(C)(I) (emphasis added). The term “solicits” is not defined. But consistent with the limitations imposed by the Commerce Clause, New York law has long provided that an entity does not become a “vendor” solely by virtue of “having its advertising disseminated or displayed on the Internet by an individual 14 or entity subject to tax [under certain other provisions of the Tax Law].” Id. § 12(c)(2). Amazon’s Associates Program had been in place in New York for a number of years before passage of the Statute. Yet prior to the Statute’s enactment, New York officials never deemed Amazon to have “solicit[ed]” business through an employee, independent contractor, agent, or other representative under any provision of New York law. R.25. Accordingly, before the enactment of the Statute, New York authorities had never taken the position that Amazon had to register as a “vendor” under the Tax Law, and Amazon never so registered; nor did it collect sales or use taxes on any of its sales. R.25. IV. The Statute. The Statute appeared in the 2008–2009 budget legislation, which added what is now Tax Law section 1101(b)(8)(vi): For purposes of subclause (I) of clause (C) of subparagraph (i) of this paragraph, a person making sales of tangible personal property or services taxable under this article (“seller”) shall be presumed to be soliciting business 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, if the cumulative gross receipts from sales by the seller to customers in this state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ending on the last day of 15 February, May, August, and November. This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirements of the United States [C]onstitution during the four quarterly periods in question. R.809–11 (emphases added). In short, the Statute creates an evidentiary “presumption” that an out-of-state retailer is engaged in soliciting business in the State through third parties (which, if true, may be sufficient to impose tax- collection obligations on that retailer under the Commerce Clause, provided that the solicitation is significantly associated with the retailer’s ability to do business in New York) based solely on that retailer’s compensation of New York residents to “directly or indirectly refer[] potential customers, whether by link on an internet website or otherwise, to the [retailer],” provided that the retailer generates at least $10,000 per year in new sales from this type of arrangement. The Senate and Assembly passed the bill on April 9, 2008, and Governor Paterson signed it into law on April 23, 2008. See R.797–800. V. The State Attempts to Remedy the Statute’s Constitutional Infirmities with Litigation-Driven “Informational” Memoranda. On April 25, 2008, Amazon filed a complaint commencing this action, challenging the Statute’s constitutionality. R.743–44. The DTF then issued a series of so-called “informational” memoranda concerning the Statute that did little to mask the Statute’s serious constitutional failings. The DTF issued the first of 16 these memoranda, TSB-M-08(3)S (“First TSB-M”), on May 8, 2008—less than two weeks after Amazon commenced this litigation. R.824–29. The First TSB-M provides a series of hypothetical examples and attempts to “interpret” the Statute as applying only to retailers who, like Amazon, compensate third parties for posting advertising links on their websites on a commission or “pay-per-purchase” basis. See R.825–28. This would exclude, among others, “pay per click” compensation models3—even though the Statute, on its face, purports to apply regardless of whether retailers compensate the third parties by “commission or other consideration.”4 The DTF issued a second memorandum, TSB-M-08(3.1)S (“Second TSB- M”), on June 30, 2008. R.831–32. The Second TSB-M reaches beyond the State’s constitutional taxing authority by purporting to define “solicitation” with a non- exhaustive list of activities that are far broader than what would be permissible under the Commerce Clause. Specifically, it defines solicitation as “including, but not limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending e-mails.” R.831. Several of the 3 Under a “pay-per-click” compensation model, the third party is compensated each time a viewer “clicks” on the advertising link, taking the viewer to the seller’s site, regardless of whether the viewer ultimately makes a purchase there. 4 N.Y. Tax Law § 1101(b)(8)(vi) (emphasis added). 17 activities in this list (distributing flyers and promotional materials, initiating telephone calls, and sending emails), without more, are not sufficient to establish a “substantial nexus” under the U.S. Supreme Court’s case law. See, e.g., Quill, 504 U.S. at 304 (catalogs and flyers); id. at 302 (“advertisements in national periodicals, and telephone calls”); id. at 313 n.6 (including a subscription card in a magazine); Nat’l Bellas Hess, 386 U.S. at 754–55, 758 (distributing flyers). Additionally, the Second TSB-M ostensibly allows an out-of-state retailer to “rebut” the presumption if it can establish both that (i) a contract exists between the seller and all of the third parties that post advertisements on the retailer’s behalf, prohibiting the “solicitation” activities listed above, and (ii) it has collected certifications from all of these third parties stating that they have not, in fact, engaged in solicitation. R.831–32. For the third parties who are required to submit certifications, there is no guidance as to what sorts of activities might constitute “solicitation” beyond the non-exhaustive list in the TSB-M. R.831–32. Likewise, for the retailers, there is no guidance on how to assess the reliability of the certifications collected (the certifications are meaningless if the DTF determines that any of the third parties “are actually engaging in solicitation”). R.832. 18 VI. Procedural History. Amazon’s complaint alleges that the Statute violates the Due Process Clauses of the United States and New York Constitutions, and the Commerce Clause of the United States Constitution, both on the face of the Statute (the “Facial Claims”) and as the Statute is applied to Amazon (the “As-Applied Claims”). Amazon also alleged that the Statute violates the Equal Protection Clause of the United States Constitution. On January 12, 2009, the Supreme Court, New York County (Bransten, J.), issued a Decision and Order granting the Defendants-Respondents’ motion to dismiss Amazon’s complaint pursuant to CPLR 3211(a)(7), and denying Amazon’s cross-motion for summary judgment. On November 4, 2010, the Appellate Division, First Department, issued its opinion affirming in part and reversing in part the Supreme Court’s judgment. Specifically, the First Department modified the judgment to declare that the Statute is constitutional on its face, that it does not violate the Equal Protection Clause either on its face or as-applied to Amazon, and to reinstate the complaint for further proceedings with respect to Amazon’s As-Applied Claims. Among other things, the First Department held that: • The Statute does not violate due process on its face because it is “not irrational to presume that the in-state representative will engage in 19 various legal methods to enhance earnings. Advertising would be one of those methods, but mere advertising does not implicate the [S]tatute. Solicitation, however, in varying forms, is another extremely plausible and likely avenue by which any competent businessperson would seek to improve revenues.” A-32. • While “irrebuttable presumptions are looked upon with disfavor as violative of due process,” the Statute is not irrebuttable and thus does not violate due process because the “implementing regulation [the Second TSB-M]” allows a retailer to offer proof “in the form of a certification from the in-state representative that it did not engage in solicitation.” A- 31–32. • The Statute does not violate the Commerce Clause on its face because it requires “solicitation, not passive advertising,” and “Amazon’s program, reasonably, is not designed for the passive advertiser, but seeks growth by reliance upon representatives who will look to solicit business.” A- 27, 29. • “A plaintiff can only succeed in a facial challenge by establishing that no set of circumstances exists under which the Act would be valid, i.e., that the law is unconstitutional in all of its applications.” A-22–23 (internal quotation marks omitted). Amazon then sought leave to appeal, which the First Department denied on March 15, 2011. A-67–68. On remand to the Supreme Court, Amazon discontinued the As-Applied Claims voluntarily, but not the Facial Claims, clearing the way for Amazon to appeal the Facial Claims directly to this Court. Pursuant to CPLR 3217(a)(2), Amazon filed a Stipulation of Discontinuance in the Supreme Court on February 8, 20 2012. A-6–7. Amazon then filed its Notice of Appeal to this Court on February 17, 2012. A-4–5. Amazon and Defendants responded to this Court’s jurisdictional inquiry on March 7, 2012, and March 9, 2012, respectively. On March 22, 2012, this Court terminated its jurisdictional inquiry, and ruled that this appeal could go forward. In a related appeal noticed on January 11, 2012, entitled Overstock.com, Inc. v. New York State Department of Taxation and Finance et al., New York County Clerk Index No. 107581/08, plaintiff-appellant Overstock.com, Inc. (“Overstock”) also challenges the constitutionality of the Statute under the Due Process and Commerce Clauses. On February 27, 2012, Amazon requested that this Court coordinate Amazon’s appeal with Overstock’s such that the briefing and argument schedules for the two appeals proceed on parallel tracks (as they have in the past). While this Court did not formally rule on Amazon’s request, Amazon and Overstock are currently proceeding on the same briefing schedule. ARGUMENT On its face, the Statute violates due process because it impermissibly circumvents the bright-line limitations of the Commerce Clause through an irrational and effectively irrebuttable evidentiary presumption triggered by mere advertising—which then serves as conclusive evidence of nexus-creating 21 “solicitation” and thus forces out-of-state Internet retailers to collect taxes on New York sales. The Statute also violates the Commerce Clause on its face because it imposes tax-collection obligations on out-of-state Internet retailers that lack a “physical presence” in the State, and that are not engaged in “continuous local solicitation” that is “significantly associated” with their ability to do business in New York. Finally, the First Department erroneously applied the NSC analysis to resolve Amazon’s facial constitutional challenges, but this test is inapposite and inconsistent with the standards that the U.S. Supreme Court and other courts actually apply to resolve the kinds of claims at issue here. The Statute Violates Due Process On Its Face. I. Through an irrational and effectively irrebuttable evidentiary presumption that is triggered by mere advertising, the State has been unconstitutionally exceeding the outer bounds of the Commerce Clause, which prohibit the imposition of tax-collection obligations on out-of-state Internet retailers that lack a “substantial nexus” with the State. This regime violates due process. A. The Statute Amounts to an Impermissible End-Run Around the Commerce Clause’s “Substantial Nexus” Requirement. It is well-settled that a state cannot impose tax-collection obligations on an out-of-state retailer that lacks a “substantial nexus” with the taxing state. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977). A “substantial nexus” exists 22 only if the retailer has a “physical presence” in the taxing state, such as real estate, employees, or sales representatives engaged in “continuous local solicitation.” Quill, 504 U.S. at 314; Scripto, 362 U.S. at 210. Moreover, solicitation does not automatically create a “substantial nexus” unless that solicitation is “significantly associated” with the out-of-state retailer’s ability to do business in the taxing state. Tyler Pipe, 483 U.S. at 250. Quill set forth this “bright line rule” to “firmly establish boundaries of legitimate state authority to impose a duty to collect sales and use taxes.” 504 U.S. at 315. Importantly, mere advertising in the taxing state does not amount to “solicitation” and is therefore insufficient to give rise to a substantial nexus. Id. at 302, 304, 313 n.6; Nat’l Bellas Hess, 386 U.S. at 754–55, 758; Miller Bros. Co. v. Maryland, 347 U.S. 340, 347 (1954).5 The State admits that if third parties do nothing more than post a retailer’s advertising links on their websites and receive pay-per-click commissions, this would not create a “substantial nexus” between the retailer and the State. R.827–29. Accordingly, absent evidence that the third parties are actually engaging in constitutionally sufficient solicitation activities on 5 The Tax Law makes clear that an entity does not become a “vendor” solely by virtue of “having its advertising disseminated or displayed on the Internet by an individual or entity subject to tax [under certain other provisions of the Tax Law].” Tax Law § 12(c)(2); see also R.826 (First TSB-M: “an agreement to place an advertisement does not give rise to the presumption”). 23 an out-of-state retailer’s behalf (which requires far more than posting links on websites), the State cannot constitutionally impose tax-collection obligations on that retailer. By enacting the Statute, the State has circumvented these bright-line rules, camouflaging a violation of the Commerce Clause with an evidentiary “presumption.” This presumption transforms mere advertising6—which indisputably does not give rise to a “substantial nexus”—into dispositive evidentiary proof that an out-of-state Internet retailer is actually engaged in constitutionally sufficient solicitation of New York customers, such as going door- to-door and encouraging New Yorkers to purchase goods from Amazon. The Statute thus violates the longstanding due process principle that “a constitutional prohibition cannot be transgressed indirectly by the creation of a statutory presumption any more than it can be violated by direct enactment. The power to create presumptions is not a means of escape from constitutional restrictions.” Speiser v. Randall, 357 U.S. 513, 526 (1958) (citations and internal quotation 6 The First Department erroneously held that “mere advertising does not implicate the statute.” A-32. In fact, mere advertising (plus payment on a pay-per- purchase commission basis) is all that is required to trigger the presumption. See R.826 (First TSB-M, explaining that the presumption arises following “the placement of a link on a Web site that, directly or indirectly, links to the Web site of a seller, where the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link”). 24 marks omitted) (invalidating, on due process grounds, a statutory presumption involving tax exemptions, which had the effect of deterring speech protected by the First Amendment).7 In 2011, Illinois enacted a taxation statute substantially similar to the Statute at issue here; the main difference being that Illinois’s statute does not contain a “presumption.” See Ill. Comp. Stat. 105/2 (2011); H.B. 3659, 96th Gen. Assemb. (Ill. 2011). An Illinois court recently struck down that statute as “facially invalid” under the Commerce Clause, among other grounds, because the advertising activity at issue (out-of-state Internet retailers using Affiliate Marketing in Illinois) was not sufficient to create a “substantial nexus.” Performance Mktg. Ass’n v. Hamer, No. 2011 CH 263333 (Cook County Circuit Court, May 11, 2012) (Attached as Exhibit 2, to the Addendum Containing Unreported Decision and Amicus Filing). This ruling confirms that New York’s “presumption” is nothing more than an impermissible attempt to camouflage—in violation of due process— what is otherwise a blatant transgression of the Commerce Clause. 7 See also Bailey v. Alabama, 219 U.S. 219, 244 (1911) (invalidating evidentiary presumption that relieved the state of proving “intent” to injure: “[w]hat the state may not do directly it may not do indirectly”). 25 B. There is No Rational Connection Between the Fact Proven and the Fact Presumed. A statutory presumption, even one that is rebuttable, is facially unconstitutional if there is “no rational connection between the fact proved and the ultimate fact presumed, if the inference of the one from proof of the other is arbitrary because of lack of connection between the two in common experience.” United States v. Romano, 382 U.S. 136, 139 (1965); see Tot v. United States, 319 U.S. 463, 467–68 (1943); Leyva, 38 N.Y.2d at 166, 379 N.Y.S.2d at 34-35; People v. Terra, 303 N.Y. 332, 335, (1951). Mandatory evidentiary presumptions, like the one at issue here, are generally reviewed on their face to “determine the extent to which the basic and elemental facts coincide.” Allen, 442 U.S. at 158 (citations omitted); see id. at 159 (“To the extent that the trier of fact is forced to abide by the presumption, and may not reject it based on an independent evaluation of the particular facts presented by the State, the analysis of the presumption’s constitutional validity is logically divorced from those facts and based on the presumption’s accuracy in the run of cases.”). To pass constitutional muster, a proven fact must “more likely than not” lead to the presumed fact. Id. at 165 (citation and internal quotation marks omitted). This Court has prescribed an even “higher standard” for statutory presumptions—the connection must assure “‘a reasonably high degree of probability’ that the 26 presumed fact follows from those proven directly.” Leyva, 38 N.Y.2d at 166, 379 N.Y.S.2d at 35 (emphasis added) (citation omitted) (presumption of “possession” from defendant’s presence in a car containing drugs). In rejecting Amazon’s due process challenge, the First Department reasoned that when out-of-state Internet retailers pay independent third parties by commission to post advertising links on their websites, it is “not irrational to presume that the [third parties] will engage in various legal methods to enhance earnings.” A-32. The court added that “[s]olicitation . . . in various forms, is [an] extremely plausible and likely avenue” to improve revenues. A-32 (emphasis added). This analysis conflicts with precedent from the U.S. Supreme Court and this Court. First, the fact that an out-of-state Internet retailer compensates a “resident” of New York with commissions for placing advertising links on its website (the fact that triggers the statutory presumption) does not logically lead to the conclusion that the resident and all of its employees somehow are transformed into a roving in-state sales force which “solicit[s]” New York customers on the retailer’s behalf (the fact that is presumed). Internet commerce is based on volume. The opportunity to earn a percentage of an Internet retailer’s sales might potentially incentivize an 27 enterprising third party to try to drive more traffic to its own website—e.g., investing in search-engine optimization technology in an effort to become more relevant in “Google” and “Yahoo” search results. But it is simply not plausible to contend that these independent third parties will “more likely than not” be out roaming the streets of Brooklyn and other cities, posting flyers, knocking on doors, and handing out coupons, see Tyler Pipe, 483 U.S. at 249–51; Scripto, 362 U.S. at 210-11, all in an attempt to attract visitors to their own websites, with the hope that these visitors will then click on the Amazon.com link and give the third parties the opportunity to earn a commission on Amazon’s sale of a book or DVD. This scenario defies common sense, yet it is the very premise on which the Statute is based. The U.S. Supreme Court explained the distinction between permissible and impermissible statutory presumptions in two seminal due process cases, both of which involved a presumption arising from a defendant’s “presence” at an illegal still. In United States v. Gainey, 380 U.S. 63 (1965), the Court upheld the rationality of a presumption that persons present at the still were, absent explanation, related in some way to, and thus guilty of “carrying on,” a criminal enterprise. Id. at 67–68. By contrast, in Romano, the Court held that “possession, custody, and control” of a still could not be presumed from a person’s mere 28 unexplained presence there. 382 U.S. at 140. The link between “presence” (the fact proven) and “possession” (the fact presumed) was too attenuated to render the presumption “rational or reasonable”: Presence at an operating still . . . tells us only that the defendant was there . . . . But presence tells us nothing about what the defendant’s specific function was and carries no legitimate rational or reasonable inference that he was engaged in one of the specialized functions connected with possession, rather than in one of . . . activities having nothing to do with possession. Id. at 141. The Court in Romano distinguished Gainey, explaining that presence at a still was sufficient to presume the act of “carrying on” because “anyone present at the site is very probably connected with the illegal enterprise.” Id. Yet “absent some showing of the defendant’s function at the still, [the] connection [between presence and] possession is too tenuous to permit a reasonable inference” from one to the other. Id. (emphasis added). Here, as in Gainey, the relationship between posting advertising links for a commission, on the one hand, and engaging in various in-state solicitation activities on behalf of the retailer, on the other, cannot withstand scrutiny, as a matter of reason and precedent. Second, nowhere in the legislative history or anywhere else is there any indication that active in-state solicitation (phone calls, emails, etc.) probably flows 29 from Affiliate Marketing relationships. Thus, there is nothing more than sheer speculation supporting the link between the fact presumed and those actually proven, Leary v. United States, 395 U.S. 6, 53 (1969), and “legislative fiat may not take the place of fact in the judicial determination of issues involving life, liberty, or property.” W. Atl. R.R. v. Henderson, 279 U.S. 639, 644 (1929) (citations omitted) (striking down an irrational presumption of a railroad’s negligence from the mere fact of collision and resulting death because “[r]easoning does not lead from occurrence back to its cause”); see Hensler v. City of Davenport, 790 N.W.2d 569, 588 (Iowa 2010) (invalidating presumption that, if a minor violates the law, the violation was a result of the parent’s negligence, because “injuries can happen without any negligence” and “it is irrational to allow a fact finder to use the mere occurrence of an incident to presume a person was negligent”). In other words, “the inference is so strained as to not have a reasonable relation to the circumstances of life as we know them.” Romano, 382 U.S. at 139.8 8 In examining the validity of a presumption under which a seller of obscene material was presumed to know its contents, Chief Judge Fuld explained: “To say that booksellers in the circumstances of this case are ‘more likely than not’ to know the character and content of all material they sell is to ignore not only the record evidence regarding the manner in which books and magazines are ordered but the very ‘circumstances of life’ itself.” People v. Kirkpatrick, 32 N.Y.2d 17, 31, 343 N.Y.S.2d 70, 82 (1973) (Fuld, C.J., dissenting) (relying on the rule set forth in Leary, 395 U.S. at 36, that the presumed fact must be more likely than not to flow from the proven fact). 30 Third, due to the geographically untethered nature of the Internet, websites owned or operated by New York “residents” generally are no more likely to target or reach New Yorkers than websites operated by individuals physically located outside of New York State. See Reno v. ACLU, 521 U.S. 844, 851 (1997) (striking down a statute on First Amendment grounds and describing “‘cyberspace’ [as] located in no particular geographical location but available to anyone, anywhere in the world, with access to the Internet”); Yahoo! Inc. v. La Ligue Contre La Racisme et L’Antisemitisme, 433 F.3d 1199, 1202 (9th Cir. 2006) (per curiam) (en banc) (explaining, for purposes of personal jurisdiction, that a website’s geographic boundaries “are highly permeable” such that any user in the United States can access a website operated in France); see also Ashcroft v. ACLU, 535 U.S. 564, 587 (2002) (O’Connor, J., concurring) (“given Internet speakers’ inability to control the geographic location of their audience” it is undesirable to expect them to control their speech). Websites by definition are not “local” in terms of their content or circulation. Indeed, one would have thought that a 56-second video of an English toddler complaining about his finger-biting brother would have had little appeal outside that boy’s immediate family, school, or community. Yet on the Internet, this 31 obscure video generated more than 437 million views and turned the child into a worldwide star.9 Given the lack of any connection between a website and a physical location, there is no reason to believe that the hypothetical website www.NewYorkDining.com would have any more New York-based visitors if located in Manhattan, rather than Los Angeles. A particular website’s geographic location is irrelevant and not what draws users to it. See, e.g., Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160, 165 (S.D.N.Y. 1997) (statute criminalizing use of a computer to disseminate obscene material to minors held invalid under the Commerce Clause, because an Internet address is not a “geographic concept” and users cannot “predict the results of their Internet use”); see Voyeur Dorm, L.C. v. City of Tampa, 265 F.3d 1232, 1237 (11th Cir. 2001) (Internet transmissions originating at a residence could not be associated with that geographic location in determining a zoning violation because information “occurs over the Internet in ‘virtual space’”). Thus, the basis underlying the presumption is contrary to the very nature of the Internet.10 9 See Charlie Bit My Finger, Wikipedia, http://en.wikipedia.org/wiki/Charlie_Bit_My_Finger (last visited May 20, 2012). 10 Even if it were reasonable to presume that some websites might be more likely to appeal to New Yorkers, the DTF defines “resident” so broadly that no rational connection would exist. For example, a Colorado company selling skis, 32 Fourth, the State’s self-serving, litigation-driven TSB-Ms have only exacerbated the presumption’s irrationality. For instance, the Statute on its face applies to agreements in which out-of-state retailers compensate third parties by “commission or other consideration.” N.Y. Tax Law § 1101(b)(8)(iv). Yet the State has chosen to interpret the presumption to apply exclusively to pay-per- purchase advertising models, in apparent recognition that flat-fee or pay-per-click compensation models are “merely to place advertising.” R.826–28. There is no rational basis for this distinction.11 If anything, a pay-per-click model may provide a greater incentive for third parties to do more than simply post advertising links— there is a direct correlation between a referral to a retailer’s website and earned fees. Conversely, in a commission-based model, such as Amazon’s, any fees paid to the third party necessarily depend on a potential customer’s subjective and headquartered in Colorado and doing business only in Colorado, would still be a “resident” of New York if it were incorporated here. See 20 NYCRR § 526.15. 11 The State’s rationale for this distinction is that a pay-per-purchase model “tie[s] remuneration—and the concomitant incentive to solicit business—to a consummated sale.” Brief for Defendants-Respondents, Amazon.com, LLC v. N.Y. State Dep’t of Taxation & Fin., 81 A.D.3d 183, 913 N.Y.S.2d 129 (1st Dep’t 2010) (Nos. 1525, 1538), 2009 WL 7868639, at *64. The State does not however address how this distinction saves the irrationality of the presumption that pay-per- purchase compensation models lead, with a “reasonably high degree of probability,” to in-state solicitation. Leyva, 38 N.Y.2d at 166, 379 N.Y.S.2d at 35. 33 inherently unpredictable decisions once they arrive at the retailer’s website.12 As demonstrated above, there is no “rational connection” between the fact proved (posting advertising links for commission) and the presumed fact (in-state solicitation). See Romano, 382 U.S. at 139. The State’s illogical distinction between pay-per-purchase and flat-fee or pay-per-click further highlights the irrationality of the Statute and illustrates that there is nothing more than sheer speculation supporting the presumption. See W. & Atl. R.R., 279 U.S. at 644. 12 Moreover, the State’s litigation strategy of interpreting “other consideration” out of the Statute cannot save the Statute from constitutional scrutiny. See Lewis v. Grinker, 965 F.2d 1206, 1220 (2d Cir. 1992) (“[T]his response, coming while plaintiff’s motion for a permanent injunction was pending, is the sort of post hoc litigation posture that is entitled to no deference.”); Excellus Health Plan, Inc. v. Serio, 2 N.Y.3d 166, 171, 777 N.Y.S.2d 422, 425 (2004) (“[A] determination by the agency that runs counter to the clear wording of a statutory provision is given little weight.” (internal quotation marks omitted)). The TSB-Ms are not agency regulations promulgated pursuant to the State Administrative Procedure Act but, rather, are “document[s] ‘advisory in nature [that are] merely explanatory’ and without ‘legal force.’” Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 322, 756 N.Y.S.2d 108, 111–12 (2003) (quoting 20 NYCRR § 2375.6(c)). Moreover, even if the Legislature had intended to afford these memoranda “the same deference . . . [the DTF] may enjoy when it more concretely applies statutory terms to specific transactions,” all that is at issue here is pure statutory interpretation that would be entitled to no deference in any event. Id. at 323, 756 N.Y.S.2d at 112; N.Y. Life Ins. Co. v. State Tax Comm’n, 80 A.D.2d 675, 676, 436 N.Y.S.2d 380, 381–82 (1st Dep’t), aff’d sub nom., Metro. Life Ins. Co. v. State Tax Comm’n, 55 N.Y.2d 758, 447 N.Y.S.2d 245 (1981). Cf. United States v. Stevens, 130 S. Ct. 1577, 1591 (2010) (“We would not uphold an unconstitutional statute merely because the Government promised to use it responsibly.”). 34 In sum, the presumption violates due process because it cannot be said that in-state solicitation activities sufficient to create a “substantial nexus” (e.g., going door-to-door to encourage New Yorkers to buy from a particular retailer, to a degree that is significantly associated with the retailer’s ability to do business in the State) “more likely than not” flow from the fact that out-of-state Internet retailers compensate a “resident” of New York by commission for posting advertising links on its website. Allen, 442 U.S. at 165. And there certainly is not “a reasonably high degree of probability” that one flows from the other. Leyva, 38 N.Y.2d at 166, 379 N.Y.S.2d at 35. C. The Presumption is Effectively Irrebuttable and Not Universally True. As the First Department recognized, “irrebuttable presumptions are looked upon with disfavor as violative of due process.” A-31. In particular, irrebuttable presumptions violate due process if they are not necessarily or universally true in fact,13 and when the State has reasonable alternative means of making the crucial determination.14 Vlandis, 412 U.S. at 452; see also Cleveland Bd. of Educ. v. 13 The State admits that compensating third parties by commission for posting advertising links does not—without more—amount to constitutionally sufficient solicitation. R.827–29 (First TSB-M). Thus, the Statute’s presumption is not universally true. 14 According to the State, it also has reasonable alternative means for determining who is a “vendor” under the Tax Law, given that the Statute “changes very little 35 LaFleur, 414 U.S. 632, 646–48 (1974). In fact, even if a presumption purports to be rebuttable, it still violates due process if, in practice, the statute “operates to deny a fair opportunity to repel it.” W. & Atl. R.R., 279 U.S. at 642; Hensler, 790 N.W.2d at 586–87. Here, the presumption is effectively irrebuttable. It requires out-of-state Internet retailers to prove an impossible negative: that all of the in-state “residents” posting a retailer’s advertising links on their own websites are taking no other affirmative steps to “solicit” customers on the retailer’s behalf. Unless the retailer is able to collect and adduce this proof, the Statute forces the retailer to collect taxes on all of its New York sales, including sales to customers who were not referred to the retailer through a third-party advertising link. R.810 (N.Y. Tax Law § 1101). Many retailers have advertising relationships with hundreds of thousands of third parties’ websites. A-42. In order to rebut this presumption, then, a retailer would have to first identify all third-party “residents” compensated to post links on their websites, which includes persons and companies maintaining a physical address in New York, maintaining a place of business in New York, incorporating about the law in New York”; “does not make any additional transactions taxable that were not taxable prior to its passage”; “[n]or . . . does the Statute expand the definition of ‘vendor.’” R.528 (State’s motion to dismiss). 36 under New York law, or doing business in New York. 20 NYCRR § 526.15; R.826. The First Department concluded that retailers could identify their New York “resident” advertising partners because retailers have contracts with all of them. A-27. This is flatly wrong. Under the First TSB-M, the presumption applies even where the out-of-state retailer has no direct contractual relationship with the operator of a third-party website posting the advertising links. R.826 (“a seller is also considered to have met the condition of having an agreement with a New York State resident where the seller enters into an agreement with a third party under which the third party, in turn, enters into an agreement with the New York resident to act as the seller’s representative”).15 Moreover, even in situations where there is a contractual relationship between the retailer and the third-party advertiser, that advertiser might give the retailer a Minnesota address even though it is incorporated in New York (and thus qualifies as a New York “resident”). In any event, even if the out-of-state retailer could identify all New York “residents” with whom it had advertising relationships, these third parties operate 15 Assume for example that an out-of-state retailer located in Nebraska had an advertising agreement with a company in Oregon. If the Oregon-based company, in turn, contracted with a “resident” of New York to post links on its website to the Nebraska retailer’s website, the Nebraska retailer would still be subject to the presumption even absent any direct contractual relationship with the New York advertiser. See infra pp. 39–40. 37 independently and each one operates differently from the other. See R.26–27, R.714–15. As a result, retailers would have to locate and gather a wide variety of evidence regarding the day-to-day activities of thousands of third parties, their websites, and all of their employees and members. Cf. Reno, 521 U.S. at 853 (“The Web is thus comparable, from the readers’ viewpoint, to both a vast library including millions of readily available and indexed publications and a sprawling mall offering goods and services.”). Adding to the impossibility of this task, many of these third parties also have advertising relationships with many other out-of- state retailers as well as a variety of non-retail Internet companies (such as Google). Also, generally speaking, these third parties’ websites are not maintained solely to post advertisements. These third-party websites exist for a wide variety of purposes, and there would be no way to tell on which entity’s behalf (if any) the website was communicating with the public. Nor, of course, could a retailer possibly gather sufficient evidence from these entities to actually prove by a preponderance of evidence the lack of solicitation in a court or administrative proceeding, which the Statute requires in order to rebut the presumption. In particular, the retailer would have to prove that none of the third parties (or their employees or members) reached out to New Yorkers on behalf of the retailer through phone calls, emails, flyers, newsletters, 38 in-person promotions, or any other undefined activities that could constitute “solicitation.” R.831 (Second TSB-M). The presumption is therefore effectively irrebuttable. See Speiser, 357 U.S. at 526 (“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 First Department disagreed and concluded that the Statute was, in fact, rebuttable, relying on the Second TSB-M. A-31–32. This informal memorandum, expressly revocable or subject to modification at any time, asserts that out-of-state retailers can rebut the presumption by meeting two conditions. R.831. First, the “Contract condition” requires retailers to include the following language in their contracts with third parties that post advertising links on their websites: [T]he resident representative is prohibited from engaging in any solicitation activities in New York State that refer potential customers to the seller including, but not limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending e-mails. Id. Second, the “Proof of compliance condition” requires each third party to submit an annual certification to the retailer stating that it has not engaged in any of the above activities that year. Id. 39 Complying with these conditions would provide little comfort to Internet retailers. Under the Statute, New York-resident advertisers may not (without triggering tax-collection obligations for the out-of-state retailer) do anything that might “indirectly refer[]” potential customers to the retailer’s website through an Internet link “or otherwise.” N.Y. Tax Law § 1101(b)(8)(vi). Thus, for example, a New York-based web company could inadvertently violate the “Contract condition” as follows: (1) an employee sends his sister (who lives in New York) an email that contains the company’s website URL;16 (2) the employee’s sister reads the email and goes on the Internet to learn about her brother’s company; (3) while on the website, the employee’s sister sees a book that interests her; (4) she clicks on the Amazon.com link and buys that book from Amazon; and (5) as a result, Amazon compensates the company with a percentage of the sale. In that scenario, the company just “indirectly” referred a New York customer to Amazon, and in doing so violated the “Contract condition.”17 16 URL’s are “[s]equences of letters that identify resources in the web, such as documents, images, downloadable files, services, and electronic mailboxes. The URL is the address of the resource, and contains the protocol of the resource (e.g., “http://” or “ftp://”), the domain names for the resource, and additional information that identifies the location of the file on the computer that hosts the website.” Register.com, Inc. v. Verio, Inc., 356 F.3d 393, 407 n.4 (2d Cir. 2004). 17 These sorts of violations of the “Contract condition,” even if intentional, would come nowhere close to establishing a constitutionally sufficient “substantial 40 There is no limit to the types of activities that could constitute a referral in a manner “other than a direct click.” A-33. An out-of-state retailer thus could not possibly be sure that none of its advertising partners is referring customers “indirectly” by means “other[]” than an Internet link. In any event, the contractual “safe harbor” is anything but safe for an out-of- state retailer attempting to do business going forward. A true “safe harbor” would permit a retailer—upon notice and evidence of a third party’s activities that qualified as “solicitation” on the retailer’s behalf—to terminate its relationship with the third-party advertiser (and/or the advertiser would have the opportunity to cease such “solicitation” activities). Here, however, if just one of the website operators considered a “resident” of New York were to breach its contract with the retailer (even mistakenly or inadvertently) by directly or indirectly referring a New Yorker to the retailer’s website, by whatever means, that retailer could be on the hook for collecting taxes on all of its New York sales. R.832 (stating that the “Contract” and “Proof of compliance” conditions are sufficient to rebut the presumption “unless the Department subsequently determines that any of the resident representatives are actually engaging in solicitation activities in New York State” (emphasis added)). And a retailer who had received certifications from nexus,” further demonstrating why the TSB-Ms cannot save the Statute from its constitutional invalidity. 41 “fewer than all its New York resident representatives,” even if that retailer had thousands of in-state advertisers and received certifications from most of them, could not, with any confidence, rely on the TSB-M’s “safe harbor” either. Id. (emphasis added). Therefore, the Statute effectively forces all out-of-state retailers with even the slightest advertising presence in New York to collect and remit taxes on all of their sales to New Yorkers, under the threat of civil and criminal penalties. The only alternative for these retailers is to eliminate all Affiliate Marketing relationships with entities that could be deemed a “resident” of New York, as Overstock has done. The Statute Violates The Commerce Clause On Its Face. II. The Statute forces Internet retailers who lack a “substantial nexus” with New York to collect and remit sales taxes in violation of the Commerce Clause. In fact, the Statute is precisely the type of imposition against which the “substantial nexus” requirement was designed to guard. A. The Statute Impermissibly Targets Out-of-State Retailers that Do Not Engage in Continuous Local Solicitation. As discussed above, a substantial nexus exists only if an out-of-state retailer has a “physical presence” in the taxing state, such as real estate, employees, or sales representatives engaged in “continuous local solicitation.” Quill, 504 U.S. at 42 314; Scripto, 362 U.S. at 210–11. And “solicitation,” for dormant Commerce Clause purposes, involves far more than mere advertising; it requires direct, in- person, local sales-support activities that include involvement in the actual sales transaction. See Tyler Pipe, 483 U.S. at 249–51; Scripto, 362 U.S. at 210–11. In Tyler Pipe, the U.S. Supreme Court held that a substantial nexus existed where the activities of in-state sales representatives included “calling on [Tyler Pipe’s] customers and soliciting orders[,]” having “long-established and valuable relationships with Tyler Pipe’s customers[,]” and “maintain[ing] and improv[ing] . . . individual customer relations of Tyler Pipe.” 483 U.S. at 249. Likewise, in Scripto, a substantial nexus existed where an out-of-state company hired several “sales[men]” who traveled throughout the 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].” 362 U.S. at 209; see also id. at 212 (distinguishing Miller Brothers on the ground that the tax struck down in that case was applied to an out-of-state retailer with “no solicitors” in the taxing state). The team of salesmen in Scripto engaged in “continuous local solicitation” and “[t]he only incidence of th[e] sales transaction that [was] nonlocal [was] the acceptance of the order.” Id. at 210–11. Scripto represented the outer limit, under the Commerce Clause, of a state’s ability to impose tax-collection 43 obligations on out-of-state retailers. Nat’l Bellas Hess, 386 U.S. at 757 (noting that Scripto was “[t]he case in this Court which represents the furthest constitutional reach to date of a State’s power to deputize an out-of-state retailer as its collection agent for a use tax”). In contrast to the local, in-person sales representatives in Tyler Pipe and Scripto who were targeting in-state customers, the websites operated by New York “residents” that refer customers to out-of-state Internet retailers have no involvement in the actual sales transactions. In fact, Internet retailers who do nothing more than run advertisements in national periodicals based in New York— which are precisely the type of out-of-state retailers that the U.S. Supreme Court held lacked a substantial nexus in Quill, 504 U.S. at 315—could very well be subject to the Statute if such advertisements “indirectly refer[]” customers to the retailers. N.Y. Tax Law § 1101(b)(8)(vi). Moreover, to the extent the Statute is premised on the assumption that third parties engage in solicitation activities beyond merely posting advertising links on their websites (which is all that they are compensated to do), no court has upheld the imposition of tax-collection obligations based on such unauthorized and undirected activities. See, e.g., St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F. Supp. 2d 575, 581–82 (E.D. La. 2007) (activities of 44 brick-and-mortar stores on behalf of website (a separate company) were insufficient to create a substantial nexus because the stores had “[n]ever taken or solicited orders on behalf of” the retailer, “such as was involved in Scripto and Tyler Pipe”). Accordingly, the protections of the “continuous local solicitation” requirement would be eviscerated if an out-of-state retailer’s tax-collection obligations were held to turn on the unpredictable and unknowable acts of independent third parties. B. The Statute Targets Activities Performed for Out-of-State Retailers that Are Not “Significantly Associated” with Those Retailers’ Ability to Maintain a New York Market. For “substantial nexus” purposes, the U.S. Supreme Court held in Tyler Pipe that an in-state representative’s activities must not only amount to solicitation, but they also must be “significantly associated” with the out-of-state retailer’s ability to do business in the taxing state. 483 U.S. at 250. Here, the Statute violates the Commerce Clause because it creates tax-collection obligations based solely on the activities of third parties—and there is no means of ensuring that such activities (even if they could be deemed “solicitation,” which they cannot) are “significantly associated” with the retailer’s ability to do business in the State. In Tyler Pipe, the in-state representatives “acted daily on behalf of Tyler Pipe in calling on its customers and soliciting orders,” had “long-established and 45 valuable relationships with Tyler Pipe’s customers,” and “[t]hrough sales contracts, the representatives maintain[ed] and improve[d] the name recognition, market share, goodwill, and individual customer relations of Tyler Pipe.” Id. at 249 (internal quotation marks omitted). The representatives provided Tyler Pipe with “virtually all” of its information regarding the Washington market—“including product performance; competing products; pricing; market conditions and trends; existing and upcoming construction products; customer financial liability; and other critical information of a local nature concerning Tyler Pipe’s Washington market.” Id. at 250 (emphasis added). In other words, Tyler Pipe could not have done business in Washington without the support of its local representatives.18 Similarly, in Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 630 N.Y.S.2d 680 (1995), the activities at issue met Tyler Pipe’s requirement because they were “significantly associated” with the out-of-state retailers’ ability to do business in New York. As this Court explained, “Orvis’ substantial wholesale business in [New York] was generally accomplished by means of its sales 18 See also Scripto, 362 U.S. at 209 (substantial nexus created by team of salesmen who were out-of-state retailer’s local conduit and whose purpose was “attracting, soliciting and obtaining” local customers); Gen. Trading Co. v. State Tax Comm’n, 322 U.S. 335, 337 (1944) (substantial nexus created by seller’s engagement of in-state sales agents for the purpose of establishing and maintaining a local market); Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62, 64–65 (1939) (substantial nexus created by seller’s engagement of in-state sales agents for the purpose of establishing and maintaining a local market). 46 personnel’s direct solicitation of retailers through visits to their stores in New York.” Orvis, 86 N.Y.2d at 179, 630 N.Y.S.2d at 687 (emphasis added); see id. at 180, 630 N.Y.S.2d at 688 (sales personnel visited the State “‘in a loop’, suggesting systematic visitation to all of its as many as 19 wholesale customers on the average of four times a year”). By contrast, the activities of New York residents who post advertising links on their websites (even assuming arguendo that this constituted constitutionally- sufficient “solicitation,” which it does not) are not “significantly associated” with Internet retailers’ ability to do business in New York. As noted above, the nature of the Internet renders the physical location of third-party advertisers irrelevant. Unlike the local sales force in Tyler Pipe and Scripto, an Internet advertisement posted on a New York “resident’s” website has no effect on a retailer’s ability to maintain a New York market for its sales. See Am. Libraries Ass’n, 969 F. Supp. at 166–67 (an Internet “address is a logical rather than geographic concept”; “[a] speaker thus has no way of knowing the location of the recipient of his or her communication”). In addition, Affiliate Marketing is only one type of advertising—many Internet retailers have thriving businesses even in states in which they do not utilize this particular advertising model. Overstock, for 47 instance, is able to maintain a New York market despite eliminating its Affiliate Marketing relationships in the State. C. The Statute Violates the Quill Bright-Line Physical Presence Rule, Which Rests on Sound Considerations of Constitutional Principle and Public Policy. Finally, this Court should not allow the State to eviscerate Quill’s well- established physical presence requirement. As the U.S. Supreme Court recognized in Quill, state taxation has the potential to unduly burden interstate commerce. 504 U.S. at 313. This case highlights the danger that, “[w]ithout the limitations imposed by the Commerce Clause, . . . inconsistent regulatory schemes could paralyze the development of the Internet altogether,” as well as this burgeoning aspect of our economy. Am. Libraries Ass’n, 969 F. Supp. at 181. As noted above, the recent decision from Illinois confirms that a statute is “facially invalid” under the Commerce Clause if it bases tax-collection obligations solely on Affiliate Marketing relationships, which are not sufficient to create a “substantial nexus.” Performance Mktg. Ass’n, No. 2011 CH 263333. Were the rule otherwise, then every Internet retailer could potentially be subjected to tax- collection obligations “by the Nation’s 6,000-plus taxing jurisdictions.” Quill, 504 U.S. at 313 n.6. Tellingly, rather than subject itself to this regulatory patchwork 48 quilt, Overstock simply pulled the plug on all of its Affiliate Marketing relationships in the State. A-17–18. Thus, 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 that prevent the State from imposing that obligation directly; (2) expend considerable time and money trying to develop the evidence needed to rebut the presumption, which would be impossible in practice (see supra Argument, Section I.C); 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 subjects out-of-state retailers to 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) (striking down as facially invalid, under the Commerce Clause, a “notice and reporting” requirement imposed on retailers with “no physical presence in Colorado and no connection with Colorado customers other than by common carrier, the United States mail, and the internet. Those retailers are protected from such burdens on interstate commerce by the safe-harbor established in Quill.”). 49 In addition, New York’s attempt to impose tax-collection obligations on Internet retailers with no substantial nexus to New York State also would impermissibly interfere with interstate commerce and undermine ongoing efforts by Congress and state governments to standardize and simplify tax laws across the nation. See Brief for Performance Marketing Alliance as Amicus Curiae at 26–27 (discussing issues arising from multiple state-taxation systems). This burden on interstate commerce is precisely what Quill’s bright-line physical-presence rule was designed to protect against. See Quill, 504 U.S. at 313(the “substantial nexus” requirement “limit[s] the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce”); see also id. at 313 n.6. The First Department Applied the Wrong Legal Standard To III. Decide Amazon’s Facial Constitutional Claims. The First Department rejected Amazon’s facial challenges by applying the “no set of circumstances” (“NSC”) language associated with the U.S. Supreme Court’s decision in United States v. Salerno. A-22–23. This test cannot be reconciled with the U.S. Supreme Court’s longstanding practice (before and after Salerno) of adjudicating facial constitutional claims—including claims under the Due Process and Commerce Clauses—in light of the specific constitutional tests applicable to those claims, and not the NSC formulation. Accordingly, as described above, the Court should analyze whether the statutory presumption at 50 issue violates due process on its face by asking whether the presumed fact “more likely than not” flows from the proven one, and whether the presumption is effectively rebuttable. Further, the Court should determine whether the Statute violates the Commerce Clause by deciding whether it forces retailers who lack a “substantial nexus” with the State to collect and remit taxes. The NSC test has no place in this analysis. A. The “No Set of Circumstances” Test is Not the Universal Standard for Deciding All Facial Constitutional Challenges. “The idea that the Supreme Court applies the ‘no set of circumstances’ test to every facial challenge is simply a fiction, readily dispelled by a plethora of Supreme Court authority.” Doe v. City of Albuquerque, 667 F.3d 1111, 1124 (10th Cir. 2012). In fact, the Court has readily and regularly acknowledged the significant disagreement concerning whether the NSC test is a definitive standard for every—or even any—facial constitutional challenge. See, e.g., United States v. Stevens, 130 S. Ct. 1577, 1587 (2010) (“Which standard applies in a typical [facial challenge] case is a matter of dispute that we need not and do not address[.]”); Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442, 449 (2008). Salerno involved a facial Eighth Amendment challenge to the Bail Reform Act of 1984. In that case, the majority stated that “[a] facial challenge to a legislative Act is, of course, the most difficult challenge to mount successfully, 51 since the challenger must establish that no set of circumstances exists under which the Act would be valid.” 481 U.S. at 745. Ironically, in rejecting the facial challenge at issue, Salerno did not actually apply the NSC analysis.19 Nor has the NSC formulation played a leading role in the facial-constitutional-challenge jurisprudence of the U.S. Supreme Court—either before or after Salerno. As the plurality explained in City of Chicago v. Morales: “To the extent we have consistently articulated a clear standard for facial challenges, it is not the Salerno formulation, which has never been the decisive factor in any decision of this Court, including Salerno itself.” 527 U.S. 41, 54 n.22 (1999).20 Notably, the Court has explicitly declined to apply the NSC analysis in facial challenges arising under a variety of constitutional doctrines, including: 19 Instead of identifying a circumstance in which the Bail Reform Act could be applied constitutionally, Salerno rejected the petitioner’s facial challenge on essentially as-applied grounds by balancing the petitioner’s liberty interest against the government’s interest in protecting citizens against future violence. 481 U.S. at 747–48, 751–52; see also Morales, 527 U.S. at 54 n.22 (plurality opinion) (referring to the NSC language as “Salerno’s dictum”); Washington v. Glucksberg, 521 U.S. 702, 740 (1997) (Stevens, J., concurring) (“[T]he Court has [n]ever actually applied such a strict standard, even in Salerno itself.”); Michael C. Dorf, Facial Challenges to State and Federal Statutes, 46 Stan. L. Rev. 235, 239–42 (1994). 20 Some Members of the Court have endorsed an alternative test for facial constitutionality—i.e., whether a statute has “a ‘plainly legitimate sweep.’” Wash. State Grange, 552 U.S. at 449 (citing Glucksberg, 521 U.S. at 740 n.7 (Stevens, J., concurring)); accord Stevens, 130 S. Ct. at 1587. Amazon’s facial challenges would also succeed under this alternative formulation, although it does not apply here either for the reasons explained below. Infra Argument, Section III.C. 52 • the Due Process Clause of the Fourteenth Amendment, see Morales, 527 U.S. 41 (facially invalidating a loitering ordinance that failed to curb police officer discretion and provide a clear definition of proscribed conduct); Planned Parenthood of Se. Pa. v. Casey, 505 U.S. 833 (1992) (striking down a state abortion regulation on its face);21 • the Equal Protection Clause of the Fourteenth Amendment, Romer v. Evans, 517 U.S. 620 (1996) (facially invalidating a Colorado constitutional amendment that prohibited recognition of gay and lesbian citizens as a protected class); and • certain provisions of the First Amendment, see Wash. State Grange, 552 U.S. at 450 n.6 (identifying a “second type of facial challenge in the First Amendment context” that does not apply Salerno’s “no set of circumstances” test). B. In Practice, Courts Do Not Generally Apply the “No Set of Circumstances” Test to Facial Challenges. The U.S. Supreme Court has decided many facial constitutional challenges without applying the NSC formulation, without addressing the controversy about the applicability of this test, and without purporting to set forth any other universal standard for deciding facial challenges. As the Court explained two years ago, referring to authorities both within and outside the First Amendment context, “the distinction between facial and as-applied challenges is not so well defined that it 21 See also Morales, 527 U.S. at 81 (Scalia, J., dissenting) (acknowledging that the Court did not apply the NSC formulation in Casey); Glucksberg, 521 U.S. at 740 (Stevens, J., concurring); Janklow v. Planned Parenthood, 517 U.S. 1174, 1175 (1996) (Stevens, J., concurring in denial of cert.) (referring to the NSC test as “draconian” and arguing that “Salerno’s rigid and unwise dictum has been properly ignored in subsequent cases even outside the abortion context”). 53 has some automatic effect or that it must always control the pleadings and disposition in every case involving a constitutional challenge.” Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876, 893 (2010).22 Indeed, even after Salerno, 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. These “facial challenges hiding in plain sight”23 include challenges to: • Congress’s authority under the Commerce Clause, United States v. Morrison, 529 U.S. 598, 627 (2000); United States v. Lopez, 514 U.S. 549, 559–68 (1995); the Suspension Clause, see Boumediene v. Bush, 553 U.S. 723, 771 (2008); the Qualifications Clause, see U.S. Term Limits, Inc. v. Thornton, 514 U.S. 779, 828–36 (1995); and section 5 of the Fourteenth Amendment, Bd. of Trs. of Univ. of Ala. v. Garrett, 531 U.S. 356, 374 (2001); Kimel v. Fla. Bd. of Regents, 528 U.S. 62, 67, 91– 92 (2000); Fla. Prepaid Postsecondary Educ. Expense Bd. v. Coll. Sav. Bank, 527 U.S. 627, 637–48 (1999); City of Boerne v. Flores, 521 U.S. 507, 532–36 (1997); • federal statutes that offend structural provisions of the Constitution by infringing on powers reserved to the President under Article II, see Free Enter. Fund v. Pub. Co. Accounting Oversight Bd., 130 S. Ct. 3138, 3151–54 (2010); powers reserved to the courts under Article III, see Plaut v. Spendthrift Farm, Inc., 514 U.S. 211, 238–40 (1995); or 22 Scholars likewise have recognized that the NSC formulation is not the controlling standard in many—if not most—cases deciding facial constitutional challenges. See, e.g., Richard H. Fallon, Jr., Fact and Fiction About Facial Challenges, 99 Calif. L. Rev. 915, 919 (2011); Richard H. Fallon, Jr., As-Applied and Facial Challenges and Third-Party Standing, 113 Harv. L. Rev. 1321, 1339 (2000); Dorf, supra, at 239–42. 23 Fallon, Jr., Fact and Fiction About Facial Challenges, 99 Calif. L. Rev. at 935. 54 sovereign powers reserved to the states, see Printz v. United States, 521 U.S. 898, 933 (1997); • discriminatory state laws under the Privileges and Immunities Clause of Article IV, see Lunding v. N.Y. Tax Appeals Tribunal, 522 U.S. 287, 315 (1998); state duties under the Tonnage Clause, Polar Tankers, Inc. v. City of Valdez, 557 U.S. 1, 16 (2009); and state laws preempted by federal law under the Supremacy Clause, Haywood v. Drown, 556 U.S. 729, 737–41 (2009); Am. Ins. Ass’n v. Garamendi, 539 U.S. 396, 413–20 (2003); Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 540–53 (2001); • laws that discriminate or rely on suspect classifications in violation of the Equal Protection Clause, see, e.g., Gratz v. Bollinger, 539 U.S. 244, 270– 76 (2003); Bush v. Vera, 517 U.S. 952, 976–86 (1996); United States v. Virginia, 518 U.S. 515, 539–46 (1996); City of Richmond v. J.A. Croson Co., 488 U.S. 469, 507–08 (1989); and • laws that violate the Free Exercise Clause, see Church of Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520, 542, 545 (1993); or the Establishment Clause of the First Amendment, see McCreary Cnty. v. ACLU, 545 U.S. 844, 864–65 (2005); Santa Fe Indep. Sch. Dist. v. Doe, 530 U.S. 290, 317 (2000); Bd. of Educ. v. Grumet, 512 U.S. 687, 705 (1994). Though by no means exhaustive, this list amply demonstrates that the NSC framework does not provide the substantive legal standard in a vast number of facial challenges. C. Traditional Due Process and Commerce Clause Jurisprudence—Not Salerno—Provides the Framework for Analyzing Amazon’s Facial Constitutional Claims. The NSC language from Salerno could not and did not displace hundreds of specific constitutional tests devised and refined by the Supreme Court over the course of two centuries. The U.S. Supreme Court’s (and other courts’) practice 55 with respect to facial constitutional challenges undermines any argument that NSC is the universal—or even the prevailing—standard governing all such claims. Accordingly, this Court should evaluate Amazon’s facial Due Process and Commerce Clause 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 of Albuquerque, 667 F.3d at 1124 (emphasis added).24 1. Salerno Did Not Change the Test for Facial Constitutional Challenges Under the Due Process Clause. As explained above, courts evaluate whether an irrational statutory presumption violates due process on its face under the test elaborated in cases such as Allen, 442 U.S. 140, and Leary, 395 U.S. 6, which is plainly incompatible with the NSC formulation. While the NSC analysis asks whether any set of circumstances exists in which the statute could be applied constitutionally, Salerno, 481 U.S. at 745, the Allen/Leary standard asks whether, based on 24 See, e.g., People v. Taylor, 9 N.Y.3d 129, 152, 848 N.Y.S.2d 554, 566 (2007) (rejecting application of the NSC analysis in a facial due process challenge to a jury deadlock instruction in a capital case because “neither Salerno nor Stuart adequately addresses [the constitutional] challenge” at issue); Robinson v. City of Seattle, 10 P.3d 452, 458–59 (Wash. Ct. App. 2000) (“Our review persuades us that Salerno is not the appropriate test for taxpayer challenges in Washington. . . . [W]e will apply the test dictated by the nature of the challenge.”). 56 “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.” Leary, 395 U.S. at 36 (emphasis added); accord Allen, 442 U.S. at 158–59; Tot, 319 U.S. at 468; see also Leyva, 38 N.Y.2d at 166, 379 N.Y.S.2d at 34–35 (“Our court has exacted an even higher standard of rational connection. . . . [T]he connection must assure a reasonably high degree of probability that the presumed fact follows from those proved directly.” (emphasis added) (citation and internal quotation marks omitted)). In other words, regardless of whether a statutory presumption can be applied constitutionally in at least one hypothetical circumstance, if the presumed fact does not at least “more likely than not” flow from the proved fact in many or most other circumstances, the statutory presumption violates due process on its face. Importantly, the U.S. Supreme Court has not revisited this standard since deciding Salerno, and federal and state courts continue to apply the Allen/Leary formulation when assessing a challenge to the facial constitutionality of a statutory presumption, rather than applying some iteration of the NSC analysis.25 25 See, e.g., Gov’t of the V.I. v. Parrilla, 7 F.3d 1097, 1102 (3d Cir. 1993) (voiding, on its face, a mandatory statutory presumption of intent to commit mayhem whenever a defendant inflicts injury upon another person); Morgan v. Shirley, 958 F.2d 662, 667, 669–70 (6th Cir. 1992) (addressing statutory presumption that a driver with a certain blood alcohol concentration was under the 57 Similarly, whether a statutory presumption is irrebuttable, and thus facially violative of due process, is not properly determined under the NSC formulation. See Vlandis, 412 U.S. at 452. The Vlandis standard requires courts to invalidate a statute on its face where an irrebuttable presumption is not universally true, regardless of whether that presumption may be true in at least one hypothetical set of facts (the NSC formulation). And federal and state courts have continued to apply this standard even after Salerno.26 influence of intoxicating beverages); United States v. Kim, 884 F.2d 189, 195 (5th Cir. 1989) (addressing statutory presumption that a defendant signed his tax return when his signature appears on the return); State v. James, 315 S.W.3d 440, 448–54 (Tenn. 2010) (addressing mandatory inference of theft from possession of recently stolen property); State v. Gerardi, 677 A.2d 937, 943–45 (Conn. 1996) (voiding mandatory presumption of machine gun possession based on the gun’s location in a vehicle); Commonwealth v. Sattazahn, 631 A.2d 597, 605–06 (Pa. Super. Ct. 1993) (voiding, on its face, presumption that possession and use of an unlicensed firearm evinces intent to commit the crimes of murder, robbery, and/or aggravated assault). 26 See Carlson v. Reed, 249 F.3d 876, 881–82 (9th Cir. 2001) (addressing presumption of non-residency for in-state tuition policy); Buchwald v. Univ. of N.M. Sch. of Med., 159 F.3d 487, 496 & n.9 (10th Cir. 1998); Catlin v Sobol, 93 F.3d 1112, 1117–18 (2d Cir. 1996) (addressing presumption of non-residence for children who have not been abandoned by out-of-state parents); Owens v. State, 724 A.2d 43, 48, 55–56 (Md. 1999); Commonwealth v. Clayton, 684 A.2d 1060, 1063–65 (Pa. 1996) (voiding, on its face, presumption that a single epileptic seizure automatically rendered a driver incompetent for at least one year). 58 2. Salerno Did Not Change The Test for Facial Constitutional Challenges Under the Commerce Clause. The U.S. Supreme Court has not applied the NSC formulation in its post- Salerno decisions addressing facial challenges under the dormant Commerce Clause. See, e.g., W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 199 (1994); C & A Carbone, Inc. v. Clarkstown, 511 U.S. 383, 389–94 (1994); Quill, 504 U.S. at 308; New Energy Co. v. Limbach, 486 U.S. 269, 275–80 (1988). In fact, the U.S. Supreme Court has never applied NSC in any Commerce Clause case. Instead, the Court determines whether a state has overstepped its authority under the Commerce Clause in light of the test applied in Quill, 504 U.S. 298. In Quill, a facial constitutionality case decided five years after Salerno, the Court explained that a “substantial nexus” exists only if the out-of-state retailer has a “physical presence” in the taxing state, such as real estate, employees, or sales representatives engaged in “continuous local solicitation,” and that advertising alone is insufficient. 504 U.S. at 313–14 & n.6. None of the various opinions in Quill (including the majority’s) mentions Salerno or the NSC analysis. Rather, the Court applied the traditional standards derived from Commerce Clause decisions dating back a quarter of a century—and in doing so, the Court confirmed the 59 validity of these standards even after Salerno. Id. at 301, 314–18 (applying and declining invitation to overrule National Bellas Hess, 386 U.S. 753). Indeed, in a number of important respects, the Court’s analysis in Quill was the precise opposite of—and thus fundamentally inconsistent with—the NSC standard. The Court in Quill did not ask whether the statute at issue was constitutional in at least one hypothetical scenario (the NSC formulation). To the contrary, the Court struck down the statute because of its potential for a variety of unconstitutional applications that could offend the Commerce Clause: North Dakota’s use tax illustrates well how a state tax might unduly burden interstate commerce. On its face, North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year. Thus, absent the Bellas Hess rule, a publisher who included a subscription card in three issues of its magazine, a vendor whose radio advertisements were heard in North Dakota on three occasions, and a corporation whose telephone sales force made three calls into the State, all would be subject to the collection duty. What is more significant, similar obligations might be imposed by the Nation’s 6,000-plus taxing jurisdictions. Id. at 313 n.6. The NSC analysis fails to account for the underlying constitutional concerns animating the Court’s decision in Quill: taxing retailers that lack a substantial nexus with the taxing state impermissibly hampers the system of free-flowing interstate commerce envisioned by the Framers. Id. at 312 (“[T]he Commerce Clause and its nexus requirement are informed . . . by structural concerns about the 60 effects of state regulation on the national economy. Under the Articles of Confederation, state taxes and duties hindered and suppressed interstate commerce; the Framers intended the Commerce Clause as a cure for these structural ills.” (citing The Federalist Nos. 7, 11 (Alexander Hamilton))). The Commerce Clause protects the structure and integrity of the national economy by “firmly establish[ing] the boundaries of legitimate state authority to impose a duty to collect sales and use taxes.” Id. at 315 (emphasis added). And the Court has always treated a legislative act that exceeds these carefully guarded boundaries as void on its face. See id. (extolling the “benefits of a clear rule” in state taxation cases).27 After Quill, the Court rejected an invitation to apply the NSC framework in Kraft General Foods, Inc. v. Iowa Department of Revenue and Finance, 505 U.S. 71 (1992), which addressed a facial Commerce Clause challenge to a state tax 27 Relatedly, a law is “facially invalid under the negative Commerce Clause” when it discriminates between in-state and out-of-state interests in a way “that benefits the former and burdens the latter.” Or. Waste Sys., Inc. v. Dep’t of Envir. Quality, 511 U.S. 93, 99, 108 (1994). This “virtually per se” rule of facial unconstitutionality for “discriminatory” restrictions on commerce, id. at 99, has developed separately from the NSC framework, and is irreconcilable with it (there could be hypothetical circumstances under which a discriminatory law might neither benefit a particular in-state interest nor burden a specific out-of-state interest). 61 statute. Contra id. at 82–83 (Rehnquist, C.J., dissenting).28 The Court also has suggested a preference for addressing Commerce Clause challenges on a facial, rather than as-applied, basis. See, e.g., Gonzales v. Raich, 545 U.S. 1, 15–22 (2005) (rejecting as-applied challenge to the Controlled Substances Act because the Act was “well within Congress’s commerce power” and thus, the Act, on its face, created a legitimate, interstate regulatory regime); see also Fallon, Jr., Fact and Fiction, 99 Calif. L. Rev. at 936 (“Raich . . . can be read as rejecting the possibility of successful as-applied challenges to assertions of legislative power under the Commerce Clause and thus as establishing that all attacks must be facial if they are to have any chance at success.”).29 In rejecting Amazon’s facial Commerce Clause claim below, the First Department relied on this Court’s statement in Moran Towing that “[a] party 28 Following the U.S. Supreme Court’s lead in Kraft, numerous state courts have rejected the NSC test in facial Commerce Clause challenges to state tax laws. See, e.g., Caterpillar Inc. v. N.H. Dep’t of Revenue Admin., 741 A.2d 56, 60 (N.H. 1999); Caterpillar, Inc. v. Comm’r of Revenue, 568 N.W.2d 695, 700 n.8 (Minn. 1997) (“[T]he Salerno principle does not accurately characterize the standard for deciding facial challenges to state tax statutes.”); Conoco, Inc. v. Taxation & Revenue Dep’t, 931 P.2d 730, 737–38 (N.M. 1996); see also Robinson, 10 P.3d at 458–59 (“Our review persuades us that Salerno is not the appropriate test for taxpayer challenges in Washington.”). 29 Accord David L. Franklin, Facial Challenges, Legislative Purpose, and the Commerce Clause, 92 Iowa L. Rev. 41, 51–52, 62–68 (2006) (“[Raich] strongly suggests that the Court simply disfavors as-applied challenges altogether in the Commerce Clause area. . . . Raich is, in essence, a facial validation of the Controlled Substances Act for Commerce Clause purposes.”). 62 mounting a facial constitutional challenge [under the Commerce Clause] . . . ‘must establish that no set of circumstances exists under which the Act would be valid.’” 99 N.Y.2d at 448, 757 N.Y.S.2d at 516 (quoting Salerno, 481 U.S. at 745). This Court should revisit Moran Towing’s application of the NSC analysis because it finds no support in Commerce Clause jurisprudence or in Salerno itself (which did not involve the Commerce Clause). See, e.g., Taylor, 9 N.Y.3d at 149, 848 N.Y.S.2d at 564 (Courts “should ‘not . . . apply stare decisis as rigidly in constitutional as in nonconstitutional cases’” because “the Legislature cannot change the constitution to correct an error found by a court.”); People v. Bing, 76 N.Y.2d 331, 338, 559 N.Y.S.2d 474, 477 (1990) (concluding that “sound policy” required the overruling of precedent based on its “antecedents and the experience of the courts in applying it”). In fact, of the more than 100 federal and state decisions applying Quill, only two decisions—Moran Towing and one other case from New Jersey—have analyzed the “substantial nexus” standard with reference to the NSC language in Salerno. See Whirlpool Props., Inc. v. Director, Div. of Taxation, 26 A.3d 446, 466–68 (N.J. 2011). Therefore, this Court should decline to extend the NSC formulation any further than the U.S. Supreme Court or Salerno itself require. 63 Instead, the Court should apply the long-standing dormant Commerce Clause test reaffirmed in Quill. Even Under The “No Set Of Circumstances” Test, The Statute IV. Would Still Be Unconstitutional On Its Face. Finally, even if this Court were to apply the NSC analysis to Amazon’s facial constitutional claims (which it should not, see supra Argument, Section III), the Court still should strike down the Statute on its face because it is unconstitutional in all its applications. As noted above, “every vendor of tangible personal property or services” must collect taxes on New York sales. N.Y. Tax Law § 1131(1) (emphasis added). Before the Statute, the longstanding definition of “vendor” in New York was as broad as the Commerce Clause would allow. For example, a “vendor” already included: • a company maintaining a place of business in New York and making sales to New Yorkers (id., § 1101(8)(i)(B)); • an out-of-state company that solicited business in New York through in- state employees or independent contractors, “and by reason thereof” made sales to New Yorkers (id., § 1101(8)(i)(C)(I)); • an out-of-state company that solicited business in New York by distributing catalogues or other advertising materials, if that company made sales to New Yorkers “by reason of” the catalogues and/or advertising, provided that “such [a company] has some additional connection with the state which satisfies the nexus requirement of the United States constitution” (id., § 1101(8)(i)(C)(II) (emphasis added)). 64 Thus, consistent with the bright-line limitations of the Commerce Clause, the definition of “vendor” before enactment of the Statute would not have included out-of-state retailers whose only connection with the State was through advertising—i.e., retailers who lacked any “additional connection with the state which satisfies the nexus requirement of the United States constitution.” Id. Now, however, the new statutory “presumption” specifically targets those out-of- state retailers that advertise in the State but lack the “additional connection” needed to satisfy the Commerce Clause: retailers without a “substantial nexus” to the State. The Statute thus applies only to this new class of retailers that were never before, under the prior regime, subject to tax-collection obligations in New York. See, e.g., Roe v. Meese, 689 F.Supp. 344, 347–48 (S.D.N.Y. 1988) (examining the constitutionality of an amended statute “in view of its broader purpose” and concluding that the statute’s prohibition on obscene telephone conversations, only as amended, violated the First Amendment); In re Rademaker’s Estate, 2 N.Y.S.2d 309, 315 (N.Y. Sur. 1938) (citing United States v. Arizona, 295 U.S. 174 (1935)). But “no set of circumstances exists under which the [Statute] would be valid,” Salerno, 481 U.S. at 745, because this new class of retailers is entirely outside the State’s constitutional taxing authority and yet forced 65 to collect taxes under the Statute’s irrational and effectively irrebuttable presumption. See Speiser, 357 U.S. at 526; supra Argument, Section I. The State may attempt to rely on hypothetical scenarios in which it could, consistent with the Commerce Clause, impose tax-collection obligations on out-of- state retailers who, for instance, affirmatively rely on in-state employees to solicit sales on their behalf. But those scenarios would be irrelevant under the “no set of circumstances” formulation because such hypothetical entities already were covered by the prior definitions of “vendor,” and thus are not subject to the Statute. N.Y. Tax Law § 1101(8)(i)(C)(I). The State therefore cannot insulate itself from a facial attack under Salerno by drafting an overbroad statute and then relying on hypothetical scenarios drawn from an overbroad class. If NSC applies here (which it does not), then the appropriate inquiry is whether the Statute is unconstitutional “in all of its applications,” Wash. State Grange, 552 U.S. at 449— which necessarily precludes the State from resorting to examples involving retailers to which the Statute does not actually “apply.” Accordingly, the Statute is unconstitutional across the board because it can be applied only to those retailers that lack a “substantial nexus” with the State, making it unconstitutional in all of its applications. CONCLUSION The Statute is unconstitutional on its face because it relies on an irrational, effectively irrebuttable statutory presumption to force 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 due process and the Commerce Clause. The judgments of the courts below to the contrary should therefore be reversed by this Court. Dated: May 21, 2012 Respectfully submitted, Oliver M. Olanoff GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York 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 66