Overstock.com, Inc., Appellant,v.New York State Department of Taxation and Finance, et al., Respondents.BriefN.Y.February 6, 2013 To be argued by: STEVEN C. WU 20 minutes requested Supreme Court, New York County State of New York Court of Appeals OVERSTOCK.COM, INC., Plaintiff-Appellant, -against- THE NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, et al., Defendants-Respondents. . Index No. 107581/08 . AMAZON.COM LLC, et al., Plaintiffs-Appellants, -against- THE NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, et al., Defendants-Respondents. . Index No. 601247/08 . BRIEF FOR RESPONDENTS BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General STEVEN C. WU Special Counsel of Counsel ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondents 120 Broadway New York, New York 10271 (212) 416-6312 (212) 416-8962 (facsimile) Dated: August 17, 2012 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES............................................................. iv PRELIMINARY STATEMENT ........................................................ 1 QUESTIONS PRESENTED ............................................................. 7 STATEMENT OF THE CASE .......................................................... 8 A. Statutory and Regulatory Background.......................... 8 1. Statutory Background............................................. 8 2. DTF’s Guidance on the Statute ............................ 11 B. Factual Background...................................................... 13 C. Procedural History........................................................ 15 ARGUMENT .................................................................................. 18 POINT I - FACIAL INVALIDATION REQUIRES PROOF THAT A STATUTE IS INDISPUTABLY UNCONSTITUTIONAL REGARDLESS OF INDIVIDUAL FACTUAL CIRCUMSTANCES ................................................. 18 POINT II - THE STATUTE COMPLIES WITH THE DORMANT COMMERCE CLAUSE ....................... 26 A. An Out-of-State Seller’s Use of Thousands of New York Residents to Promote Its Products and Solicit Sales Gives the Seller a Substantial Nexus with the State................... 26 B. The Retailers Mischaracterize the Dormant Commerce Clause’s Lenient Test for Nexus...... 31 ii TABLE OF CONTENTS (cont'd) Page 1. The dormant Commerce Clause does not require a substantial physical presence........32 2. The dormant Commerce Clause requires only some physical presence, not any particular type of solicitation. .......................35 3. The Retailers’ objections rely on untested and disputed factual assertions that cannot support a facial challenge. .........37 POINT III - THE STATUTE’S PRESUMPTION OF SOLICITATION SATISFIES THE DUE PROCESS CLAUSE.................................................39 A. The Statute Rationally Presumes Solicitation from the Retailers’ Use of Commissions to Encourage New York Residents to Refer Sales. ....................................40 B. The Presumption Merely Confirms the Normal Rule That a Taxpayer Has the Burden of Proving Its Immunity from Tax Laws.....................................................................47 C. The Retailers’ Arguments Against the Presumption Improperly Rely on Misinterpretations of the Statute and Unsupported Factual Assertions........................50 1. The presumption is rebuttable. .....................51 2. The dormant Commerce Clause does not wholly preclude New York from applying a presumption to out-of-state sellers.............55 iii TABLE OF CONTENTS (cont'd) Page 3. Mere advertising does not trigger the presumption. .................................................. 57 4. The Statute rationally presumes that commission payments will lead to in- state solicitation............................................. 61 CONCLUSION ................................................................................ 65 iv TABLE OF AUTHORITIES Cases Page(s) Arizona v. United States, 132 S. Ct. 2492 (2012)................................................................ 22 Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320 (2006) .................................................................... 38 C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383 (1994) .................................................................... 23 Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158 (2d Cir. 2010) ....................................................... 56 Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876 (2010).................................................................. 20 Cohen v. Cuomo, 19 N.Y.3d 196 (2012).................................................................. 18 Cohen v. State, 94 N.Y.2d 1 (1999)...................................................................... 19 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) .................................................................... 36 County Court of Ulster County v. Allen, 442 U.S. 140 (1979) .............................................................. 23, 41 Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., 512 U.S. 61 (1994).................................................... 21, 22, 53, 54 Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939)...................................................................... 32 Gonzales v. Carhart, 550 U.S. 124 (2007) .................................................................... 21 v TABLE OF AUTHORITIES (cont’d) Cases Page(s) Gonzales v. Raich, 545 U.S. 1 (2005)........................................................................ 24 Illinois v. Hemi Group LLC, 622 F.3d 754 (7th Cir. 2010)...................................................... 56 Kraft General Foods, Inc. v. Iowa Dep’t of Revenue & Fin., 505 U.S. 71 (1992)...................................................................... 23 LaValle v. Hayden, 98 N.Y.2d 155 (2002) ................................................................. 61 Lavine v. Milne, 424 U.S. 577 (1976).............................................................passim Matter of 31/32 Lexington Assocs. v. Tax Appeals Tribunal, 258 A.D.2d 684 (3d Dep’t 1999)................................................. 48 Matter of AT&T v. State Tax Comm’n, 61 N.Y.2d 393 (1984) ................................................................. 58 Matter of Branford House, Inc. v. Michetti, 81 N.Y.2d 681 (1993) ................................................................. 61 Matter of Casse v. N.Y. State Racing & Wagering Bd., 70 N.Y.2d 589 (1987) ............................................... 41, 42, 46, 52 Matter of Grace v. N.Y. State Tax Comm’n, 37 N.Y.2d 193 (1975) ................................................................. 48 Matter of McGee v. Korman, 70 N.Y.2d 225 (1987) ................................................................. 20 Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443 (2003) ..................................................... 19, 20, 27 vi TABLE OF AUTHORITIES (cont’d) Cases Page(s) Matter of Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165 (1995).......................................................... passim Matter of Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85 (2003)...................................................................... 26 Mobile, Jackson & Kansas City R.R. v. Turnipseed, 219 U.S. 35 (1910).................................................... 39, 41, 46, 47 Nat’l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551 (1977) ............................................................ passim Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502 (1990) .................................................................... 21 Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154 (2d Cir. 2011) ....................................................... 54 Paterson v. Univ. of State of N.Y., 14 N.Y.2d 432 (1964).................................................................. 18 People v. Nelson, 69 N.Y.2d 302 (1987).................................................................. 21 People v. Stuart, 100 N.Y.2d 412 (2003).......................................................... 18, 22 Quill Corp. v. North Dakota, 504 U.S. 298 (1992) ............................................................ passim Sabri v. United States, 541 U.S. 600 (2004) .............................................................. 20, 22 Scripto, Inc. v. Carson, 362 U.S. 207 (1960) ............................................................ passim vii TABLE OF AUTHORITIES (cont’d) Cases Page(s) Shaffer v. Heitner, 433 U.S. 186 (1977).................................................................... 56 Standard Pressed Steel Co. v. Wash. Dep’t of Revenue, 419 U.S. 560 (1975).............................................................. 32, 35 Trump v. Chu, 65 N.Y.2d 20 (1985) ................................................................... 48 Tyler Pipe Industries, Inc. v. State of Washington, Department of Revenue, 105 Wash. 2d 318, 715 P.2d 123 (1986) .................................... 34 Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232 (1987).................................................................... 34 United States v. Gainey, 380 U.S. 63 (1965)...................................................................... 41 United States v. Lopez, 514 U.S. 549 (1995).................................................................... 23 United States v. Morrison, 529 U.S. 598 (2000).............................................................. 23, 24 United States v. Raines, 362 U.S. 17 (1960)................................................................ 21, 38 United States v. Salerno, 481 U.S. 739 (1987).............................................................. 19, 21 Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976)........................................................................ 41 Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442 (2008).................................................. 20, 21, 37, 54 viii TABLE OF AUTHORITIES (cont’d) Cases Page(s) West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994) .................................................................... 24 Statutes Tax Law § 12.............................................................................................. 58 § 208............................................................................................ 39 § 1101.................................................................................. passim § 1110............................................................................................ 8 § 1131............................................................................................ 8 § 1132............................................................................................ 8 § 1145.......................................................................................... 39 § 1105............................................................................................ 8 26 U.S.C. § 183............................................................................................ 39 § 672............................................................................................ 39 § 1092.......................................................................................... 39 Miscellaneous Authorities Amazon.com Associates, Tools for Every Site, https://affiliate-program. amazon.com/gp/associates/join/ landing/tools.html ...................................................................... 43 Amazon Products, Affiliate Marketing - 3 Tips to Promote Amazon Products Successfully (Mar. 1, 2012), http://marketofamazon. blogspot.com/2012/03/affiliate- marketing-3-tips-to-promote.html ............................................ 45 AmazonLocal: Help, https://local.amazon.com/help...................... 63 Associates Program Operating Agreement (July 1, 2012), https://affiliate-program.amazon.com/gp/ associates/agreement ................................................................. 43 ix TABLE OF AUTHORITIES (cont’d) Miscellaneous Authorities Page(s) Black’s Law Dictionary 1520 (9th ed. 2009) ................................. 27 Brown, Bruce C., The Complete Guide to Affiliate Marketing on the Web: How to Use and Profit from Affiliate Marketing Programs (2009) ...................................................... 45 Gardner, Rosalind, Make a Fortune Promoting Other People’s Stuff Online: How Affiliate Marketing Can Make You Rich (2007).......................................................................................... 45 Gonzales v. Raich, Joint Appendix (No. 03-1454), 2004 WL 1902226 .............................................. 24 Mazerov, Michael, New York’s “Amazon Law”: An Important Tool For Collecting Taxes Owed on Internet Purchases (Jul. 23, 2009), available at http://www.cbpp.org/files/7-23-09sfp.pdf .................................. 11 Official Amazon Associates Blog, http://amazonassociates.typepad.com....................................... 43 Popper, Nathaniel, For Amazon, Stakes Are High in Sales Tax Fight, Los Angeles Times, July 19, 2011, http://articles.latimes.com/2011/jul/19/business/la-fi- amazon-taxes-20110719 ............................................................ 10 Scripto, Inc. v. Carson, Brief for Appellant, (No. 59-80), 1959 WL 101491 .................................................... 28 PRELIMINARY STATEMENT Amazon and Overstock (“the Retailers”) are two of the largest Internet businesses in the world. Together, they sell hundreds of millions of dollars of products to New York residents every year. In a deliberate effort to generate more sales from New Yorkers, both companies instituted “affiliate” programs under which New York residents promote the Retailers’ products in exchange for a commission from every completed sale. These commission schemes are designed to encourage affiliates to direct as much business as possible to the Retailers-as Amazon promises its affiliates, “The higher your referrals, the greater your earnings will be” (A.R. 1160).1 In 2008, the Legislature amended the Tax Law to require out-of-state sellers with such in-state sales representatives to collect sales and use taxes that are indisputably owed by New York purchasers. The Tax Law has long imposed tax-collection duties on any retailer that solicits business from New York 1 “A.R.” refers to Amazon’s Record on Appeal. “O.R.” refers to Overstock’s Record on Appeal. “A.” refers to Amazon’s Appendix. 2 consumers through independent contractors, agents, or other representatives. The 2008 amendment supplements this well- established rule with a statutory presumption: a new provision, Tax Law § 1101(b)(8)(vi) (“the Statute”), presumes that a New York resident is soliciting business for an out-of-state seller if the resident is paid a commission for directing business to that seller, and those referrals lead to at least $10,000 in annual sales. Thus, under the Statute, an out-of-state seller with commission-based affiliate programs is presumptively required to collect taxes from its sales to New York customers. The sole effect of this tax-collection duty is to place out-of- state sellers like Amazon and Overstock on an equal footing with other New York retailers-including brick-and-mortar stores, all of whom already collect such taxes. As the Legislature intended, the presumption thus ensures that all retailers with a physical presence in New York compete on the quality of their products and services, rather than on an artificial tax advantage. Out-of-state sellers may nonetheless excuse themselves from even this commonplace tax-collection obligation by rebutting the 3 presumption of solicitation, as the Tax Law expressly permits. The Department of Taxation and Finance (“DTF”) has provided detailed guidance on how sellers may demonstrate that their commission-paid affiliates do not in fact engage in solicitation, despite a compensation scheme that is specifically designed to reward such activity. Rather than attempting to rebut the presumption, Amazon and Overstock instead filed these lawsuits, only days after the Statute came into effect, asserting that the Statute is unconstitu- tional both on its face and as applied to the Retailers. Both Supreme Court and the Appellate Division held that the facial claims were meritless. But the Appellate Division remanded the as-applied claims for additional discovery into facts that, in the court’s view, were essential to evaluating the Statute’s constitu- tionality as applied to the Retailers. The Retailers declined to present any additional facts in support of their claims. Instead, they elected to abandon their as- applied claims and now press only their facial challenges here. 4 This Court should reject the Retailers’ request to invalidate the Statute on its face. As this Court and the United States Supreme Court have consistently recognized, facial challenges are disfavored because they seek to invalidate a duly enacted statute in toto, without the benefit of a full development of the facts. The Retailers quibble about the precise formulation of the test for evaluating facial claims, but their arguments elevate semantics over substance. There is no dispute that, however the test is framed, facial chal- lenges require the clearest proof of a statute’s unconstitutionality. In addition, because (as in this case) facial challenges are typically made without the benefit of a fully litigated factual record, arguments about a statute’s facial invalidity cannot rely upon disputed empirical assertions or speculation about future events. Instead, a statute’s facial invalidity must follow directly and unambiguously from the language of the statute alone. The Retailers’ facial claims do not come close to meeting this stringent standard. The Retailers contend that the Statute violates the dormant Commerce Clause because their affiliates’ in- 5 state actions do not in fact give the Retailers an adequate presence in New York. And they further contend that the Statute’s presumption of solicitation from commission payments violates the Due Process Clause because it is both irrational and irrebuttable. These arguments cannot support this facial challenge to the Statute for two basic reasons. First, under both the dormant Commerce Clause and the Due Process Clause, the legislation at issue here is entitled to great deference, and so viewed it plainly survives attack. The dormant Commerce Clause permits a State to extend its taxing power to any entity that has only somewhat more than the slightest presence in the State. In-state solicitation has always satisfied that standard-even when out-of-state sellers have only one or a handful of sales representatives, let alone the thousands that the Retailers have here. Likewise, the Due Process Clause permits a State to enact presumptions for use in the civil context so long as there is a rational basis for connecting the fact proved to the fact presumed. The presumption here easily satisfies that test: it relies on the commonsense notion that 6 affiliates who are paid only when a purchase is made will tend to encourage their contacts to make such purchases. Second, the Retailers’ principal arguments against the Statute improperly rely on speculation and unsupported factual assertions-contentions that are not cognizable in a facial challenge. For example, the Retailers claim that the solicitation presumption will be irrebuttable in practice, but the Statute on its face says that the presumption is rebuttable, and DTF has provided unambiguous guidance on how out-of-state sellers may rebut the presumption. Similarly, the Retailers repeatedly claim that the Statute improperly requires tax collection when their affiliates engage in nothing more than passive advertising of the Retailers’ websites, but the Tax Law and DTF’s guidance on their face exclude mere advertising as a basis for requiring out-of-state sellers to collect taxes. The Retailers’ speculation about the Statute’s future enforcement, and their characterization of their affiliates’ in-state activities, are empirical claims-ones that they have deliberately declined to back up with concrete evidence. The 7 Retailers cannot invalidate a state tax law on its face based upon such unsupported assertions. Accordingly, this Court should affirm the lower courts’ dismissal of Amazon’s and Overstock’s facial constitutional claims. QUESTIONS PRESENTED 1. Should this Court overturn the well-established distinction between facial and as-applied claims, and eliminate the heightened scrutiny to which courts have always subjected attempts to invalidate a state law on its face? 2. Does the dormant Commerce Clause wholly forbid New York from requiring an out-of-state retailer to collect taxes from New York sales, when the retailer pays commissions to thousands of New York residents to encourage them to promote its products and direct customers to the retailer? 3. Does the Due Process Clause forbid a rebuttable civil presumption that relies on the commonsense judgment that sales representatives who are paid only when they generate sales will solicit their contacts to place orders? 8 STATEMENT OF THE CASE A. Statutory and Regulatory Background 1. Statutory Background New York consumers are required to pay a sales tax for products purchased within the State, and a corollary use tax for products purchased from out of state.2 See Tax Law §§ 1105, 1110, 1131(1), 1132(a). The individual consumer is responsible for paying the tax; however, the practical impossibility of collecting from millions of individual purchasers has led New York, like most other States, to require “every vendor of tangible personal property” to collect the tax from the consumer at the point of purchase, and then to remit the tax to the State. Id. § 1131(1); see also id. § 1132(a) (vendor’s duty to collect tax from customer). “The constitutionality of such state schemes is settled.” Nat’l Geographic Soc’y v. Cal. Bd. of Equalization, 430 U.S. 551, 555 (1977). 2 For convenience, this brief uses “sales tax” to refer to both sales and use taxes. 9 For many years, the obligation to collect New York sales taxes has extended to any retailer “who solicits business . . . by employees, independent contractors, agents or other representatives . . . and by reason thereof makes sales to persons within the state of tangible personal property or services,” Tax Law § 1101(b)(8)(i)(C)(I). The Retailers do not challenge the validity of this long-standing provision. In April 2008, the Legislature supplemented this provision by adding the rebuttable presumption that is at issue in this appeal. The new provision (the Statute) provides that a retailer “shall be presumed to be soliciting business through an indepen- dent contractor or other representative” if two conditions are met: (1) under an express agreement, the retailer pays commissions to a New York resident for referring customers to the retailer, and (2) such referrals generate more than $10,000 of sales per year. Tax Law § 1101(b)(8)(vi). The Legislature expressly provided that the Statute’s solicitation presumption “may be rebutted” if the retailer shows that its in-state, commission-paid sales representa- 10 tives do not in fact engage in solicitation that “would satisfy the nexus requirement of the United States constitution.” Id. The Statute serves an important function in facilitating the collection of millions of tax dollars that would otherwise be lost each year. Although use taxes are indisputably owed when a New York resident purchases goods from an out-of-state retailer, the overwhelming majority of those purchases are never reported to the state taxing authorities, and hence taxes on them are never collected. These lost revenues can be substantial: for example, DTF collected approximately $250 million in use taxes from dozens of online retailers during the first three years that the Statute was in effect. See Nathaniel Popper, For Amazon, Stakes Are High in Sales Tax Fight, Los Angeles Times, July 19, 2011, http://articles.latimes.com/2011/jul/19/business/la-fi-amazon- taxes-20110719. The Statute also restores a level playing field between brick- and-mortar stores and their Internet-only counterparts. Although Internet retailers with no physical presence in New York remain free from any duty to collect New York sales taxes, retailers who 11 deliberately use New York residents to promote their products and solicit sales may no longer lure customers away from brick-and- mortar establishments with the offer of tax-free purchases (A.R. 1239, 1248). See, e.g., Michael Mazerov, New York’s “Amazon Law”: An Important Tool For Collecting Taxes Owed on Internet Purchases 2 (Jul. 23, 2009), available at http://www.cbpp.org/files/7-23-09sfp.pdf. 2. DTF’s Guidance on the Statute Shortly after the Statute was enacted, DTF issued two memoranda offering guidance on the meaning and enforcement of the Statute, in accordance with its usual practice regarding new tax legislation. In an initial memorandum (“First TSB-M”),3 DTF explained the two conditions that trigger the Statute’s presumption of solicitation (A.R. 825-826) and offered six hypothetical scenarios to illustrate how the Statute operates. These scenarios confirmed that the solicitation presumption is 3 TSB-M stands for “Technical Services Bureau Memorandum.” (A. 14.) 12 triggered only by commission-based referral agreements (not flat- fee arrangements) (A.R. 828), and that the presumption is not triggered by mere advertising (A.R. 826 (“an agreement to place an advertisement does not give rise to the presumption”)). The First TSB-M also explained in detail that the solicitation presumption may be rebutted if the seller establishes that “the only activity” of its in-state representatives consists of their placement of Internet links from their websites to the seller’s website, and “none of the resident representatives engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller” (A.R. 828). By contrast, the presumption will not be rebutted if in-state representatives do more than simply place links, such as targeting New Yorkers “through the use of flyers, newsletters, telephone calls or e-mails . . . or any other means of solicitation” (A.R. 828-829). DTF subsequently issued a Second TSB-M to “provide[] additional guidance” on rebutting the solicitation presumption (A.R. 831). The Second TSB-M sets forth a “safe harbor” proce- dure whereby sellers can rebut the presumption by (1) including 13 in their business-referral agreements a provision prohibiting their in-state representatives from “engaging in any solicitation activities in New York State that refer potential customers to the seller”; and (2) requiring each in-state representative to submit a signed certification each year, stating that he or she has not engaged in any such solicitation during the prior year (A.R. 831). B. Factual Background Plaintiffs Amazon and Overstock are both Internet retailers that sell millions of dollars of products online (see A.R. 22; O.R. 41). Although both allege that they have no physical presence in New York (A.R. 22, 25; O.R. 38, 41-42), they rely on “affiliate” programs under which they pay hundreds of thousands of independent contractors across the country-including thousands in New York-to drum up sales (see A.R. 27, 411; O.R. 43, 188). Amazon’s affiliates (known as “Associates”) enter into an “Operating Agreement” with Amazon (see A.R. 403-411), under which they agree to refer business to Amazon by placing special links to Amazon’s products on their own websites. Associates are 14 not paid simply for placing those links. Rather, they are paid only after a potential customer “click[s] through” from the Associate’s website to Amazon’s website and then purchases a product; only at that point does the Associate earn a commission in the form of a percentage share of the proceeds of the sale (A.R. 26-27). As Amazon tells its Associates, “[t]he higher [the Associate’s] referrals, the greater [its] earnings will be” (A.R. 1160). According to Amazon, “thousands” of its Associates have provided it with New York addresses (A.R. 27). Overstock’s affiliate program is essentially identical to Amazon’s: affiliates contract directly with Overstock pursuant to a “Master Agreement” (see O.R. 182-188), agree to place links from their websites to Overstock’s website, and are paid only when a customer clicks through those links and completes a purchase from Overstock (O.R. 42, 182-188). In contrast with Amazon, however, Overstock has no current affiliate program in New York. Overstock alleges that it severed its relationship with all of its New York affiliates in May 2008-less than a month after the Statute was enacted-in order to avoid collecting sales taxes 15 (O.R. 45). It is undisputed that Overstock has never collected or remitted any taxes under the Statute. By contrast, Amazon has maintained its Associates Program, and as a result is currently collecting sales taxes from New York consumers. C. Procedural History Before DTF could investigate or audit the solicitation and tax-collection practices of any out-of-state seller, the Retailers preemptively filed the underlying lawsuits, only days after the Statute came into effect. As relevant here, the Retailers’ complaints asserted that the Statute is unconstitutional-both on its face and as applied (A.R. 21; O.R. 37)-for two reasons. First, the Retailers alleged that the Statute violates the dormant Commerce Clause by requiring out-of-state sellers to collect sales taxes even though they did not have a “substantial nexus” with the State. Second, the Retailers alleged that the Statute’s presumption of solicitation from the existence of a commission- based incentive scheme violates due process because it is irrational and “effectively” irrebuttable (A.R. 34; O.R. 45). 16 In January 2009, Supreme Court, New York County, Commercial Division (Bransten, J.), dismissed the Retailers’ facial and as-applied constitutional claims under C.P.L.R. 3211(a)(7) (A. 66; O.R. 13-16). In November 2010, the Appellate Division, First Department affirmed in part and reversed in part Supreme Court’s order. The Appellate Division agreed with Supreme Court that the Retailers had failed to meet the extremely high burden faced by plaintiffs seeking to facially invalidate a duly enacted law (A. 22-23, 45-46). The court concluded that the Statute complied with the dormant Commerce Clause as a facial matter because it required out-of-state sellers to collect sales taxes only when they had a sufficient physical nexus with New York, in the form of in- state affiliates who receive commission payments for referring customers (A. 27-29). The court further found that the Statute’s presumption of solicitation from commission-based business- referral agreements was not only rational, but “extremely plausible”: in-state affiliates would naturally seek to maximize their commissions by generating more sales (A. 32). 17 The Appellate Division, however, reversed Supreme Court’s dismissal of the as-applied claims, concluding that those claims could not be evaluated without more fact-finding into the Retailers’ particular circumstances. The court accordingly remanded for additional discovery into (among other things) whether the Retailers’ affiliates in fact solicit other New Yorkers, or instead merely display passive advertisements; and whether the Retailers can as a practical matter keep track of their affiliates’ activities in New York (A. 39-42). On remand, the Retailers declined to present any additional facts in support of their constitutional claims. Instead, they deliberately abandoned their as-applied claims and agreed “never to refile or otherwise reinitiate” those claims (A. 7; see also O.R. xi.3 (agreeing to discontinue as-applied claims “with prejudice”)). That tactical decision enabled the Retailers to file an appeal as of right to this Court. But it limits this Court’s review to the facial validity of the Statute, without the benefit of a fully developed factual record. And it precludes the Retailers from 18 making fact-based arguments in this Court to support their arguments that the Statute is unconstitutional on its face. ARGUMENT POINT I FACIAL INVALIDATION REQUIRES PROOF THAT A STATUTE IS INDISPUTABLY UNCONSTITUTIONAL REGARDLESS OF INDIVIDUAL FACTUAL CIRCUMSTANCES Although the Retailers initially raised both facial and as- applied challenges to the Statute, they made the tactical decision to abandon their as-applied claims below. Accordingly, the only claim before this Court is the Retailers’ demand that the Statute be invalidated altogether, rendering it incapable of being applied to any out-of-state seller, regardless of its individual circumstances. See People v. Stuart, 100 N.Y.2d 412, 421 (2003). All attempts to strike down a state law as unconstitutional, whether facially or as-applied, already require a showing beyond a reasonable doubt that the statute is illegal. See Cohen v. Cuomo, 19 N.Y.3d 196, 201-02 (2012); Paterson v. Univ. of State of N.Y., 14 N.Y.2d 432, 438 (1964). But a party bringing a facial challenge 19 faces an even heavier burden: it must prove “that ‘in any degree and in every conceivable application,’ the law suffers wholesale constitutional impairment.” Cohen v. State, 94 N.Y.2d 1, 8 (1999). Because of this stringent standard, “[a] facial challenge to a legislative Act is, of course, the most difficult challenge to mount successfully.” United States v. Salerno, 481 U.S. 739, 745 (1987). To evade the “substantial burden” faced by parties making a facial challenge to a statute, Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443, 448 (2003), the Retailers here argue, in essence, that facial claims should be evaluated in the same manner as as-applied claims. See Amazon Br. at 54-55; Overstock Br. at 49, 71-72. But this argument is mistaken. To be sure, there may be a legitimate debate about how to properly charac- terize the distinction between facial and as-applied challenges. But neither the Supreme Court nor this Court has abandoned the distinction altogether-or denied its importance in evaluating constitutional claims. Just a few years ago, this Court reaffirmed the stringent standard applicable to facial challenges in rejecting a facial dormant Commerce Clause claim that an out-of-state 20 business lacked a sufficient nexus with New York-the same claim that the Retailers raise here. See Matter of Moran Towing, 99 N.Y.2d at 445. And the Supreme Court recently confirmed that the distinction between facial and as-applied challenges remains “both instructive and necessary.” Citizens United v. Fed. Election Comm’n, 130 S. Ct. 876, 893 (2010). As relevant here, that distinction rests on two bedrock principles. First, “[f]acial challenges are disfavored,” Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442, 450 (2008), and facial invalidation of a duly enacted law “is to be taken only as a last resort,” Matter of McGee v. Korman, 70 N.Y.2d 225, 231 (1987); see also Sabri v. United States, 541 U.S. 600, 608 (2004) (“facial challenges are best when infrequent”). This disfavor reflects the sweeping nature of facial challenges, which “threaten to short circuit the democratic process” by preventing any attempt to apply a duly enacted law in a constitutional manner. Wash. State Grange, 552 U.S. at 451. The Retailers’ arguments to eradicate the difference between facial and as-applied challenges simply ignore this fundamental concern. 21 Second, plaintiffs bringing a facial challenge are forbidden to rely on speculation or disputed facts about the application of a statute in arguing for the statute’s unconstitutionality. See Wash. State Grange, 552 U.S. at 450. Thus, they cannot speculate that a state agency might in the future implement a statute in an unconstitutional manner. See Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., 512 U.S. 61, 75-76 (1994); see also Ohio v. Akron Ctr. for Reprod. Health, 497 U.S. 502, 514 (1990) (facial challenge may not be “based upon a worst-case analysis that may never occur”). And they cannot assert that the statute “might operate unconstitutionally” under some untested set of facts, or against some hypothetical set of parties. Salerno, 481 U.S. at 745; see also Gonzales v. Carhart, 550 U.S. 124, 168 (2007) (declining to consider every “potential situation that might develop”); United States v. Raines, 362 U.S. 17, 22 (1960) (criticizing “reference to hypothetical cases,” including speculation about applications “to other persons or other situations”); cf. People v. Nelson, 69 N.Y.2d 302, 308 (1987) (“if the actions of the defendants are plainly within the ambit of the statute, the court will not strain to 22 imagine marginal situations in which the application of the statute is not so clear”). Instead, facial invalidation requires the clearest proof that, regardless of the facts of individual cases or parties, the statute “as written” will necessarily result in unconstitutional applications. Milhelm Attea, 512 U.S. at 69; see also Stuart, 100 N.Y.2d at 421 (requiring plaintiffs to prove facial invalidity based only on “the words of the statute on a cold page”). This second restriction is what Salerno’s “no set of circumstances” formulation is intended to capture. Facial challenges by their nature cut off the development of a full factual record-particularly when, as here, the plaintiffs have abandoned any parallel as-applied claims. See Sabri, 541 U.S. at 609. Plaintiffs may not take advantage of the absence of fact-finding to make untested empirical assertions in support of their claims, or to engage in freewheeling speculation about how a statute might be enforced. See Arizona v. United States, 132 S. Ct. 2492, 2509 (2012) (rejecting argument that a provision of Arizona’s immigration statute might “in practice” be unconstitutionally enforced, when the statute “could be read” and enforced in a 23 manner that “avoid[s] these concerns”); County Court of Ulster County v. Allen, 442 U.S. 442 U.S. 140, 155 n.14 (1979) (criticizing lower court’s reliance on “hypothetical, even implausible” examples to facially invalidate a statutory presumption). The cases cited by the Retailers do not say otherwise. In particular, the Commerce Clause cases they cite did not repudiate the traditional distinction between facial and as-applied challenges-let alone express a preference for facial challenges. See Amazon Br. at 61; Overstock Br. at 58. For one thing, those cases did not involve the type of facial, pre-enforcement challenge that the Retailers have brought here; instead, those cases arose from (and frequently relied on the facts of) particular proceedings, including criminal prosecutions, see United States v. Lopez, 514 U.S. 549, 551-52 (1995); government enforcement actions against an individual party, see Quill Corp. v. North Dakota, 504 U.S. 298, 306 (1992); C & A Carbone, Inc. v. Town of Clarkstown, 511 U.S. 383, 388 (1994); civil lawsuits seeking damages, United States v. Morrison, 529 U.S. 598, 604 (2000); challenges to tax assessments, see Kraft General Foods, Inc. v. Iowa Dep’t of Revenue & Fin., 505 24 U.S. 71, 74-75 (1992); license revocations, see West Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 191 (1994); or particular applications of a statute against the plaintiff, see Gonzales v. Raich, 545 U.S. 1, 7-8 (2005); see also Joint App’x, Gonzales v. Raich (No. 03-1454), 2004 WL 1902226, at *34-*36 (asserting only as-applied claims).4 More fundamentally, as the Retailers occasionally admit, these cases are at most silent on whether the constitutional claims are being analyzed on a facial or as-applied basis. See Amazon Br. 4 The Commerce Clause cases involving Congress are also distinct because they involve a fundamentally different analysis of government power. Congress may act only if authorized to do so under a specific provision of the Constitution. See Morrison, 529 U.S. at 607. Thus, whether a federal statute is proper under the Commerce Clause is in some sense always a pre-enforcement question: if Congress cannot establish a source of authority, then it cannot act at all. The dormant Commerce Clause, by contrast, does not define the States’ underlying authority to legislate: there is no dispute here, for instance, that New York has the inherent sovereign power to enact and enforce its tax laws. Rather, the dormant Commerce Clause sets certain limitations on the practical sweep of state statutes. But determining whether a particular state law goes too far is fundamentally a line-drawing question that depends on “a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes.” Quill, 504 U.S. at 315. With only some exceptions (e.g., for facially discriminatory state laws), that “case-by-case evaluation” is by its nature incompatible with a facial challenge. 25 at 52-53, 58; Overstock Br. at 58 n.31, 67-68. The Retailers infer from this silence the Supreme Court’s wholesale rejection of the distinction between facial and as-applied claims. But that inference is entirely at odds with the Court’s continued recognition that the distinction is a meaningful one-and that plaintiffs who choose to bring a facial constitutional challenge must satisfy the most stringent standards to prevail on their claims. As described in more detail below, the Retailers here pay no heed to the heightened burdens placed on parties challenging a state law on its face. Their arguments rely heavily-at times exclusively-upon sweeping factual claims that they have deliberately declined to put to trial, including characterizations of their affiliates’ business and solicitation activities in New York; speculation about DTF’s future administration of the Statute; and assertions about how New Yorkers in fact use the Internet. At the same time, the Retailers refuse to afford the Statute the plain meaning that its unambiguous language clearly expresses. And finally, the Retailers mischaracterize the legal tests applicable to their claims in a futile attempt to rebut the lower courts’ 26 conclusion that they have “not come close to refuting the [Statute’s] presumed constitutionality” (A. 60)-let alone proven the Statute’s unconstitutionality beyond a reasonable doubt. The courts below correctly framed and evaluated the Retailers’ facial challenges to the Statute. This Court should reject the Retailers’ attempt to radically alter the well-established framework for evaluating facial claims and affirm the decisions below. POINT II THE STATUTE COMPLIES WITH THE DORMANT COMMERCE CLAUSE A. An Out-of-State Seller’s Use of Thousands of New York Residents to Promote Its Products and Solicit Sales Gives the Seller a Substantial Nexus with the State. States may tax interstate commerce so long as the tax “is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.” Matter of Zelinsky v. Tax Appeals Tribunal, 1 N.Y.3d 85, 90 (2003) (quotation marks omitted). Only the first 27 prong of this test-the requirement of a “substantial nexus”-is at issue in this appeal. It has long been settled that an out-of-state seller has a substantial nexus with a State so long as it has “demonstrably” more than the “slightest” physical presence there. Matter of Moran Towing, 99 N.Y.2d at 449. And it is equally undisputed that in-state solicitation by sales representatives-i.e., any “attempt or effort to gain business” for the seller, Black’s Law Dictionary 1520 (9th ed. 2009)-satisfies this “not unduly exacting” physical-presence requirement. Matter of Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165, 172 (1995); see also Quill Corp., 504 U.S. at 306 (holding that “in-state solicitation . . . performed by independent contractors” establishes substantial nexus). The courts below correctly held that, under these deferential standards, Amazon and Overstock have “not come close to refuting the [Statute’s] presumed constitutionality” (A. 60; see also A. 27). The Statute expressly conditions out-of-state sellers’ tax- collection responsibilities on a determination that they generate 28 more than $10,000 in annual sales by “soliciting business” in New York “through an independent contractor or other representative.” Tax Law § 1101(b)(8)(vi). Both this Court and the Supreme Court have squarely held that this type of in-state solicitation justifies the imposition of a tax-collection duty on out-of-state sellers. In Scripto, Inc. v. Carson, 362 U.S. 207 (1960), the Supreme Court held that Florida could require an out-of-state manufacturer to collect use taxes for in-state sales when the manufacturer used a handful of Florida residents as “advertising speciality brokers” to solicit business. Like Amazon’s and Overstock’s affiliates, these brokers referred business to the manufacturer in return for a “commission . . . on the sales made,” they were not full-time regular employees; they did not work exclusively for the out-of-state manufacturer; they did not themselves handle any money or execute any sales; and they were assertedly not under the direct control of the manufacturer. Id. at 209-11; Br. for Appellant at 7, Scripto, Inc. v. Carson (No. 59-80) (arguing that manufacturer had “no control whatever over the broker”), 1959 WL 101491. Similarly, in Matter of Orvis, this 29 Court held that an out-of-state vendor could be required to collect taxes when a few of its salesmen-who were residents of Vermont-occasionally traveled into New York to visit existing customers. 86 N.Y.2d at 179. Here, as in Scripto and Matter of Orvis, New York’s Statute comports with the dormant Commerce Clause because it properly hinges out-of-state sellers’ tax- collection obligations on similar in-state activity by the sellers’ representatives. It is hardly an unfair burden to require out-of-state sellers to collect New York sales taxes when they engage thousands of New York residents to promote their products. The Retailers’ affiliate programs necessarily depend on “the benefits and protections the State confers in providing for a stable and secure legal-economic environment.” Id. at 175; see also Nat’l Geographic Soc’y, 430 U.S. at 561 (noting that in-state sales representatives “had the advantage of . . . municipal services fire and police protection”). Without the State’s support of its citizens, the Retailers could not rely upon them to “refer[] a high volume of traffic” to their online stores (A.R. 1160). 30 On the other side of the ledger, the Statute imposes no onerous costs on the out-of-state seller. The out-of-state seller does not pay any money out-of-pocket itself; instead, it merely collects a tax that is indisputably owed by the New York purchaser. See Nat’l Geographic Soc’y, 430 U.S. at 558; Scripto, 362 U.S. at 211. And on this facial challenge there has been no showing that the administrative cost of collecting the tax imposes any extraordinary burdens. Because Amazon and Overstock ship all of their products directly to consumers, every purchaser’s tax jurisdiction is already “self-evident.” Nat’l Geographic Soc’y, 430 U.S. at 558. The relevant taxes for each purchase can be collected through the same electronic payment systems that the Retailers already use. And determining the amount of the tax is “not very hard”: many other Internet retailers (such as Walmart, Target, and Netflix) already calculate and collect taxes for dozens of States (A.R. 1244), and indeed Amazon itself has been collecting taxes from New Yorkers for the past several years without any apparent difficulty. At base, the Statute does nothing more than require certain out-of-state sellers to collect the same taxes that 31 nearly every other retailer doing business in New York already collects. That obligation does not facially violate the dormant Commerce Clause. B. The Retailers Mischaracterize the Dormant Commerce Clause’s Lenient Test for Nexus. Notwithstanding Scripto and Matter of Orvis, the Retailers argue that the Statute violates the dormant Commerce Clause- as a facial matter-because it might encompass in-state solicitation that is insufficient to establish a nexus with New York. This argument rests on two closely related and equally invalid assertions. First, the Retailers contend that only a substantial amount of solicitation can establish an out-of-state seller’s physical presence in New York. Second, the Retailers contend that the dormant Commerce Clause requires a certain type of solicitation: “direct, in-person” marketing in which affiliates “go[] door-to-door,” “roam[] the streets of Brooklyn and other cities, post[] flyers, . . . and hand[] out coupons.” Amazon Br. at 23, 27, 42. Neither of these assertions has any merit-and 32 even if they did, they would nonetheless be irrelevant to this facial challenge. 1. The dormant Commerce Clause does not require a substantial physical presence. This Court has expressly rejected the argument that the dormant Commerce Clause requires “a substantial physical pres- ence.” Matter of Orvis, 86 N.Y.2d at 177. Indeed, even a single in- state representative is sufficient to justify a state’s application of its tax laws to all of an out-of-state seller’s sales in the state. See Standard Pressed Steel Co. v. Wash. Dep’t of Revenue, 419 U.S. 560, 561 (1975); see also, e.g., Nat’l Geographic Soc’y, 430 U.S. at 554 n.2 (eight advertising salesmen); Scripto, 362 U.S. at 209 (ten independent contractors); Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62, 64, 67-68 (1939) (two in-state contractors). Moreover, that single in-state representative’s activities need not even be related to the activity being taxed; it suffices that the out-of-state seller has some physical presence in the State, even if that presence has nothing to do with its sales activities. See Matter of Orvis, 86 N.Y.2d at 174; Nat’l Geographic Soc’y, 430 U.S. at 561. 33 Here, Amazon (like Overstock, before it canceled its affiliate program in New York) does not have just a single New York affiliate-or two, or eight, or ten. Instead, the Retailers have contracted with thousands of New York residents (A.R. 27), and paid them commissions for “referring a high volume of traffic” to their online stores (A.R. 1160 (emphasis added)). Moreover, far from being unrelated to the activity being taxed, Amazon’s and Overstock’s affiliates encourage the very same activity for which the Tax Law requires collection: purchases of the Retailers’ products. This substantial and directly related in-state activity easily meets this Court’s requirement that out-of-state sellers have “demonstrably more than a slightest presence” in New York. Matter of Orvis, 86 N.Y.2d at 178 (quotation marks omitted). In a variation of the argument that a substantial presence is required, Amazon contends that the dormant Commerce Clause imposes the separate requirement that an out-of-state seller’s in- state activity be “significantly associated” with the seller’s “ability to do business in New York”; indeed, Amazon suggests that the in- state activity must be essential for the seller’s in-state business. 34 Amazon Br. at 45. Amazon hinges this contention on language from Tyler Pipe Industries, Inc. v. Washington State Department of Revenue, 483 U.S. 232, 250 (1987). But the language that it cites is actually a quotation from the lower state court’s characterization of a state regulation-not part of a constitutional rule. See Tyler Pipe Indus., Inc. v. State of Wash., Dep’t of Revenue, 105 Wash. 2d 318, 323, 715 P.2d 123, 126 (1986). Indeed, requiring that in-state activity be “significantly associated” with an out-of-state seller’s in-state sales would conflict with National Geographic Society’s express holding that there need not be any association “between the activity of the seller sought to be taxed and the seller’s activity within the State,” 430 U.S. at 560-let alone the significant association that Amazon asserts is required here.5 5 For this reason, it is also immaterial whether, as Amazon contended below, its affiliates’ referrals constitute only 1.5% of Amazon’s New York sales, or more (A.R. 198-199). Even that fraction provides more of a connection to Amazon’s in-state business than National Geographic Society requires. And, as the Appellate Division found, even 1.5% of Amazon’s revenues may (continued on next page) 35 2. The dormant Commerce Clause requires only some physical presence, not any particular type of solicitation. Similarly, there is no merit to the Retailers’ assertion that any particular type of solicitation is required to establish an out- of-state seller’s nexus. To be sure, the Supreme Court has adopted a bright-line rule that one type of solicitation is categorically insufficient to establish nexus: namely, solicitation solely through the United States mail or common carrier. Quill, 504 U.S. at 314- 15. But the Court has never adopted the opposite principle that the Retailers espouse here: that only certain types of solicitation are sufficient. Indeed, States may impose tax-collection duties on out-of- state sellers whose physical presence does not involve any solicitation at all. See Matter of Orvis, 86 N.Y.2d at 180-81 (upholding tax-collection duty based on post-sale technical support); Standard Pressed Steel, 419 U.S. at 561 (upholding tax based on provision of customer service). And even the cases that still be a substantial absolute number given Amazon’s enormous quantity of sales (A. 41 n.6). 36 did rely on in-state solicitation did not consecrate the sales practices of the time as the only way that an out-of-state seller could establish a physical presence in a State. Rather, the cases considered whether the concrete evidence about each seller’s in- state activities-whatever their form-amounted to a measurable amount of physical presence in the State. See Matter of Orvis, 86 N.Y.2d at 176; Nat’l Geographic Soc’y, 430 U.S. at 556. Limiting the States’ taxing power to only particular types of in-state solicitation would “open the gates to a stampede of tax avoidance” by allowing sophisticated commercial parties to technically structure their in-state activities in a way that shelters them from taxation, without affecting their practical presence in the State. Scripto, 362 U.S. at 211. Evaluations of state tax laws under the dormant Commerce Clause do not rest on such formalism. Cf. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 281 (1977). Solicitation practices have changed significantly over time: from “phalanx[es] of drummers”; to peddlers rolling their carts from farm to farm; to automobiles, telephones, and fax machines in the last century; and to e-mails and websites in the 37 current one. Quill, 504 U.S. at 308. Whatever its form, the question is not whether an out-of-state seller’s in-state solicitation accords with any previously approved model. Rather, “[t]he test is simply the nature and extent of the [seller’s] activities” in New York. Scripto, 362 U.S. at 211. And here, the Retailers’ deliberate engagement of thousands of New Yorkers to promote their products satisfies that deferential standard. 3. The Retailers’ objections rely on untested and disputed factual assertions that cannot support a facial challenge. Finally, even if the Retailers were correct in interpreting the dormant Commerce Clause cases as imposing a far more stringent test than this Court or the Supreme Court has ever approved, that argument would still be insufficient to invalidate the Statute as a facial matter. It is undisputed that the Statute has a “plainly legitimate sweep,” Wash. State Grange, 552 U.S. at 449 (quotation marks omitted), because it unquestionably encompasses solicita- tion that would be sufficient to establish nexus under the dormant Commerce Clause (see A. 29). As a result, the Retailers’ argument would at most show that in some circumstances the Statute might 38 cover solicitation that is not sufficiently substantial. But it is an empirical question whether any actual out-of-state sellers-let alone “many or most” of them (Amazon Br. at 56)-employ their New York affiliates for such minimal in-state activity. Indeed, the available evidence about these Retailers’ New York affiliates suggests that in both degree and kind their solicitation activities are substantial enough to satisfy even the Retailers’ unjustifiably strict test. See infra at 44-45; see also Raines, 362 U.S. at 21 (plaintiff cannot complain about statute’s unconstitutionality as applied to others if the statute would be constitutional as applied to him). Further factual development would be required to determine whether and to what extent the Statute falls short of the standard proposed by the Retailers. And in the absence of those additional facts, even assuming that the Retailers have correctly interpreted the dormant Commerce Clause (and they have not), the Statute cannot be invalidated in toto as a facial matter. See Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320, 331 (2006) (holding that lower court 39 should “not have invalidated the law wholesale” when only a few applications would have raised constitutional concerns). POINT III THE STATUTE’S PRESUMPTION OF SOLICITATION SATISFIES THE DUE PROCESS CLAUSE Presumptions are a common and uncontroversial feature of many state statutes, including tax laws, and they are regularly upheld.6 See Mobile, Jackson & Kansas City R.R. v. Turnipseed, 219 U.S. 35, 42 (1910). Here, the Statute’s presumption of in-state solicitation from the existence of a commission-based incentive scheme complies with due process for two independent reasons. First, the presumption draws a rational connection between the fact proved (commissions paid only for completed purchases) and 6 See, e.g., Tax Law § 1101(b)(8)(iii) (presumption that person is “regularly or systematically delivering property or services” within the State); id. § 1145(a)(viii) (presumption of knowledge as to possession of untaxed cigarettes); id. § 208(9) (presumption regarding taxpayer’s “entire net income”); 26 U.S.C. § 672(c) (presumption regarding grantors of trusts); id. § 183(d) (presumption as to gross income); id. § 1092(c)(3) (presumption regarding personal property). 40 the fact presumed (solicitation to encourage more purchases, and thus more commissions). Second, the sole effect of this presumption is to define the party that bears the burden of production. This kind of default evidentiary rule rarely raises constitutional concerns-particularly when, as here, the rule merely clarifies, rather than adjusts, the parties’ pre-existing burdens of proof. A. The Statute Rationally Presumes Solicitation from the Retailers’ Use of Commissions to Encourage New York Residents to Refer Sales. The Statute’s solicitation presumption relies on a commonsense inference: when an out-of-state seller pays New York residents only for referring customers who in fact complete an order with that seller, then at least some of those residents will be encouraged to solicit business for that seller. As the Appellate Division correctly found, this presumption of solicitation is not just rational-it is an “extremely plausible” inference from a form of compensation that is expressly designed to encourage that very activity (A. 32). 41 It is well established that a civil presumption must be upheld so long as it is not “purely arbitrary,” Turnipseed, 219 U.S. at 43-i.e., “there is a rational connection between the facts proven and the fact presumed,” Matter of Casse v. N.Y. State Racing & Wagering Bd., 70 N.Y.2d 589, 595 (1987). This rational- basis test is a highly deferential one. The rationality of a presumption is by its nature an empirical determination, and therefore one that the Legislature is uniquely suited to make. Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 28 (1976). And even when a court does consider the constitutional validity of a statutory presumption, it necessarily depends upon facts-“the stuff of actual experience”-to evaluate whether a statutory presumption accurately reflects the true nature of a particular industry, practice, or area. United States v. Gainey, 380 U.S. 63, 67 (1965); Allen, 442 U.S. at 140, 163 (1979) (presumptions must be evaluated “as applied to the record before the Court”).7 7 The Retailers rely on criminal cases to argue that a higher standard than mere rationality applies here. See Amazon Br. at 25-26, 55-56; Overstock Br. at 77. But both this Court and the (continued on next page) 42 Under this standard, the Statute’s solicitation presumption is rational. The Statute presumes that a commission incentive scheme, under which affiliates are paid a percentage of completed sales orders, will encourage solicitation-i.e., attempts to direct business to an out-of-state seller. The connection between these two facts is straightforward: a commission incentive scheme rewards the very outcome-a completed purchase-that solicitation is intended to achieve. Amazon’s affiliate program highlights the close link between commission incentives and solicitation. Amazon’s affiliates are not paid when they merely place “advertising links“ to Amazon’s products on their websites, as Amazon suggests. Amazon Br. at 26; see also Overstock Br. at 7 (stating, incorrectly, that “[a]ffiliates are paid by commission for the placement of the advertisement on their sites“).8 They are not paid when visitors Supreme Court have made clear that civil presumptions do not merit such heightened scrutiny. See Lavine v. Milne, 424 U.S. 577, 585 (1976); Matter of Casse, 70 N.Y.2d at 595. 8 Amazon also incorrectly states that affiliates only “advertise the website Amazon.com.” Amazon Br. at 10. To the (continued on next page) 43 see the link or banner advertisement for Amazon’s products. And they are not even paid when visitors “click on the Amazon.com link” and arrive on Amazon’s webpage. Amazon Br. at 27. Instead, affiliates are paid only after (1) they refer a customer to Amazon through an affiliate link, and (2) that customer actually purchases a product from Amazon (A.R. 1159-1160; O.R. 185-186). That structure closely parallels the compensation given to salespeople who indisputably engage in solicitation for purposes of the dormant Commerce Clause. Like Amazon’s affiliates, the salespeople in Scripto directed customers to an out-of-state seller and were paid only when the customer consummated an order contrary, most affiliates choose to promote specific products that are sold on Amazon. See Associates Program Operating Agreement (July 1, 2012) (“The purpose of the Program is to permit you to advertise Products on your site”), https://affiliate- program.amazon.com/gp/associates/agreement (last visited Aug. 16, 2012); Amazon.com Associates, Tools for Every Site (offering “Product Links,” “Banners” for particular “Amazon product categories and promotions,” and a template online store to “Feature Amazon Products”), https://affiliate-program. amazon.com/gp/associates/join/landing/tools.html (last visited Aug. 16, 2012); The Official Amazon Associates Blog (providing additional compensation incentives to encourage affiliates to promote certain products), http://amazonassociates.typepad.com (last visited Aug. 16, 2012). 44 with that seller-outside the salespeople’s presence and without their involvement. See 362 U.S. at 209-10. Common sense dictate s that Amazon’s affiliates, like other salespeople, will respond to materially identical commission incentives by doing precisely what they are paid to do: encourage people to purchase products from Amazon. Indeed, solicitation is not only a rational consequence of a commission incentive scheme; for Amazon, at least, it is the intended and actual consequence. For example, Amazon encourages its school affiliates to promote Amazon’s products “far and wide to parents, teachers, students, family members, friends, acquaintances, and anyone else who might like to support the school” (A.R. 1163)-including through targeted e-mails that encourage the recipients to “shop at Amazon” (A.R. 1167). In response to this and other similar encouragement, a New York public school affiliate actively urges “families and friends” to use the school’s referral link to “order through Amazon” (A.R. 1174). A New York synagogue affiliate distributes bulletins to its members urging them to “preorder ‘Harry Potter and the Deathly 45 Hallows’” and “tax software” from Amazon (A.R. 1186). And a cottage industry of books and websites advises affiliates to do precisely what commission payments encourage them to do: reach out to people and direct them to purchase products from Amazon.9 As the actual implementation of Amazon’s affiliate program makes clear, an affiliate who solicits on behalf of an out-of-state seller is not running rogue; it is simply fulfilling the intended purpose of the program. To be sure, not every affiliate will respond to the commission incentive by engaging in solicitation. See Overstock Br. at 42. But a similar objection could be raised against all of the other rebuttable presumptions upheld by this Court and the Supreme Court. Not every horse trainer will be 9 See, e.g., Bruce C. Brown, The Complete Guide to Affiliate Marketing on the Web: How to Use and Profit from Affiliate Marketing Programs 41, 74 (2009) (urging affiliates to “sell to your existing customers” and “drive customers to your affiliate links”); Rosalind Gardner, Make a Fortune Promoting Other People’s Stuff Online: How Affiliate Marketing Can Make You Rich 49 (2007) (“Promoting quality products offered by reputable merchants is crucial to the success of your affiliate business.”); Amazon Products, Affiliate Marketing - 3 Tips to Promote Amazon Products Successfully (Mar. 1, 2012), http://marketofamazon. blogspot.com/2012/03/affiliate-marketing-3-tips-to-promote.html (last visited Aug. 8, 2012). 46 responsible for his horse’s failed drug test-but in Casse this Court held that the Racing and Wagering Board could rely on just such a presumption to suspend a trainer’s license, without any demonstration of the trainer’s supervision practices or history of illegal doping. 70 N.Y.2d at 595-96. A railroad employee’s negligence may not be the cause of every railroad accident-but in Turnipseed the Supreme Court held that a state statute could presume such negligence from the mere fact that somebody had been injured by a railroad car. 219 U.S. at 43. And a person may quit his job for any number of reasons-but in Lavine v. Milne the Court upheld a New York law that presumed that a welfare applicant quit his job specifically to qualify for benefits if he applied within seventy-five days of becoming unemployed. 424 U.S. 577, 587 (1976). Despite the imperfect fit between the facts proved and the facts presumed in these cases, each of these presumptions was upheld because there was some rational basis for associating the fact proved with the fact presumed. The Statute’s solicitation presumption easily satisfies this deferential test. As the Appellate 47 Division recognized, affiliates “seek, quite frankly, to make money” (A. 32). And under a commission incentive scheme that pays affiliates only when a referral results in a completed purchase, the most effective way for affiliates to make money is to actively encourage potential customers to purchase products from the out-of-state seller. That type of sales-driven promotional activity is solicitation under any definition of the word. B. The Presumption Merely Confirms the Normal Rule That a Taxpayer Has the Burden of Proving Its Immunity from Tax Laws. Independently of the presumption’s rationality, the Statute’s solicitation presumption should be upheld because it merely clarifies what has always been the case: the taxpayer bears the burden of showing that it has no duty to collect (or pay) a tax. The only legal consequence of a rebuttable presumption is to require one party rather than another to produce evidence of the dispos- itive facts in the first instance. See Turnipseed, 219 U.S. at 43. “Outside the criminal law area, where special concerns attend,” such burden-shifting rarely raises constitutional problems. Lavine, 48 424 U.S. at 585. And a state law’s constitutionality is particularly secure when a statutory presumption merely confirms a pre- existing burden of production, rather than shifting it. Here, the Statute’s solicitation presumption implicates no due process concerns because a business disputing its tax responsibilities in New York has always borne the burden of proof. See id. at 584. This is true whether the business challenges an assessment, seeks a refund, or files a plenary action questioning DTF’s authority. See Trump v. Chu, 65 N.Y.2d 20, 25 (1985) (constitutional challenge to tax statute); Matter of Grace v. N.Y. State Tax Comm’n, 37 N.Y.2d 193, 195 (1975) (challenge to tax assessment); Matter of 31/32 Lexington Assocs. v. Tax Appeals Tribunal, 258 A.D.2d 684, 685 (3d Dep’t 1999) (refund suit). In other words, if (for example) DTF had sought to compel the Retailers to collect sales taxes because of their affiliates’ in- state solicitation, then even without the Statute the Retailers would have borne the burden of proving that their affiliates’ in- state activities did not establish a sufficient nexus with New York. See Matter of Orvis, 86 N.Y.2d at 178 (holding that out-of-state 49 business failed to “sustain[] its definite burden of establishing immunity under the Commerce Clause from that tax collection obligation”). The Statute’s solicitation presumption merely makes this burden explicit and clarifies when that burden must be met- i.e., after the out-of-state seller establishes a commission-based incentive scheme. No constitutional provision forbids such a clarification. See Lavine, 424 U.S. at 583-84 & n.9. It makes sense to impose on out-of-state sellers such as Amazon and Overstock the burden of showing that they lack a substantial nexus with New York. The Statute requires out-of- state sellers to collect use taxes based on the presumed in-state activities of their commission-paid affiliates. Such sellers are better informed than the state taxing authorities about both the identities and activities of their New York affiliates-they are the ones who chose to create the affiliate relationship; they set the rules for what affiliates may or may not do; and they alone maintain the contact information that permits them to communicate with and send payments to their in-state representatives. Whatever difficulties out-of-state sellers may 50 face in monitoring their affiliates’ New York activities-and, as noted below, Amazon and Overstock seriously exaggerate those difficulties-there can be no question that DTF would face even more substantial obstacles. The Statute’s solicitation presumption, like the burden of proof that existed before the Statute was enacted, sensibly reflects out-of-state sellers’ superior knowledge of their in-state affiliates and reasonably charges them with the task of providing that information in the first instance. C. The Retailers’ Arguments Against the Presumption Improperly Rely on Misinterpretations of the Statute and Unsupported Factual Assertions. The Retailers’ objections to the presumption all rely on arguments that are simply not cognizable in a facial challenge. See supra Point I. Rather than giving the unambiguous language of the Statute its plain meaning, the Retailers instead strain to give the Statute an unconstitutional reading. Rather than interpreting the Statute as written, the Retailers instead speculate that the Statute might in the future be applied in an unconstitutional manner. And rather than basing their 51 arguments on legal principles, the Retailers instead rely on unsupported factual characterizations about their affiliates, their business practices, and indeed about “the realities of the internet itself.” Overstock Br. at 79. In an as-applied challenge, these speculations and factual claims would require evidentiary support and a trial to resolve disputes; in a facial challenge, they have no place whatever. 1. The presumption is rebuttable. The Retailers repeatedly assert that the Statute’s solicitation presumption is “effectively irrebuttable,” and that the presumption must therefore be evaluated according to a stricter standard than mere rationality. See, e.g., Amazon Br. at 1, 21. But they cannot show-as they must-that the presumption is irrebuttable on its face. The Statute itself expressly says that the presumption “may be rebutted.” Tax Law § 1101(b)(8)(vi). And DTF has issued several guidance documents explaining how out- of-state sellers may rebut the presumption of solicitation (e.g., A.R. 828). Indeed, DTF has gone so far as to provide an explicit “safe harbor” under which out-of-state sellers may preemptively 52 rebut the presumption by simply amending their business-referral agreements to prohibit solicitation and collecting certifications from their affiliates that no solicitation has occurred (A.R. 831).10 As a facial matter, then, the Statute unambiguously provides a “fair opportunity” for out-of-state sellers to show that their commission incentive schemes do not lead to in-state solicitation. Casse, 70 N.Y.2d at 595. The Retailers nonetheless assert that the solicitation presumption is irrebuttable in practice. For example, Overstock asserts that DTF’s “safe harbor” is inadequate because DTF may reject a particular out-of-state seller’s attempt to comply with the safe harbor-and because DTF may change the requirements of the safe harbor in the future. Overstock Br. at 84-85. And Amazon claims that it “cannot possibly collect sufficient evidence to prove . . . the lack of any in-state solicitation” because it has “no way of 10 Newegg.com, one of the largest online-only retailers in the country, has for years included the necessary language to rebut the presumption in its agreements with its New York affiliates (see Addendum 9-11). 53 ascertaining what, if any, independent business activities” its affiliates “might undertake from day to day.” Amazon Br. at 5, 12. As an initial matter, these assertions are both unsupported and implausible. Overstock offers no evidence for its speculation that DTF will violate its existing guidance documents on the safe harbor (A.R. 828-829, 831). And Amazon’s bald factual assertion of inevitable ignorance is at the very least inconsistent with the Retailers’ detailed restrictions on their affiliates’ activities, including (among a long list of other examples) prohibitions on the material that affiliates can offer on their websites (A.R. 403; see also A.R. 405-407; O.R. 183-184). The Retailers presumably monitor and enforce these lengthy terms in some manner. Whatever these assertions’ validity, however, it is undisputed that they are at base empirical claims-and such claims are not cognizable in a purely facial challenge like this one. See Milhelm Attea, 512 U.S. at 69 (holding that facial challenge is restricted to “those alleged defects that inhere in the regulations as written”). Neither Amazon nor Overstock has ever even attempted to rebut the Statute’s solicitation presumption. As a 54 result, all of their assertions about the effective or practical conclusiveness of the presumption rest on sheer speculation about “consequences that, while possible, are by no means predictable.” Id. Until Amazon or Overstock actually attempts a rebuttal, their concerns about how the Statute might be applied to them are “hypothetical or imaginary” at best-and wholly inadequate to facially invalidate a duly enacted tax law. Wash. State Grange, 552 U.S. at 450 (quotation marks omitted); see also Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154, 175 (2d Cir. 2011) (disregarding plaintiffs’ speculation about how DTF might enforce a newly enacted Tax Law provision). The Appellate Division remanded this case for additional discovery on, inter alia, whether the Retailers are in fact unable to keep track of their affiliates (A. 42, 46). Amazon and Overstock expressly declined to present further facts to support their assertions. They cannot now rely on those very same unsupported factual claims to facially invalidate the Statute. 55 2. The dormant Commerce Clause does not wholly preclude New York from applying a presumption to out-of-state sellers. Overstock contends that “the allegedly rebuttable nature of the presumption is unavailing” because, under the dormant Commerce Clause, “an out-of-state seller with no substantial nexus in the State” cannot even be required to rebut the presumption in the first instance. Overstock Br. at 43, 45. But this argument simply begs the question. The entire purpose of the Statute and its presumption is to determine whether an out-of- state seller has a substantial nexus with New York. An out-of- state seller cannot resist the application of the Statute by assuming the very issue that the rebuttable presumption is intended to resolve. In any event, this argument against the presumption rests on a category error. An objection to being haled into a foreign jurisdiction-whether to answer a lawsuit or to rebut a presumption-sounds in due process, not interstate commerce. See Quill, 504 U.S. at 307 (noting that due process governs whether an out-of-state seller may be required “to defend [a] suit 56 in that State”); Shaffer v. Heitner, 433 U.S. 186, 218 (1977) (Stevens, J., concurring in judgment) (due process determines whether “a particular activity may subject a person to the jurisdiction of a foreign sovereign”). And it is well-settled that, under the Due Process Clause, States may extend their jurisdiction to any out-of-state seller who ships a substantial quantity of products into the State, even in the absence of any physical presence. Quill, 504 U.S. at 308; Illinois v. Hemi Group LLC, 622 F.3d 754, 757-58 (7th Cir. 2010); Chloé v. Queen Bee of Beverly Hills, LLC, 616 F.3d 158, 170-71 (2d Cir. 2010). If the rule were otherwise, as Overstock contends, then the dormant Commerce Clause would preclude the State or DTF from even suing an out-of-state seller in New York-or requiring, in such a suit, that the seller bear the burden of proving its lack of substantial nexus. No case cited by Overstock supports such a rule. See Matter of Orvis, 86 N.Y.2d at 178 (imposing on out-of- state seller the burden of “establishing immunity under the Commerce Clause”). 57 Here, the Statute’s presumption is triggered only when an out-of-state seller deliberately chooses to enter into contractual relationships with New York residents to promote the seller’s products in exchange for a commission for each completed sale. In other words, the Statute does not extend to simply every seller in the United States regardless of its connection to New York; instead, it is carefully limited to that subset of out-of-state sellers who have intentionally chosen to engage New York representatives in some capacity. Whether or not that presence is enough to require all of those sellers to comply with the substantive requirements of the Tax Law, it is at least sufficient to require those sellers to submit to an administrative or judicial process to determine whether such compliance is required. 3. Mere advertising does not trigger the presumption. The Retailers next contend that the Statute’s presumption is triggered when New York residents merely post “advertisements” for out-of-state sellers on their websites. See Amazon Br. at 3, 4, 21, 23; Overstock Br. at 12, 28, 83. Like their argument about the 58 presumption’s rebuttability, this argument also ignores the plain language of the Tax Law. The Statute does not refer to advertising; instead, it unambiguously bases the presumption on the use of commissions to encourage referrals. See Tax Law § 1101(b)(8)(vi). And a related provision of the Tax Law, which predates the Statute, expressly precludes reliance on Internet advertising alone to impose tax-collection duties on out-of-state sellers. See Tax Law § 12(c). DTF’s guidance is consistent with this plain statutory language: the First TSB-M confirms that “an agreement to place an advertisement does not give rise to the presumption” (A.R. 826). See Matter of AT&T v. State Tax Comm’n, 61 N.Y.2d 393, 400 (1984) (deferring to State Tax Commission’s interpretation and application of statutory term). The Retailers’ insistence that the Statute covers mere advertising not only ignores this plain statutory and regulatory language; it also elides the distinction between traditional advertising and commission-based referral programs. Overstock, for example, asserts without citation that “[w]hether paid for by commission, flat fee or otherwise, an advertisement is still just 59 that-an advertisement.” Overstock Br. at 40. But, as Overstock elsewhere concedes, advertising and commission-paid referral programs differ substantially in what they compensate-and hence what they encourage. “[T]raditional advertisers” are paid a “flat fee” regardless of an advertisement’s success rate. Overstock Br. at 8. This flat-fee compensation model reflects traditional advertising’s focus on the passive display of information to the audience: because there is typically no way to track whether a billboard or television commercial leads to an actual order, traditional advertisers are paid principally to disseminate information about a retailer or its products. Commission-based referral programs adopt a different model. In contrast to traditional advertising, the purpose of such schemes is not to encourage mere passive displays of information; thus, traveling salesmen do not get paid based solely on the number of houses they visit, and affiliates do not get paid merely for placing banner advertisements on their websites. Rather, the schemes induce completed purchases, and the manner in which 60 commissions are calculated and distributed reinforces this incentive: salesman and affiliates are paid only when the seller actually executes a sale to a referred customer. Thus, the very fact that the Statute premises its presumption on the existence of a commission-based referral agreement further reinforces that it does not cover traditional advertising. The Retailers nonetheless contend that the Statute’s use of the phrase “commission or other consideration” necessarily means that the presumption of solicitation is triggered by any form of payment-including the flat fees that compensate traditional advertisers. Overstock Br. at 29; Amazon Br. at 32. But that is not the most natural reading of the phrase, and DTF has declined to interpret the presumption in that manner (see O.R. 63). When read in context, the term “other consideration” is most naturally understood in conjunction with the word “commission” to refer to similar forms of compensation-for example, a percentage of sales proceeds in the form of store credit or payment in kind. By contrast, the Retailers’ interpretation would improperly render superfluous the initial reference to “commission,” which would be 61 encompassed by the Retailers’ broad reading of “consideration.” See Matter of Branford House, Inc. v. Michetti, 81 N.Y.2d 681, 688 (1993) (“A construction rendering statutory language superfluous is to be avoided.”). Particularly in a facial challenge, courts should not strain to read a statute in a way that will “needlessly render it unconstitutional.” LaValle v. Hayden, 98 N.Y.2d 155, 161 (2002). Thus, neither the plain language of the Statute nor DTF’s interpretation of that language supports the Retailers’ view that passive advertisements trigger the Statute’s presumption of solicitation. 4. The Statute rationally presumes that commission payments will lead to in-state solicitation. Finally, even assuming that affiliates engage in solicitation to earn more commissions, the Retailers contend that there is no reason to believe that New York affiliates will solicit in New York. Amazon contends that the Internet’s “geographically untethered nature” means that New Yorkers’ websites “generally are no more likely to target or reach New Yorkers than websites operated by individuals physically located outside of New York State.” Amazon 62 Br. at 30. And Overstock similarly contends that “the realities of the internet itself” do not restrict affiliates to soliciting only “their friends, neighbors and colleagues.” Overstock Br. at 79. These claims are again nothing more than bald factual assertions that have no place in a facial challenge to a duly enacted tax law. The Retailers offer no empirical support for their categorical statements about “the realities of the internet” or the online activities of their thousands of affiliates. To the contrary, the limited record that was formed before the Retailers abandoned their as-applied claims uncovered several examples where New York affiliates (including schools and synagogues) did solicit New York residents-both online and offline. See supra at 44-45. As these examples show, it defies common sense and experience to believe (as the Retailers do) that New Yorkers go on the Internet only to communicate with people outside of New York. Huge national corporations like Amazon and Overstock may have an “inherent disregard for internet users’ geographic location.” Overstock Br. at 79. But for many people and businesses, the Internet is merely an extension of their local 63 presence: restaurants post hours and menus for their local patrons; schools communicate with students, parents, and teachers; religious institutions announce their worship schedules and programs; neighborhood blogs report on local events and gossip; and people of all ages increasingly use social-networking sites like Facebook to keep up with the friends, colleagues, and classmates that they see every day. Even the Retailers themselves have begun to focus on their “users’ geographic location.” Id. In 2011, for example, Amazon launched AmazonLocal, “a local deals website” that offers “deeply discounted products and services . . . from local businesses.”11 When Amazon expanded AmazonLocal to New York City, it began offering coupons from local vendors, such as a pedicure shop, a fitness and dance instructor, and a local eyeglasses store (see Addendum 6-8)-discounts that would hardly interest anybody other than a resident of New York City. 11 AmazonLocal: Help, https://local.amazon.com/help (last visited Aug. 16, 2012). 64 Again, for the Statute’s presumption to be constitutional, it need not be universally true that every New York affiliate will solicit only other New Yorkers. Instead, there need only be a rational basis for believing that encouraging New York affiliates with commissions will lead to in-state solicitation. For the reasons given above, the Statute’s solicitation presumption satisfies this deferential standard. Accordingly, the Appellate Division properly dismissed the Retailers’ facial constitutional challenge to the presumption. 65 CONCLUSION The decision of the Appellate Division, which upheld the dismissal of plaintiffs’ facial constitutional claims, should be affirmed. Dated: Albany, NY August 17, 2012 BARBARA D. UNDERWOOD Solicitor General ANDREW D. BING Deputy Solicitor General STEVEN C. WU Special Counsel to the Solicitor General of Counsel Respectfully submitted, ERIC T. SCHNEIDERMAN Attorney General of the State of New York Attorney for Respondents By: ____________________________ ANDREW D. BING Deputy Solicitor General The Capitol Albany, NY 12224 (518) 474-5487 Reproduced on Recycled Paper ADDENDUM Table of Contents Bruce C. Brown, The Complete Guide to Affiliate Marketing on the Web: How to Use and Profit from Affiliate Marketing Programs 41, 74 (2009) ........ 1 Rosalind Gardner, Make a Fortune Promoting Other People’s Stuff Online: How Affiliate Marketing Can Make You Rich 49 (2007) ...................... 4 http://local.amazon.com/mediaroom#amazonlocal-nyc...................................... 6 Newegg.com Affiliate Program, Special Terms and Conditions ....................... 9 A ddendum 1 THE COMPLETE GUIDE TO AFFILIATE MARKETING ~, ON THE WEB How TO USE AND PROFIT FROM AFFILIATE MARKETING PROGRAMS By BRUCE C. BROWN BABYLOf .~. '- LIBRARY A ddendum 2 40 THE COMPLETE GUIDE TO AFFILIATE MARKETING ON THE WEB CHAPTER 2: AFFILIATE 101: THE BASICS YOU NEED TO KNOW 41 • There are no shortcuts. Affiliate traffic is one of the most labor-intensive techniques available, but also is potentially one of the most effective. It is important to realiz.e that affiliate marketing is perhaps one of the most effective tools you have at your disposal to generate traffic and sales; bur again, only when used in conjunction with orher traffic generation methods. In traditional affiliate marketing, the traffic generated is only a side issue and the main focus is on the sales figure; the traffic might be relatively low, bur the conversion to sales can be fantastic. Programs that encourage users to only subscribe to a newsletrer or sign up for a community or forum are not intended to immediately generate sales. These actions are not considered a part of affiliate marketing, but part of a pay-per-action (PPA) campaign. Atrempting to capture e-mails or sign-ups for future sales, however, is a technique widely used in conjunction with affiliate marketing. Affiliate traffic is suited to those cases who seek a direct conversion of traffic to sales. There are two sides to this story. You might be interested in either becoming an affiliate or selling ypur product through an affiliate program. The first case does not really concern traffic generation, bur it is definitely an issue you must be familiar with in order to make your affiliate program actually work; or, if you are interested in becoming an affiliate, the issue becomes maximiz.ing the cash flow of your traffic. When you approach affiliate marketing, you must ask yourself if you would buy the product you are promoting. This is a key question because the answer is often no. Why would you not buy the product? Is it of low quality? Is the language used to promote it too full of hype? Do you have an aversion toward the format in which the offer is available? Would you have a problem buying a product from a middleman and not the manufacturer of the product? These questions hold the key to a more effective type of affiliate marketing. Examine each issue one at a time. Picking the Right Product The best affiliate product to sell is the one you are most familiar with. Anything can be sold if it fits a niche, and although the niche itself might be small, the competition also will be smaller. If you have experrise in a certain field, and you pick a product related to that field, you will have a huge advantage over your competition because you will be able to understand your customers. You also will be able to instantly differentiate a quality product from a low-quality product, and quality counts. As time goes on and you attract more traffic, you build up a porrfolio of affiliate products to sell to your existing customers. The basic idea is to find a custOmer niche you understand and know how to cater to and concentrate on marketing those products through your affiliate program. Effective Product Web Copy or Sales Material There are many approaches available to sell products on the Web. Why are people browsing the Web? A consistent percentage are indeed out there looking for a solution to a problem or simply looking for a product to purchase, but most of them are only looking for general information or human interaction. You should cater to those looking for a solution to a problem or a product to purchase. Catering to a small community with a high likelihood of purchase with products you know very well is a key to affiliate success. Trying to cater to everyone without specialization is much less successful. Target your Web copy to your products and provide detailed information, advantages, and reviews to generate interest. Generic banner ads plastered allover your Web site without anything else to supporr them will not generate conversions. The Sales Letter Style of Wet,) Copy The sales letter has b,oth advantages and disadvantages. Its use is most effective when selling products that target a niche audience. Long sales A ddendum 3 74 THE COMPLETE GUIDE TO AFFILIATE MARKETING ON THE WEB CHAPTER 4: HOW DO I GET STARTED? 75 Some words of caution with affiliate networks: They are very easy to use, and you can add a wide variery of affiliate products to your site effortlessly - but do not get carried away. Adding products to your site does not necessarily mean sales or profits. Do not overdo it and Aood your Web site with page after page of links, banner ads, and so on; this advice of course applies to all of your affiliate marketing goals. Find your market niche and concentrate on it, drive customers to your affiliate links, but keep it focused and relevant to your Web site. As in the previous example, if your Web site is about Boston terriers, there is little likelihood of success by adding computers and automotive supplies to your Web site because they are not related to your main content. On the other hand, custom grooming items, dog collars, shampoos, ere., may be highly profitable for you. The next chapter has a detailed walkthrough of the process you can expect when becoming an affiliate through a merchant Web site. I have provided you with a detailed overview of the process, so we will move on to establishing your own affiliate program. Establishing YOlJr Own Affiliate Program If you have products to sell, particularly if they are considered niche or highly desired items, you may consider starting your own affiliate program on your Web site. This provides you with the greatest Aexibiliry, control, and administration over your program, affiliates, and products. One word of caution: Do not attempt to design and develop your own affiliate software - it is not worth the effort, cost, or time. In a later chapter, I will review many great products you can consider for your affiliate program. Let's consider Atlamic Publishing Company. They develop, write, and publish books, like this book, and they do their own editing, layout, graphics, art, marketing, production, and sales. They own the copyright of their works, and because they have titles that cover a wide variery of topics, many of which are considered to be niche marketing, they are a perfect case study for establishing an affiliate program. Atlantic has an affiliate program which has been very successful for them. One of the concepts businesses often struggle with is why should they start an affiliate program when they already sell their products on their Web site, and why should they pay a commission that is money out of their pocket. The reason is that rhrough an affiliate you have market growth. The more Web sites on which your products are sold, the easier it is to find them. More people become aware of them, and viral marketing can take over as your products show up on Web sites, blogs, e-mails, and more. I am an affiliate ofAtlantic Publishing because they pay me 20 percent for each book I sell through my Web site or blog. I earn this by placing the links on my Web site and blog. That is the end of my work to earn the 20 percent commission. Why would Atlamic Publishing wam to do this? As an author, I can direct people to my Web site and blog, and if they are interested in my books, they can click on the link on my Web site and buy them through Adantic. I get a commission and Atlantic gets a sale they may not have gotten otherwise. Paying 20 percent on a total sale is better than no sale, which means no income. Multiply this formula times the number of affiliates and the increased marketplace presence, and you start to see the big picture. If you have 500 affiliates, and each affiliate makes one sale per day, then that is 500 books you have sold which you would not have sold otherwise. Even with the additional 20 percent commission fee you pay, you still have a net income significantly higher than you would have with zero A ddendum 4 Make a Fortune Promoting Other People I s Stuff Online How Affiliate Marketing Can Make You Rich Rosalind Gardner McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto A ddendum 5 FIND AND CHOOSE PRODUCTS TO PROMOH 49 J i I ~.f ~J: I· ~ f ,,! " d~&;A4Yi,*k.\i~~~~ ~ 8. • .lj ~. '" • .' g ~! H ~ f f ia; ~ ',;; 'Ii ~ ~~!;i ~ !~ ~ In Figure 4.6 individual products are shown for a search for ·'running." Note that the product image, name, relevant catalog, price, and company selling the product are listed in each row, Do not break out the calculator yet. We are still in t.he research phase and will return to the subject of joining afi'iliate programs later. DO YOU REALLY WANT TO PROMOTE THAT PRODUCT? Promoting quality products offered by reputable merchants is crucial to the success of your affiliate business. However, product quality and merchant reputation should not be your only concerns when it comes to choosing products for your sileo We have all seen sites that display ads for products that are not relevant to a site's content. For example, ads for contact lens cleaner on a site about kids' room decor look out of place and are a distraction to visitors. If you really must sell contact lens cleaner, consider starting a sile about vision care instead. Having firsthand knowledge about the products you promote gives you an edge over other affiliates selling the same product. You build credibility and trust with your customers when you can talk about products from expelience, Although the price of costly items may prohibit actual purchases, you can often still try the product out at a store. For example, if you sell treadmills, visit a local fitness equipment store and tryout the various models. Make note of your experience and report what you experienced. For less expensive products, you may be able to purchase an item through your own affiliate link. If the commission rate on that item was 50 percent, you would then need to make only one more sale to get your money back and start making a profit. As an affili- ate. you do not want to get e-mail from your merchant's Customers ~ ~ lJ" !() ...' ~ ~ ~ ~. §, ~. ~: L .. Q J j. . ! C&l. ~ ,,;.q I J=> • • :r S S ! li ~ j U II.o ~ § .-8 ~ ~ o 0 f ~;r ~ :;; ~ !!l !Ii ~ III c; 1 ~ ~ .. ~ i!l $ ;; ~ ~ ~ i [) [) [) U ~ ~ ~ .. I!l ill ~ o [j ~ ~~~§§~:§ ~~~~8~ .£I (Q W • II:) ~ III "'~j~~j.j Ij ~~ ~ ~ ~ i ~! ; ~, ~. w! 0<; ~ ~ ~ ~. ~ .t . s.: I i Ji ~ ! ~. <, i' i 1 ~ ,: ~: I! • rt ~ I • ' J. ~ I I ,,: 1.1. ~I: ~ . Ii . t i i: • I I ! II , JiI: ! ~ t f, .s ! Wi • 8 I'~ ~ IilI i 1tiIj , I 5 i t(,~ ! on -.i i!: ~ ~ '", '§ 0- r'....