Overstock.com, Inc., Appellant,v.New York State Department of Taxation and Finance, et al., Respondents.BriefN.Y.February 6, 2013To Be Argued By: DANIEL S. CONNOLLY Time Requested: 30 Minutes New York County Clerk’s Index No. 107581/08 Court of Appeals STATE OF NEW YORK OVERSTOCK.COM, INC., Plaintiff-Appellant, —against— THE NEW YORK STATE DEPARTMENT OF TAXATION AND FINANCE, ROBERT L. MEGNA, in his official capacity as Commissioner of the New York State Department of Taxation and Finance, and THE STATE OF NEW YORK, Defendants-Respondents. BRIEF FOR PLAINTIFF-APPELLANT d DANIEL S. CONNOLLY RACHEL B. GOLDMAN BRACEWELL & GIULIANI LLP 1251 Avenue of the Americas, 49th Floor New York, New York 10020 Telephone: (212) 508-6100 Facsimile: (212) 508-6101 Attorneys for Plaintiff-Appellant May 22, 2012 STATEMENT PURSUANT TO § 500.1(f) OF THE RULES OF THE COURT OF APPEALS Plaintiff-Appellant Overstock.com, Inc. does not have a corporate parent or any subsidiaries or affiliates, and no publicly held company owns ten percent or more of the corporation. -i- TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... iv PRELIMINARY STATEMENT ............................................................................... 1 QUESTIONS PRESENTED ...................................................................................... 3 STATEMENT OF JURISDICTION.......................................................................... 4 STATEMENT OF THE CASE .................................................................................. 5 A. Overstock’s Business And Internet Advertising ......................... 5 1. The Nature Of Overstock’s Business ............................... 5 2. The Nature Of Overstock’s Internet Advertising ............. 6 B. New York’s Tax Law .................................................................. 9 1. The Previous Tax Law’s Definition Of “Vendor” ........... 9 2. The New Internet Tax’s Expanded Definition Of “Vendor” ......................................................................... 10 3. The State’s Attempt To Limit The Tax Law Through Its Technical Services Bureau- Memorandums ................................................................ 13 C. Procedural History .................................................................... 16 D. Trial Court Decision ................................................................. 18 E. Appellate Division Decision ..................................................... 19 ARGUMENT ........................................................................................................... 20 I. NEW YORK’S INTERNET TAX IS FACIALLY INVALID UNDER THE COMMERCE CLAUSE .............................................. 20 TABLE OF CONTENTS (continued) Page -ii- A. The Commerce Clause Sets A Bright-Line Rule Requiring An In-State Physical Presence In Order To Satisfy The Substantial Nexus Factor ....................................... 24 B. New York Unconstitutionally Imposes A Tax Upon Out- of-State Retailers Who Have No Substantial Nexus With New York .................................................................................. 27 1. The Plain Language Demonstrates That The Statute Applies In The Absence Of A Substantial Nexus .............................................................................. 27 2. The Internet Tax Lacks A Physical Presence Requirement .................................................................... 33 C. The Internet Tax Employs An Invalid Presumption ................. 42 D. Moran Towing Does Not Set Forth The Proper Standard For Analyzing A Facial Challenge Under The Commerce Clause ........................................................................................ 48 1. The Salerno Standard Is Dicta And The United States Supreme Court Has Not Followed It ................... 50 2. Recognizing That Salerno Is Not The Proper Standard, Other Courts Have Rejected It, And This Court Should Not Follow It ............................................ 64 3. The Salerno Standard Does Not Apply In The Context Of The Commerce Clause ................................. 67 E. The Internet Tax Is Unconstitutional Even Under The “No Set Of Circumstances” Standard ....................................... 73 II. THE INTERNET TAX VIOLATES DUE PROCESS ....................... 75 A. Applicable Law ......................................................................... 76 TABLE OF CONTENTS (continued) Page -iii- B. The Presumption Is Unreasonable ............................................ 78 C. The Presumption Is Effectively Irrebuttable ............................. 83 CONCLUSION ........................................................................................................ 86 -iv- TABLE OF AUTHORITIES Page(s) CASES Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997) ..................................................................... 39 Anderson v. Edwards, 514 U.S. 143 (1995) ............................................................................................ 56 Bailey v. Alabama, 219 U.S. 219 (1911) ...................................................................................... 44, 76 Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 97 N.Y.2d 456 (2002) ......................................................................................... 27 Boumediene v. Bush, 553 U.S. 723 (2008) ............................................................................................ 60 Bowen v. Kendrick, 487 U.S. 589 (1998) ................................................................................ 51, 52, 69 Broadrick v. Oklahoma, 413 U.S. 601 (1973) ............................................................................................ 61 C & A Carbone, Inc. v. Clarkstown, 511 U.S. 383 (1994) ............................................................................................ 55 Caplin & Drysdale, Chartered v. United States, 491 U.S. 617 (1989) ............................................................................................ 53 Casse v. N.Y. State Racing & Wagering Bd., 70 N.Y.2d 589 (1987) ......................................................................................... 82 Caterpillar Inc. v. N.H. Dep’t of Revenue Admin., 144 N.H. 253 (1999) ........................................................................................... 71 Caterpillar v. Comm’r of Revenue, 568 N.W.2d 695 (Minn. 1997) ........................................................................... 71 TABLE OF AUTHORITIES (continued) Page(s) -v- Cent. Sav. Bank in City of New York v. City of New York, 280 N.Y. 9 (1939) ............................................................................................... 75 City of Chicago v. Morales, 527 U.S. 41 (1999) ............................................................................ 59, 64, 66, 67 Cnty. Court of Ulster, N.Y. v. Allen, 442 U.S. 140 (1979) ............................................................................................ 77 Com v. Ickes, 582 Pa. 561 (2005) .............................................................................................. 66 Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977) ............................................................................................ 22 Conoco, Inc. v. Taxation & Revenue Dep’t of State of N.M., 122 N.M. 736 (2000) .......................................................................................... 71 Cutter v. Wilkinson, 544 U.S. 709 (2005) ............................................................................................ 60 Direct Marketing Ass’n v. Huber, No. 10-cv-01546, 2012 WL 1079175 (D. Colo. Mar. 30, 2012) ............ 13, 46, 47 Doe v. City of Albuquerque, 667 F.3d 1111 (10th Cir. 2012) ........................................................ 62, 64, 65, 73 Dutchess Sanitation Serv., Inc. v. Town of Plattekill, 51 N.Y.2d 670 (1980) ................................................................................... 20, 44 Eff-Ess, Inc. v. N.Y. Edison Co., 237 A.D. 315 (1st Dep’t 1932) ........................................................................... 77 Fargo Women’s Health Org. v. Schafer, 507 U.S. 1013 (1993) .......................................................................................... 56 Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939) .............................................................................................. 36 TABLE OF AUTHORITIES (continued) Page(s) -vi- Forsyth Cnty. v. Nationalist Movement, 505 U.S. 123 (1992) ............................................................................................ 57 Gen. Motors Corp. v. Tracy, 519 U.S. 278 (1997) ............................................................................................ 20 Gen. Trading Co. v. State Tax Comm’n, 322 U.S. 335 (1944) ............................................................................................ 36 Gonzales v. Raich, 545 U.S. 1 (2005) ................................................................................................ 58 Graham v. Florida, --- U.S. ----, 130 S. Ct. 2011 (2010) ................................................................... 60 Healy v. Beer Inst., 491 U.S. 324 (1989) ............................................................................................ 20 Heiner v. Donnan, 285 U.S. 312 (1932) ............................................................................................ 76 Hewlett Assoc. v. City of New York, 57 N.Y.2d 356 (1982) ......................................................................................... 38 Homier Distrib. Co., Inc. v. City of Albany, 90 N.Y.2d 153 (1997) ........................................................................................... 4 Hughes v. Oklahoma, 441 U.S. 322 (1979) ...................................................................................... 21, 44 Janklow v. Planned Parenthood, Sioux Falls Clinic, 517 U.S. 1174 (1996) ........................................................................ 50, 51, 53, 56 John Doe No. 1 v. Reed, --- U.S. ----, 130 S. Ct. 2811 (2010) ................................................................... 60 Kraft Gen. Foods, Inc. v. Iowa Dep’t of Revenue & Fin., 505 U.S. 71 (1992) ......................................................................54, 55, 67, 71, 72 TABLE OF AUTHORITIES (continued) Page(s) -vii- Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451 (1980) ................................................................................... 33, 84 L.L. Bean, Inc. v. Commonwealth, Dep’t of Revenue, 516 A.2d 820 (Pa. Cmmw. Ct. 1986) ................................................................. 28 Lemon v. Kurtzman, 403 U.S. 602 (1971) ............................................................................................ 52 Lerman v. Bd. of Elections in City of New York, 232 F.3d 135 (2d Cir. 2000) ............................................................................... 65 Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316 (2003) ................................................................................... 32, 84 Marbury v. Madison, 5 U.S. 137 (1803) ................................................................................................ 70 Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443 (2003) ..................................................................................passim MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16 (2008) ........................................................................................ 30, 44 Miller Bros. Co. v. Maryland, 347 U.S. 340 (1954) ...................................................................................... 28, 45 Mineral Policy Ctr. v. Norton, 292 F. Supp. 2d 30 (D.D.C. 2003) ...................................................................... 65 Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753 (1967) .....................................................................................passim Nat’l Endowment for the Arts v. Finley, 524 U.S. 569 (1998) ............................................................................................ 57 Nat’l Geographic Soc’y v. Cal. Equalization Bd., 430 U.S. 551 (1977) ............................................................................................ 36 TABLE OF AUTHORITIES (continued) Page(s) -viii- Nevada Dep’t of Human Res. v. Hibbs, 538 U.S. 721 (2003) ............................................................................................ 61 Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450 (1959) ............................................................................................ 20 Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175 (1995) ............................................................................................ 21 Orvis Co. v. Tax Appeals Tribunal of the State of New York, 86 N.Y.2d 165 (1995) ................................................................................. passim Overstock.com, Inc. v. The New York State Dep’t of Taxation & Fin., et al., 12 N.Y.3d 830 (2009) ......................................................................................... 17 People v. Leyva, 38 N.Y.2d 160 (1975) ............................................................................. 76, 77, 82 People v. Stuart, 100 N.Y. 2d 412 (2003) ...................................................................................... 64 Performance Marketing Ass’n v. Hamer, Case No. 2011 CH 26333 (Ill. Cook Cnty. Cir. Ct. May 7, 2012) ..................... 12 Planned Parenthood of Se. Pa. v. Casey, 505 U.S. 833 (1992) ............................................................................................ 55 Quill Corp. v. North Dakota, 504 U.S. 298 (1992) .....................................................................................passim Red Earth LLC v. United States, 728 F. Supp. 2d 238 (W.D.N.Y. 2010) ......................................................... 44, 46 Reno v. Am. Civil Liberties Union, 521 U.S. 844 (1997) ............................................................................................ 57 Reno v. Flores, 507 U.S. 292 (1993) ............................................................................................ 54 TABLE OF AUTHORITIES (continued) Page(s) -ix- Robinson v. City of Seattle, 102 Wash. App. 795 (2000) .......................................................................... 67, 72 Romer v. Evans, 517 U.S. 620 (1996) ............................................................................................ 56 Rothe Dev. Corp. v. Dep’t of Def., 413 F.3d 1327 (Fed. Cir. 2005) .......................................................................... 65 Runyon v. McCrary, 427 U.S. 160 (1976) ............................................................................................ 41 Rust v. Sullivan, 500 U.S. 173 (1991) ............................................................................................ 54 Sabri v. United States, 541 U.S. 600 (2004) ............................................................................................ 62 Santa Fe Indep. Sch. Dist. v. Doe, 530 U.S. 290 (2000) ............................................................................................ 61 Scripto, Inc. v. Carson, 362 U.S. 207 (1960) ................................................................................ 34, 35, 80 Speiser v. Randall, 357 U.S. 513 (1958) ...................................................................................... 44, 76 St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F. Supp. 2d 575 (E.D. La. 2007) ...................................................... 41, 78, 81 Standard Pressed Steel Co. v. Wash. Dep’t of Revenue, 419 U.S. 560 (1975) ...................................................................................... 30, 36 Strauss v. The City Univ. of New York, Index No. 111900/2011, 2012 WL 1576457 (Sup. Ct. N.Y. County Apr. 25, 2012) ............................................................. 76 TABLE OF AUTHORITIES (continued) Page(s) -x- Thomas More Law Cntr. v. Obama, 651 F.3d 529 (6th Cir. 2011) ........................................................................ 70, 73 Tiffany (N.J.) Inc. v. eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008) ................................................................ 39 Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483 U.S. 232 (1987) ............................................................................................ 36 Uniformed Firefighters Ass’n Local 94, IAFF, AFL-CIO v. Beekman, 52 N.Y.2d 463 (1981) ......................................................................................... 31 United States v. Booker, 543 U.S. 220 (2005) ............................................................................................ 60 United States v. Flath, No. 11-CR-69, 2012 WL 113804 (E.D. Wisc. Jan. 13, 2012) ........................... 66 United States v. Laurent, No. 11-CR-322, 2011 WL 6004606 (E.D.N.Y. Dec. 2, 2011) ........................... 66 United States v. Lopez, 514 U.S. 549 (1995) ................................................................................ 58, 67, 70 United States v. Morrison, 529 U.S. 598 (2000) ...................................................................................... 58, 67 United States v. Nascimento, 491 F.3d 25 (1st Cir. 2007) ................................................................................. 58 United States v. Romano, 382 U.S. 136 (1965) ............................................................................................ 82 United States v. Salerno, 481 U.S. 739 (1987) .....................................................................................passim United States v. Stevens, --- U.S. ----, 130 S. Ct. 1577 (2010) ............................................................passim TABLE OF AUTHORITIES (continued) Page(s) -xi- United States v. Wilkinson, 626 F. Supp. 2d 184 (D. Mass. 2011) ................................................................. 70 Usery v. Turner Elkhorn Mining Co., 428 U.S. 1 (1976) ................................................................................................ 76 Van Orden v. Perry, 545 U.S. 677 (2005) ............................................................................................ 70 Virginia ex rel. Cuccinelli, II v. Sebelius, 728 F. Supp. 2d 768 (E.D. Va. 2010) ................................................................. 71 Virginia v. Black, 538 U.S. 343 (2003) ............................................................................................ 58 Vlandis v. Kline, 412 U.S. 441 (1973) ............................................................................................ 76 Voorheesville Rod & Gun Club, Inc. v. E.W. Tompkins Co., 82 N.Y.2d 564 (1993) ........................................................................................... 4 W. & A.R.R. v. Henderson, 279 U.S. 639 (1929) ............................................................................................ 82 W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994) ............................................................................................ 55 Wardair Canada, Inc. v. Fla. Dep’t of Revenue, 477 U.S. 1 (1986) ................................................................................................ 21 Wash. State Grange v. Wash. State Republican Party, 552 U.S. 442 (2008) ...................................................................................... 61, 75 Washington v. Glucksberg, 521 U.S. 702 (1997) .......................................................................... 59, 61, 63, 75 Wisconsin v. J.C. Penny Co., 311 U.S. 435 (1940) ............................................................................................ 30 TABLE OF AUTHORITIES (continued) Page(s) -xii- STATUTES CPLR § 5601 ........................................................................................................ 4, 17 N.Y. Tax Law § 12 ..................................................................................................... 9 N.Y. Tax Law § 210 ................................................................................................. 81 N.Y. Tax Law § 1101........................................................................................passim N.Y. Tax Law § 1131................................................................................................. 9 N.Y. Tax Law § 1145............................................................................................... 10 N.Y. Tax Law § 1817............................................................................................... 10 Ark. Code Ann. § 26-52-117 ............................................................................. 12, 23 Conn. Gen. Stat. § 12-407 .................................................................................. 12, 23 35 Ill. Comp. Stat. § 105/2 ................................................................................. 12, 23 N.C. Gen. Stat. § 105-164.8 ............................................................................... 12, 23 32 Vt. Stat. Ann. tit. 32 § 9701 .......................................................................... 12, 23 R.I. Gen. Laws § 44-18-15 ................................................................................. 12, 23 RULES CPLR Rule 3211 ...................................................................................................... 16 REGULATIONS 20 N.Y.C.R.R. 4-2.2 ................................................................................................. 81 TABLE OF AUTHORITIES (continued) Page(s) -xiii- LAW REVIEWS H. Beau Baez III, Taxing Internet Sales: Trying to Make a Two-thousand-year-old Jurisdiction Test Work in the Dot-com Economy, 64 TAX LAW. 807 (2011) ................................. 7, 13, 40, 81 Michael C. Dorf, Facial Challenges to State and Federal Statutes, 46 STAN. L. REV. 235 (1994) ............................................................... 51 David L. Franklin, Facial Challenges, Legislative Purpose, and the Commerce Clause, 92 IOWA L. REV. 41 (2006) .................................... 68 Marc E. Isserles, Overcoming Overbreadth: Facial Challenges and the Valid Rule Requirement, 48 AM. U. L. REV. 359, 387 (1998) ............... 62 Note, Sajjad Matin, Clicks Ahoy! Navigating Online Advertising in a Sea of Fraudulent Clicks, 22 BERKELEY TECH. L.J. 533 (2007) ........... 39, 81 MISCELLANEOUS THE FEDERALIST NO. 7 (Alexander Hamilton) .................................................. 21, 46 THE FEDERALIST NO. 11 (Alexander Hamilton) ...................................................... 21 Plaintiff-Appellant Overstock.com, Inc. (“Overstock”) appeals from the Decision and Order of the Supreme Court, Appellate Division, First Department, which affirmed the Decision and Order of the Supreme Court, New York County (Bransten, J.) granting Defendants’ motion to dismiss Overstock’s facial claims under the Commerce Clause and Due Process Clause of the United States Constitution, as well as the Due Process Clause of the New York State Constitution, and reversed and remanded the trial court’s decision dismissing Overstock’s as-applied claims. Overstock respectfully requests that the Appellate Division decision be reversed and the statute at issue be declared unconstitutional. PRELIMINARY STATEMENT The Commerce Clause of the United States Constitution, art. I, § 8, cl. 3, was designed to safeguard the nation from the destructive effect of state taxes and duties on the free flow of interstate commerce. Thus, for more than two centuries, the Commerce Clause has served as a bar to state legislation that exceeds the state’s legitimate taxing authority and imposes an undue burden upon interstate commerce. Accordingly, the United States Supreme Court has made clear, most recently in Quill Corp. v. North Dakota, 504 U.S. 298 (1992), that a state may not impose an obligation upon an out-of-state business to collect sales tax from residents of the state unless the out-of-state business has a substantial nexus with the taxing state. -2- However, the State of New York enacted a tax statute, N.Y. Tax Law § 1101(b)(8)(vi) (“Internet Tax”), that directly contravenes Supreme Court jurisprudence, and requires out-of-state retailers to collect taxes where no substantial nexus exists. More specifically, the statute imposes tax collection obligations upon out-of-state internet retailers who merely cause advertisements to be placed in the State, which is conduct that indisputably cannot rise to the level of a substantial nexus. Therefore, the Internet Tax places an undue burden upon interstate commerce in violation of the Commerce Clause and is unconstitutional on its face. Although this Court previously has observed that a litigant mounting a facial challenge to a statute must demonstrate that the statute is unconstitutional in every application, Overstock respectfully submits that this test is unsupported by the Supreme Court precedent from which it arises, and thus should be reconsidered by this Court. Indeed, the strict standard, or “no set of circumstances” test, has never been applied by the Supreme Court in the context of the Commerce Clause. The proper question for purposes of this appeal is simply whether the Internet Tax improperly extends the State’s taxing power beyond the clear boundaries established by Quill. In any event, even if the “no set of circumstances” test were held to apply, there are no circumstances in which the Internet Tax could be applied in a constitutional manner. -3- The Internet Tax also violates the Due Process Clauses of the Fourteenth Amendment to the United States Constitution and the New York State Constitution as the statute is premised upon an unreasonable presumption that is, in effect, irrebuttable. The Appellate Division, as well as the trial court before it, erroneously held that the Internet Tax is constitutional, basing their decisions upon the misapplication of the Supreme Court’s Commerce Clause jurisprudence, a narrow reading of the statute that ignores the plain language therein and the inference of facts in the absence of legislative or evidentiary support. As the Internet Tax cannot pass constitutional muster, the Appellate Division’s decision should be reversed and the statute should be declared unconstitutional. QUESTIONS PRESENTED 1. Whether N.Y. Tax Law § 1101(b)(8)(vi) is unconstitutional on its face under the Commerce Clause of the United States Constitution. The Appellate Division erred by concluding that the statute was constitutional on its face. 2. Whether N.Y. Tax Law § 1101(b)(8)(vi) is unconstitutional on its face under the Due Process Clauses of the Fourteenth Amendment to the United States Constitution and the New York State Constitution. -4- The Appellate Division erred by concluding that the statute was constitutional on its face. STATEMENT OF JURISDICTION The Court of Appeals has jurisdiction to hear this appeal and consider the questions presented pursuant to New York’s Civil Practice Law and Rules (“CPLR”) §§ 5601(b)(1) and 5601(d). Overstock, having filed a Stipulation of Discontinuance with respect to its as-applied challenges, is entitled to “appeal[] as of right from the stipulation, deemed a judgment, bringing up for review the prior nonfinal Appellate Division order.” Homier Distrib. Co., Inc. v. City of Albany, 90 N.Y.2d 153, 157 (1997) (citing Voorheesville Rod & Gun Club, Inc. v. E.W. Tompkins Co., 82 N.Y.2d 564, 568 (1993)). The remaining claims on appeal “directly involve[] the construction of the constitution of the state or of the United States,” CPLR § 5601(b)(1), and therefore jurisdiction is appropriate before this Court under CPLR § 5601(d). -5- STATEMENT OF THE CASE A. Overstock’s Business And Internet Advertising 1. The Nature Of Overstock’s Business Overstock is a Delaware corporation with its principal, and only, place of business in Salt Lake City, Utah. R.190 ¶ 2.1 Overstock’s retail website, http://www.overstock.com, commenced operations in 1999, and offers brand-name products such as furniture, home goods, bedding, jewelry and electronics at discounted prices. R.190 ¶ 3. Overstock sells its merchandise through the internet and, like traditional mail-order merchants, ships purchases to customers solely via U.S. Mail or by common carriers such as UPS or Federal Express. R.190 ¶ 4. Overstock does not own, rent or otherwise occupy any property in the State of New York. R.190 ¶ 5. Moreover, none of Overstock’s employees or representatives live or work in New York. Id. Further, Overstock does not engage in any solicitation targeted specifically at New York customers, and has never hired or contracted with anyone to do so. R.190 ¶ 6. As a result, in the decade since it began shipping items to New Yorkers, Overstock had never been deemed to have solicited business under the New York State Tax Law, § 1 et seq. (“Tax Law”). 1 Citations to “R.__” refer to the indicated pages of the Plaintiff-Appellant’s Record on Appeal, filed concurrently with this brief. -6- 2. The Nature Of Overstock’s Internet Advertising As part of its marketing strategy, Overstock allows owners of independent third-party websites located around the world to advertise Overstock.com on their own websites by joining Overstock’s Affiliate Program (“Affiliate Program”). R.190 ¶ 7. These advertisements consist of electronic links and banners. R.191 ¶ 12. A link is a word or phrase on a website which, when clicked, will cause a user’s web browser to navigate to another webpage – in this case, to Overstock.com. Id. A banner is similar to a link, but generally includes additional graphics or stylized text similar in appearance to a traditional print advertisement. Id. The members of Overstock’s Affiliate Program (“Affiliate(s)”) are independent third parties who enter into a Utah law-governed Master Agreement that dictates the terms of the relationship between Overstock and the Affiliates. R.188 ¶ 10.3. There is no employee/employer relationship between the Affiliates and Overstock, and the Affiliates are not authorized to act as Overstock’s agents or representatives. R.192 ¶ 19. The Master Agreement expressly provides that Overstock and the Affiliates “shall have no authority to obligate or bind the other in any respect.” R.192 ¶ 20.2 2 Although the Master Agreement utilizes the term “independent contractor” to delineate the legal obligations the parties have with respect to one another, the Affiliate is only authorized -7- Affiliates do not solicit or consummate sales on behalf of Overstock. R.192 ¶ 18. Rather, all sales occur exclusively through the Overstock website between the purchaser and Overstock. R.186 ¶ 3.3; R.192 ¶ 21. Moreover, the Master Agreement mandates that the Affiliates will provide solely advertising services to Overstock, and only in the form of website links or banners.3 R.191 ¶ 14. Affiliates are paid by commission for the placement of the advertisement on their sites. R.192 ¶ 16. The commission is paid when a customer arrives at Overstock’s website after clicking on a link or banner displayed on an Affiliate’s website and that customer purchases goods from Overstock. R.192 ¶ 16. The Master Agreement provides that a commission will only be paid if the Affiliate’s website is the last site visited before Overstock’s website and the customer makes a purchase within a specified period of time. R.192 ¶ 17. Overstock does not seek out websites as potential advertisers. R.190 ¶ 8. Rather, website owners and operators request the opportunity to join Overstock’s Affiliate Program. Id. Overstock’s Affiliate Program is a type of internet advertising known as the “performance marketing approach,” a term coined to refer to advertising programs that can track the success of a retailer’s advertising partners by attributing a to act in such capacity for the purpose of posting advertisements on its own website; the Affiliate does not represent Overstock in any way. R.188 ¶ 10.2. 3 The Master Agreement has been modified since this case was commenced. However, it remains substantially identical in all material respects. -8- customer’s sales to that retailer’s specific advertisement. See H. Beau Baez III, Taxing Internet Sales: Trying to Make a Two-thousand-year-old Jurisdiction Test Work in the Dot-com Economy, 64 TAX LAW. 807, 810 (2011). The technology of the internet thus allows Affiliates to be paid on a commission basis, rather than the flat fee that is typically used to compensate traditional advertisers. Id. at 810-11. The performance marketing approach is generally considered an efficient means of advertising that the capability of the internet has made commonplace. Id. Despite the technological advancements of the internet, at base, the internet advertising placed by Overstock’s Affiliates is virtually identical to traditional print or broadcast advertising, such as newspaper advertisements or radio and television commercials. The only difference is that the internet allows Overstock to pay for advertisements that are effective. R.193 ¶¶ 23-24. The mechanism, while permitting more precise use of advertising expenditures, remains analogous to advertisements in, for example, a magazine or catalog: the customer sees information regarding the retailer and makes an affirmative decision to contact the retailer. In either case, the customer contacts the retailer and places an order directly, not through the person or entity publishing the advertisement. Overstock has thousands of Affiliates nationwide, and thousands who provided a New York address upon becoming an Affiliate. R.193 ¶ 25. On or -9- about May 15, 2008, Overstock suspended its relationship with all of its Affiliates in New York in response to the enactment of the Internet Tax. R.194 ¶ 29. B. New York’s Tax Law 1. The Previous Tax Law’s Definition Of “Vendor” The Tax Law has long required vendors who conduct business in the State to collect and remit New York sales and use taxes upon the receipts from every sale, except sales for resale of tangible personal property and certain services. See N.Y. Tax Law §§ 1101(b), 1131(1). A “vendor” is defined by the Tax Law as: A person who solicits business either: (I) by employees, independent contractors, agents or other representatives; or (II) by distribution of catalogs or other advertising matter, without regard to whether such distribution is the result of regular or systematic solicitation, if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution; and by reason thereof makes sales to persons within the state of tangible personal property or services, the use of which is taxed by this article. § 1101(b)(8)(i)(C)(I-II) (emphasis added). The Tax Law thus expressly recognizes that advertising is an insufficient basis upon which to require a vendor to collect taxes without “some additional connection with the state which satisfies the nexus requirement” of the Constitution. Further, the Tax Law expressly exempts from the definition of “vendor” any retailer who merely advertises on the internet. See N.Y. Tax Law § 12(c) (a vendor does not include a retailer that “(1) ha[s] its -10- advertising stored on a server or other computer equipment located in this state . . . or (2) ha[s] its advertising disseminated or displayed on the Internet by an individual or entity subject” to the Tax Law). Failure to collect taxes, or even register to do so, subjects the vendor to civil and criminal penalties. See N.Y. Tax Law §§ 1145, 1817. Under this statutory framework, Overstock, and all other similarly situated, out-of-state retailers are not considered “vendors” and, therefore, have never been required to collect sales taxes on receipts from sales to New York customers. R.193 ¶ 28. 2. The New Internet Tax’s Expanded Definition Of “Vendor” As part of New York State’s 2008-2009 fiscal budget legislation, on April 23, 2008, New York enacted a first-of-its-kind tax that, as the legislative history demonstrates, was designed with one goal: to impose sales and use tax collection obligations upon out-of-state internet retailers whose New York customers “link” to the out-of-state retailer’s website through a website administered in New York. R.81. A Senate Finance Committee Staff Report on the budget states that the statute “forc[es] out of state internet retailers to collect and remit New York State sales tax if New York based websites advertise their site in return for commissions on sales.” R.145 (emphasis added). Similarly, another Senate Finance Committee -11- Staff Report on the budget referred to the statute as the “Sales Tax Nexus for Internet Retailers” and stated that the statute “redefine[s] ‘vendor’ to include internet retailers that actively encourage web site owners residing in New York State to advertise for the internet retailer in return for a commission on sales resulting from the followed link.” R.147 (emphasis added). Further, a report prepared by New Yorkers for Fiscal Fairness, included as part of the Governor’s Bill Jacket Supplement, denominated the statute the “Amazon Tax” and stated its purpose was to “[e]stablish an evidentiary presumption that certain sellers using New York residents to solicit sales in the State are ‘vendors’ required to collect sales and use tax.” R.159. The amendment to the Tax Law supplemented the definition of “vendor” by stating: [A] person making sales of tangible personal property or services taxable under this article (‘seller’) shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars . . . . This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution during the four quarterly periods in question. -12- N.Y. Tax Law § 1101(b)(8)(vi) (emphasis added).4 Thus, under the expanded definition of “vendor,” out-of-state retailers are automatically presumed to be vendors and are unconstitutionally compelled to collect New York State sales taxes on purchases made by New York residents simply because a New York resident places an advertisement for that retailer in exchange for compensation. The statute as written applies to any out-of-state business that pays to have an advertisement appear in the State regardless of the medium, whether the internet or otherwise, and even where there is no other contact with the State.5 Numerous other states have followed New York’s example and either enacted or attempted to enact similar legislation. See Ark. Code Ann. § 26-52-117; Conn. Gen. Stat. § 12-407; 35 Ill. Comp. Stat. § 105/2; N.C. Gen. Stat. § 105- 164.8; R.I. Gen. Laws § 44-18-15; 32 Vt. Stat. Ann. tit. 32 § 9701. Thus far, at least one state court has ruled that its state’s statute was unconstitutional, see 4 The legislation provided that the statute would take effect immediately, but provided an amnesty period until June 1, 2008 whereby retailers deemed a vendor under the Internet Tax would not be liable for sales tax collection obligations prior to June 1, 2008, provided that the retailer began to collect sales taxes by that date. See R.140. 5 On or about June 24, 2008, the New York State Senate, by vote of 44 to 18, passed legislation that would repeal the Internet Tax. On the same day it was passed by the Senate, the repeal bill was delivered to the New York State Assembly, but the legislature has taken no further action. See R.172-75. -13- Order, Performance Marketing Ass’n v. Hamer, Case No. 2011 CH 26333 (Ill. Cook Cnty. Cir. Ct. May 7, 2012), while a federal court recently determined that Colorado’s statute, which requires out-of-state retailers to report purchases made by state residents, was also unconstitutional, see Direct Marketing Ass’n v. Huber, No. 10-cv-01546, 2012 WL 1079175 (D. Colo. Mar. 30, 2012). As a result of this effort to tax internet commerce, “[i]t is estimated that over 200 Internet merchants have terminated their affiliate programs in the states that have passed affiliate nexus statutes.” Baez, 64 TAX LAW. at 834. 3. The State’s Attempt To Limit The Tax Law Through Its Technical Services Bureau-Memorandums In an effort to address the constitutional infirmities in the Internet Tax, and in direct response to Overstock’s constitutional challenge, the Department of Taxation and Finance’s Office of Tax Policy Analysis issued two Technical Services Bureau-Memorandums (“TSB-Ms”) regarding the statute. Shortly after Amazon, and just before Overstock, filed their respective complaints challenging the Internet Tax, the Department of Taxation and Finance (“DTF”) issued TSB-M-08(3)S in an attempt to explain how the Internet Tax would be applied. R.63. That TSB-M stated that “an e-commerce retailer that uses persons to act as its representatives in the state to solicit or to make and maintain a market in return for commissions, referral fees or other types of compensation is -14- considered to be soliciting business within this state through the use of independent contractors or representatives.” Id. (emphasis added). DTF noted, however, that “a business is not considered a vendor under section 1101(b)(8) of the Tax Law merely because the business stores advertising on a server or other computer equipment located in New York State, or has its advertising disseminated or displayed on the Internet.” Id. (emphasis added). Paradoxically, however, the TSB-M goes on to state that while “an agreement to place an advertisement does not give rise to the presumption” that a vendor’s “resident representatives” are soliciting in the State, “placing an advertisement does not include the placement of a link on a Web site that, directly or indirectly, links to the Web site of a seller, where the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link.” R.64 (emphasis added). The TSB-M explains that indirect referrals include “where, for example, the resident representative refers potential customers to its own Web site, or to another party’s Web site which then directs the potential customer to the seller’s Web site.” Id. Shortly before the State filed its motion to dismiss, DTF issued TSB-M- 08(3.1)S, which purported to describe how an internet retailer could rebut the Internet Tax’s presumption of solicitation. R.69-70. In order to rebut the presumption, DTF required a seller “to establish that the only activity of its -15- resident representatives in New York State on behalf of the seller is placing a link on the resident representatives’ Web sites to the seller’s Web site.” R.69. According to DTF, the presumption could only be rebutted by satisfying a number of elements. First, the seller’s contract with the affiliate must contain a provision prohibiting the affiliate “from engaging in any solicitation activities in New York State that refer potential customers to the seller including, but not limited to: distributing flyers, coupons, newsletters, and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending emails.”6 Id. Second, each year every affiliate must submit a signed certification stating that no solicitation had occurred in the prior year. Id. The TSB-M contained additional information regarding the content, signature and record retention requirements for the certifications. R.70. However, DTF maintained the right to determine whether, notwithstanding the contractual provisions and certifications, an affiliate was in fact soliciting. Id. Finally, each of the TSB-Ms explicitly states that it is merely “an informational statement” and therefore is not binding and does not have the force of regulation or rule. See R.67; R.70; R.170. The TSB-Ms provide only temporary guidance as to DTF’s current position on an issue, and can be modified or wholly 6 Clubs and non-profits were further required to post warnings on their websites informing members that they could not solicit on behalf of the seller. R.69. -16- withdrawn at any time. R.67; R.70; R.170. Indeed, each of the TSB-Ms expressly warns that they are merely “accurate on the date issued,” and that “[s]ubsequent changes . . . in department policies could affect the validity of the information presented in a TSB-M.” R.67; R.70; R.170.7 C. Procedural History In its complaint, Overstock sought declaratory and injunctive relief on the grounds that the Internet Tax violated the Commerce Clause of the United States Constitution and the Due Process Clauses of the Fourteenth Amendment to the United States Constitution and of the New York State Constitution. R.37. Overstock alleged that the Internet Tax was unconstitutional both as-applied and on its face. Id. The State moved to dismiss Overstock’s complaint pursuant to CPLR Rule 3211(a)(2) and (7). R.53. At the same time, the State moved to dismiss the complaint filed in Amazon’s related action. R.55. Overstock opposed the State’s motion to dismiss and cross-moved for summary judgment pursuant to CPLR Rule 3211(c).8 R.76. Oral argument was held on October 2, 2008. R.427. 7 In fact, on or about November 20, 2007, a TSB-M was issued regarding a prior version of the statute, but was withdrawn six days later without notice or explanation. R.167-71. 8 The plaintiffs in the Amazon case similarly opposed the State’s motion to dismiss and cross-moved for summary judgment. Although the cases are similar, Overstock and Amazon -17- On January 12, 2009, the Supreme Court, New York County (Bransten, J.) granted, in separate decisions, the State’s motion to dismiss both Overstock’s and Amazon’s complaints, denied both cross-motions for summary judgment as moot, and declared the Internet Tax constitutional. R.12-16 (Overstock decision); R.17- 34 (Amazon decision). The trial court, however, articulated the majority of its reasoning within the confines of the decision issued in the Amazon case. Thus, the trial court dismissed Overstock’s complaint “[f]or the reasons stated in the [Amazon Decision],” R.15, but largely ignored the arguments raised by Overstock that were specific to its cross-motion and opposition papers. Overstock filed a direct appeal to the Court of Appeals pursuant to CPLR § 5601(b)(2). R.3. However, by order dated May 5, 2009, the Court transferred the appeal, without costs, to the First Department. See Overstock.com, Inc. v. The New York State Dep’t of Taxation & Fin., et al., 12 N.Y.3d 830 (2009). R.2. In a consolidated decision dated November 4, 2010, the First Department affirmed the trial court’s dismissal of Overstock’s and Amazon’s facial Commerce and Due Process Clause claims, but reversed the trial court’s decision dismissing submitted separate evidence and separate memoranda of law that contained distinct positions and arguments. -18- the respective as-applied Commerce and Due Process Clause claims. R.xvi (3).9 The First Department accordingly remanded the actions to the trial court for further proceedings in connection with the as-applied challenges. Id. Thereafter, Overstock voluntarily discontinued its as-applied challenges in order to maintain its direct appeal to this Court. D. Trial Court Decision The trial court held that the Internet Tax satisfied the Commerce Clause, notwithstanding Overstock’s claim of facial invalidity, because the Internet Tax was “carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes and, if such a basis does not exist, it gives the seller an out” through the rebuttable presumption. R.26; see R.15 (stating that the statute “withstands a facial constitutional challenge” because “[i]ts presumption is not constitutionally defective and can be rebutted”). Additionally, the trial court noted that the statute only applies if more than $10,000 in revenue is collected from New York residents. R.26-27. Thus, the trial court determined that the Internet Tax “contemplates a substantial nexus with New York.” R.27. 9 For the Court’s convenience, all citations to the Appellate Division decision include a citation to the Record on Appeal and a parenthetical citation to the page number of the decision itself. -19- E. Appellate Division Decision The First Department concluded that the Internet Tax did not violate the Commerce Clause on its face because, by imposing tax collection obligations “only” where there is “a business-referral agreement with a New York State resident” that compensates the resident through “a commission based on a sale in New York,” the Internet Tax satisfied the nexus requirement under the Commerce Clause. R.xxxi (18). The First Department also concluded that although “there must be solicitation, not passive advertising,” the statute provides “a ready escape hatch or safe harbor” through the rebuttable presumption for activity that amounts to mere advertising. Id. The court added that “there is a set of circumstances under which the statute would be valid,” and therefore, the facial challenge to the Commerce Clause failed. R.xxxiii (20).10 With respect to Overstock’s due process facial claim, the First Department found that the Internet Tax’s presumption of solicitation was not an irrational presumption because solicitation was likely to occur in order to “enhance earnings.” R.xxxvi (24-26). 10 The First Department remanded Overstock’s as-applied claims, which are not at issue in this appeal. Additionally, the First Department ruled that Overstock’s claims were ripe and did not require exhaustion of administrative remedies. R.xli-xliii (28-33). -20- ARGUMENT POINT I NEW YORK’S INTERNET TAX IS FACIALLY INVALID UNDER THE COMMERCE CLAUSE The Commerce Clause of the United States Constitution expressly authorizes Congress to regulate commerce among the several states. U.S. Const., art. 1, § 8, cl. 3. The Commerce Clause, in addition to its affirmative grant of authority, “has a negative sweep as well.” Quill Corp. v. North Dakota, 504 U.S. 298, 309 (1992); see also Healy v. Beer Inst., 491 U.S. 324, 326 n.1 (1989) (noting that the “affirmative grant of authority to Congress also encompasses an implicit or ‘dormant’ limitation on the authority of the States to enact legislation affecting interstate commerce”). Thus, the Supreme Court has consistently held that the “dormant Commerce Clause” prohibits state action that interferes with interstate commerce even when Congress has failed to legislate on the subject. See, e.g., Gen. Motors Corp. v. Tracy, 519 U.S. 278, 287 (1997); Quill, 504 U.S. at 309; Nw. States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458 (1959); see also Dutchess Sanitation Serv., Inc. v. Town of Plattekill, 51 N.Y.2d 670, 674-75 (1980). The Commerce Clause “‘reflect[s] a central concern of the Framers that was an immediate reason for calling the Constitutional Convention: the conviction that -21- in order to succeed, the new Union would have to avoid the tendencies toward economic Balkanization that had plagued relations among the Colonies and later among the States under the Articles of Confederation.’” Wardair Canada, Inc. v. Fla. Dep’t of Revenue, 477 U.S. 1, 7 (1986) (quoting Hughes v. Oklahoma, 441 U.S. 322, 325-26 (1979)). The Framers designed the Commerce Clause in order to prevent the “competitions of commerce” from causing “[e]ach State, or separate confederacy [from] pursu[ing] a system of commercial policy peculiar to itself” that would otherwise “occasion distinctions, preferences, and exclusions, which would beget discontent.” THE FEDERALIST NO. 7 (Alexander Hamilton). “Under the Articles of Confederation, state taxes and duties hindered and suppressed interstate commerce,” making the states’ taxing power a principal concern. Quill, 504 U.S. at 312. Thus, “the Framers intended the Commerce Clause as a cure for these structural ills,” id., to ensure a national economy free from local restrictions that would create obstacles to commerce among the states, see Nat’l Bellas Hess v. Dep’t of Revenue, 386 U.S. 753, 760 (1967). “The command has been stated more easily than its object has been attained, however, and the Court’s understanding of the dormant Commerce Clause has taken some turns.” Oklahoma Tax Comm’n v. Jefferson Lines, Inc., 514 U.S. 175, 180 (1995). Nevertheless, despite changing business landscapes and political climates, the Supreme Court has made clear that a state tax will not survive a -22- Commerce Clause challenge unless the tax “‘[1] is applied to an activity with a substantial nexus with the taxing State, [2] is fairly apportioned, [3] does not discriminate against interstate commerce, and [4] is fairly related to the services provided by the State.’” Quill, 504 U.S. at 311 (quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)) (brackets in original). The Supreme Court has explained that the Complete Auto test, and the Court’s related jurisprudence, incorporates the Framers’ concerns about the effects of state regulation on the national economy. Id. at 313. The purpose of the substantial nexus prong, which is the focus of this appeal, is to “limit the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce.” Id. Here, however, New York State has exceeded the limit on its taxing authority by enacting a tax where there is no substantial nexus, and has imposed an undue burden on interstate commerce in exactly the manner that the Framers intended to prevent. As even the courts below acknowledged, the Internet Tax employs a presumption that sweeps within its scope out-of-state entities that have no substantial nexus with the State. The fact that the State’s unconstitutional overreaching can purportedly be rebutted, by submitting proof to rebut the statute’s presumption in each individual case, does not render the statute valid. New York -23- does not have the authority in the first instance to impose its tax laws on those without a substantial nexus in New York. Moreover, placing the obligation on out- of-state entities to fight the unconstitutional imposition of a tax law in and of itself significantly burdens interstate commerce. The State cannot cast an unconstitutionally wide net in order to catch the few entities that may properly be subject to the law. The Internet Tax is even more offensive to the Commerce Clause when taking into account that every state, and the thousands of taxing jurisdictions across the country, could impose a similar law. New York was the first state to enact a tax on internet retailers; dozens of other states have enacted or proposed nearly identical laws in an effort to curb ever-diminishing state tax revenue.11 Thus, retailers without a substantial nexus in any of these jurisdictions will be subject to a maze of tax regulations and requirements just to disprove the statutes’ applicability. Accordingly, the Internet Tax runs counter to the very purpose of the Commerce Clause and, as demonstrated below, violates the bright-line rule that the 11 See Ark. Code Ann. § 26-52-117; Conn. Gen. Stat. § 12-407; 35 Ill. Comp. Stat. § 105/2; N.C. Gen. Stat. § 105-164.8; R.I. Gen. Laws § 44-18-15; 32 Vt. Stat. Ann. tit. 32 § 9701. -24- Supreme Court established in National Bellas Hess, Inc. v. Department of Revenue of Illinois and reaffirmed in Quill Corp. v. North Dakota. A. The Commerce Clause Sets A Bright-Line Rule Requiring An In-State Physical Presence In Order To Satisfy The Substantial Nexus Factor The United States Supreme Court has established a “bright-line” rule, as set forth in Quill Corp. v. North Dakota, applicable to sales and use tax cases under the Commerce Clause. See Quill, 504 U.S. at 317-18. Pursuant to Quill, a state may not impose tax collection obligations on an out-of-state retailer unless a “substantial nexus” exists between the retailer and the taxing state. See id. at 311- 16. The Quill Court reaffirmed the Bellas Hess precedent that “a vendor whose only contacts with the taxing State are by mail or common carrier lacks the ‘substantial nexus’ required by the Commerce Clause,” id. at 311, and that “such vendors are free from state-imposed duties to collect sales and use taxes,” id. at 315. Thus, the Court has made clear that a vendor’s physical presence in the taxing state is an essential factor of the “substantial nexus” requirement, and that “[w]hether or not a State may compel a vendor to collect sales or use tax may turn on the presence in the taxing State of a small sales force, plant, or office.” Id. Accordingly, physical presence is the touchstone of the “substantial nexus” requirement. See id. at 313-17; see also Orvis Co. v. Tax Appeals Tribunal of the State of New York, 86 N.Y.2d 165, 178 (1995). -25- In striking similarity to the instant appeal, in Quill, North Dakota’s tax law sought to impose an obligation to collect and pay North Dakota use tax on out-of- state, mail-order-only retailers that had neither outlets nor sales representatives in the State and who shipped purchases solely through the mail and common carriers. Quill, 504 U.S. at 301, 303. Quill merely solicited business “through catalogs and flyers, advertisements in national periodicals, and telephone calls,” and shipped purchases into the State from out-of-state locations exclusively through the mail or common carrier. Id. at 302. North Dakota ultimately sued Quill to force it to remit use taxes in accordance with the State’s law. Id. at 303. Although the trial court in Quill ruled that North Dakota’s law violated the physical presence test established by Bellas Hess, the North Dakota Supreme Court reversed. Relying predominately upon Justice Fortas’ dissent in Bellas Hess, the North Dakota Supreme Court refused to “abandon its common sense and experience at the courthouse door and ignore the tremendous social, economic, commercial, and legal innovations since” Bellas Hess, and therefore held that the Commerce Clause no longer mandated the sort of physical presence nexus suggested in Bellas Hess. North Dakota v. Quill Corp., 470 N.W.2d 203, 208 (N.D. 1991); see Quill, 504 U.S. at 301, 303-04.12 12 The dissent in Quill relied upon similar reasoning in its argument that physical presence is an “anachronistic notion.” See Quill, 504 U.S. at 327-28 (White, J., concurring in -26- The Supreme Court reversed after determining that, notwithstanding the changes noted by the North Dakota Supreme Court, the physical presence requirement articulated in Bellas Hess remained good law in connection with the Commerce Clause. Quill, 504 U.S. at 314. As the Court explained, the “bright- line rule of Bellas Hess furthers the ends of the dormant Commerce Clause” because “[u]ndue burdens on interstate commerce may be avoided not only by a case-by-case evaluation of the actual burdens imposed by particular regulations or taxes, but also, in some situations, by the demarcation of a discrete realm of commercial activity that is free from interstate taxation.” Id. at 314-15 (emphasis added). Thus, the Court reasoned that a bright-line rule “firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes[,] reduces litigation concerning those taxes,” id. at 315, “encourages settled expectations and, in doing so, fosters investment by businesses and individuals,” id. at 316. The Court expressly recognized that although this test could prove “artificial at its edges,” the Court considered that “artificiality . . . is more than offset by the benefits of such a clear rule.” Id. at 315. The Court further recognized that, part and dissenting in part). The majority, despite agreeing “with much of the state court’s reasoning,” id. at 302, and despite noting that “contemporary Commerce Clause jurisprudence might not dictate the same result were the issue to arise for the first time today,” id. at 311, nevertheless expressly preserved the precedent requiring a physical presence within the taxing state to satisfy the Commerce Clause’s substantial nexus prong, see id. at 302, 310, 312, 314. -27- without a “bright line” rule, state tax collection obligations would become unreasonably burdensome, especially where “similar obligations might be imposed by the Nation’s 6,000-plus taxing jurisdictions.” Id. at 313 n.6; see also Bellas Hess, 386 U.S. at 759-60. Quill remains the law today, notwithstanding further “tremendous social, economic, commercial, and legal innovations” since that case was decided over two decades ago. Quill, 504 U.S. at 301. B. New York Unconstitutionally Imposes A Tax Upon Out-of-State Retailers Who Have No Substantial Nexus With New York The Internet Tax impermissibly imposes a tax collection obligation on out- of-state vendors who have no physical presence in the State, and thus, no substantial nexus. Therefore, the tax crosses Quill’s bright-line rule and unduly burdens interstate commerce. 1. The Plain Language Demonstrates That The Statute Applies In The Absence Of A Substantial Nexus “[A]s in all cases requiring statutory construction, we begin with an examination of the statute’s plain meaning.” Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 97 N.Y.2d 456, 460-61 (2002). The plain language of the Internet Tax has an expansive reach. The statute states that a seller “shall be presumed to be soliciting business,” and thus subject to the obligation to collect taxes, if the retailer “enters into an agreement with a resident of this state under -28- which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales” exceed $10,000. N.Y. Tax Law § 1101(b)(8)(vi) (emphasis added). On its face, the Internet Tax subjects all out-of-state vendors who advertise in the State to tax collection obligations by creating a substantial nexus for all advertising, in any form. Thus, any retailer whose only contact with the State is by mail or common carrier that contracts with a resident of New York to place advertisements in public media for some form of payment is subject to collection obligations if the advertisements generate revenues in excess of $10,000. However, solicitation through advertisements cannot serve as a substantial nexus and does not constitute a physical presence in the taxing state. See Quill, 504 U.S. at 313 n.6 (“North Dakota’s use tax illustrates well how a state tax might unduly burden interstate commerce. On its face, North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year.”); see also Miller Bros. Co. v. Maryland, 347 U.S. 340, 346-47 (1954) (refusing to find in-state solicitation based on minimal physical contacts and “the incidental effects of general advertising”); L.L. Bean, Inc. v. Commonwealth, Dep’t of Revenue, 516 A.2d 820, 825 (Pa. Cmmw. Ct. 1986) (finding general mailings -29- and national advertising not directed to residents of one state in particular insufficient to justify imposition of collecting use tax). Indeed, the Appellate Division and the State agree that advertising is insufficient to establish a substantial nexus. See R.xxxi (18) (“Of equal importance to the requirement that the out-of-state vendor have an in-state presence is that there must be solicitation, not passive advertising.”); see also R.63-64; R.69. Yet, the Appellate Division ignored the plain language of the statute and relied upon an unjustifiably narrow reading, in which the court excised certain words and inserted requirements that were absent, in violation of principles of statutory construction. For example, the Appellate Division construed the statute as only applying when a resident of the State is compensated by commission, despite the fact that the statute clearly states the collection obligation is triggered when payment is made by “a commission or other consideration.” § 1101(b)(8)(vi) (emphasis added); see R.xxxi (18) (concluding that the Commerce Clause was not violated because the Internet Tax “imposes a tax collection obligation on an out-of-state vendor . . . only when [the in-state] resident receives a commission based on a sale in New York.”).13 Thus, a flat fee arrangement for the placement of advertising is undeniably encompassed within the terms of the statute, but ignored by the court.14 13 The Appellate Division and trial court also erroneously confused the Due Process nexus requirement with the Commerce Clause nexus requirement and, as a result, -30- Moreover, the Appellate Division based its interpretation of the statute on the agency TSB-Ms. See R.xviii (5) (paraphrasing TSB-M-08(3)S at R.63). Indeed, the court went as far as declaring, after its discussion of the TSB-Ms, that “more than a mere pass-through ‘click’ on the Internet was required to impose tax collection responsibilities on the out-of-state sellers. The in-state contractor actually has to engage affirmatively in customer solicitation before the out-of-state vendor becomes subject to the statue.” R.xix (6). However, once again, the plain language of the statute has no such requirement. Rather, the law clearly states that a seller is presumed to solicit when the in-state representative either “directly or overemphasized the Internet Tax’s use of an agreement between a retailer and an advertiser. See R.xxx-xxxi (17-18) (relying upon the “threshold inquiry” stated in Standard Pressed Steel Co. v. Washington Dep’t of Revenue, 419 U.S. 560, 562 (1975), and Wisconsin v. J.C. Penny Co., 311 U.S. 435, 444 (1940), both of which were articulating due process analyses); see also R.27 (“The statute is targeted at requiring tax collection when an out-of-state seller avails itself of the benefit of in-state contractors compensated for referrals.”) (emphasis added). However, it is clear that “[t]he Commerce Clause and the Due Process Clause impose distinct but parallel limitations on a State’s power to tax out-of-state activities.” MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16, 24 (2008) (citing Quill, 504 U.S. at 305-06); see also Quill, 504 U.S. at 312. Indeed, “[t]here may be more than sufficient factual connections, with economic and legal effects, between the transaction and the taxing state to sustain the tax as against due process objections. Yet it may fall because of its burdening effect upon the commerce.” Quill, 504 U.S. at 305-06. 14 Notably, even the TSB-Ms make clear that commission-based payments were not the only type of compensation covered by the statute. Shortly after the Internet Tax was enacted, the State released a TSB-M stating: [A]n e-commerce retailer that uses persons to act as its representatives in the state to solicit sales . . . in return for commissions, referral fees or other types of compensation is considered to be soliciting business within this state through the use of independent contractors or representatives. R.63 (emphasis added). -31- indirectly refers potential customers, whether by a link on an internet website or otherwise.” § 1101(b)(8)(vi). Thus, contrary to the court’s assertion, “a mere pass-through ‘click’ on the Internet” subjects an out-of-state retailer to tax liability.15 Further, the First Department paradoxically asserts that “an in-state resident which merely acts as a conduit for linkage with the out-of-state vendor will be presumed to have not engaged in activity which would require the vendor to collect sales tax,” R.xxxii (19) (emphasis added), and that “[t]he obligations imposed by the state to collect the tax only arise when the paradigm shifts from advertising to solicitation,” R.xxxiii (20) (emphasis added). Yet, the statute operates in precisely the opposite fashion: it presumes that all retailers advertising in the state, pursuant to an agreement under which payment is made, are in actuality soliciting.16 15 The expansive view of the statute’s coverage is illustrated further by TSB-M-08(3)S, which advises that, under the Internet Tax, “[a] resident representative would be indirectly referring potential customers to the seller where, for example, the resident representative refers potential customers to its own Web site, or to another party’s Web site which then directs the potential customer to the seller’s Web site.” R.64. 16 The legislative history makes clear that the statute operates in order to include out-of- state internet retailers through the presumption. See R.147 (Senate Finance Committee Staff Report stating that the statute “redefine[s] ‘vendor’ to include internet retailers that actively encourage web site owners residing in New York State to advertise for the internet retailer in return for a commission on sales resulting from the followed link”); see also Uniformed Firefighters Ass’n Local 94, IAFF, AFL-CIO v. Beekman, 52 N.Y.2d 463, 471 (1981) (“Sound principals of statutory interpretation generally require examination of a statute’s legislative history and context to determine its meaning and scope.”). -32- The court and agency’s attempt to narrow the statute, however, requires an unnatural, unreliable and inconsistent construction. As the Supreme Court stated in United States v. Stevens, --- U.S. ----, 130 S. Ct. 1577 (2010), “[t]his Court may impose a limiting construction on a statute only if it is readily susceptible to such a construction. We will not rewrite a law to conform it to constitutional requirements . . . . To read [the statute] as the Government desires requires rewriting, not just reinterpretation.” Stevens, 130 S. Ct. at 1591. The Court explained further, “[w]e would not uphold an unconstitutional statute merely because the Government promised to use it responsibly.” Id. at 1591-92 (internal quotation marks and citations omitted). Equally relevant to the improper reliance upon the TSB-Ms here, the Stevens Court found that “[t]he Government’s assurance that it will apply [a statute] far more restrictively than its language provides is pertinent only as an implicit acknowledgment of the potential constitutional problems with a more natural reading.” Id. at 1591. Similarly, this Court has held that where “the question is one of pure statutory reading and analysis, dependent only on accurate apprehension of the legislative intent, there is little basis to rely on any special competence or expertise of the administrative agency.” Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 322 (2003) (holding that a court need not defer to DTF’s interpretation of a statute -33- where such interpretation does not involve “the detailed labor of fitting tax filings and other accounting artifacts into the language of the Tax Law”) (citation omitted); see also Kurcsics v. Merchants Mut. Ins. Co., 49 N.Y.2d 451, 458-59 (1980) (same). Thus, the Appellate Division’s reliance upon the agency TSB-Ms is unavailing. Predicating the decision upon DTF’s statements in the TSB-Ms is all the more flawed because DTF expressly claims that its TSB-Ms are merely “informational statement[s]” that are only “accurate on the date issued.” R.67; R.70. Indeed, each of the TSB-Ms expressly warns that “[s]ubsequent changes . . . in department policies could affect the validity of the information presented in a TSB-M.” Id. Thus, the TSB-Ms provide no reliable guidance to an out-of-state seller. Accordingly, here, as in Stevens, construing the statute as narrowly as the State and the courts below suggest in order to find it constitutional would require “rewriting, not just reinterpretation.” Stevens, 130 S. Ct. at 1592. 2. The Internet Tax Lacks A Physical Presence Requirement Despite both the State agency’s and the Appellate Division’s attempts to limit the statute, on its face the Internet Tax imposes tax collection obligations on out-of-state retailers who have no physical presence in the state. All of the Supreme Court’s decisions, both before and after Quill, that have examined the -34- constitutionality of a state’s efforts to impose tax collection obligations upon out- of-state vendors have based the analysis upon whether the vendor had a physical presence in the taxing state. And, all of the cases in which the Supreme Court found a substantial nexus involved a level of physical presence that simply does not exist under the statute. For example, in Scripto, Inc. v. Carson, 362 U.S. 207 (1960), Florida required Scripto, a Georgia corporation, to collect and pay use taxes on the writing instruments it sold and shipped to Florida residents. Id. at 207-08. Although Scripto had no full-time employees or property in Florida, Scripto’s orders in the State were “solicited by . . . wholesalers or jobbers, who [were] residents of Florida.” Id. at 209. Scripto employed ten of these agents, “each having a written contract and a specific territory” in which to promote and sell Scripto’s products. Id. “Each salesman [was] furnished catalogs, samples, and advertising material, and [was] actively engaged in Florida as a representative of Scripto for the purpose of attracting, soliciting and obtaining Florida customers . . . .” Id. (emphasis added) (internal quotation marks omitted). Further, the Court observed that “[t]he only incidence of this sales transaction that [was] nonlocal [was] the acceptance of the order.” Id. at 211. Because Scripto had employed a group of salesmen specifically to travel around the state soliciting customers, and the majority of the sales activity physically occurred within the State, the Supreme Court concluded -35- that there was a sufficient nexus between the Georgia corporation and the State of Florida. See id. at 211.17 Notably, the Supreme Court has recognized on more than one occasion that its holding in Scripto represents the outer limit of its sales and use tax jurisprudence. In Bellas Hess, seven years after Scripto, the Court stated that Scripto was “[t]he case in this Court which represents the furthest constitutional reach to date of a State’s power to deputize an out-of-state retailer as its collection agent for a use tax.” Bellas Hess, 386 U.S. at 757 (emphasis added). Twenty-five years later, in Quill, the Court similarly identified Scripto as the outer boundary of its tax-related Commerce Clause cases. See Quill, 504 U.S. at 306 (describing Scripto as “[t]he furthest extension” of a state’s taxing power). The tax statute at issue here goes well beyond what the Supreme Court has delineated as the outer limit of a state’s taxing authority. The cases relied upon by the First Department similarly illustrate a degree of physical presence that is completely absent from the Internet Tax and, thus, are inapposite. Each case involves an out-of-state retailer who maintained an actual and meaningful physical presence in the taxing state via in-state representatives or 17 In Scripto, the in-state traveling salesmen were also paid by commission. Scripto, 362 U.S. at 209. The commission payments in that case, however, were not the basis of the Supreme Court’s decision, and were mentioned only within the Court’s recitation of the facts. See id. The Court’s legal conclusion was founded not upon the method of compensation, but rather upon the economic activity physically conducted in the state. See id. at 210-12. -36- employees who had been hired specifically to conduct business in the state, to maintain existing customer relationships, or to actively recruit new customers. See Standard Pressed Steel Co. v. Wash. Dep’t of Revenue, 419 U.S. 560, 562 (1975) (vendor’s employee had “a full-time job within the State, [and] made possible the realization and continuance of valuable contractual relations between appellant” and “its principal customer in the State of Washington.”).18 In Orvis Co. v. Tax Appeals Tribunal of the State of New York, 86 N.Y.2d 165 (1995), the plaintiffs were two Vermont mail-order businesses, neither of which maintained any offices, property or personnel in New York, and both of which shipped all merchandise via mail or common carrier. See id. at 169-70. However, both retailers sent personnel into New York on varying occasions to support their sales efforts by soliciting future sales and providing integral customer service. See id. The Court determined that, with respect to one plaintiff, “Orvis’ substantial wholesale business in this State was generally accomplished by means 18 The analysis in this case is consistent with that of other Supreme Court cases on the subject. See, e.g., Tyler Pipe Indus. v. Wash. State Dep’t of Revenue, 483 U.S. 232, 249 (1987) (in-state sales representatives “acted daily on behalf of Tyler Pipe in calling on its customers and soliciting orders” and had “long-established and valuable relationships with Tyler Pipe’s customers”) (internal quotation marks and citation omitted); Nat’l Geographic Soc’y v. Cal. Equalization Bd., 430 U.S. 551, 556 (1977) (declining to adopt “slightest presence” test and finding presence of two in-state offices established physical presence); Gen. Trading Co. v. State Tax Comm’n, 322 U.S. 335, 337 (1944) (sales representatives traveled into the state for the specific purpose of soliciting orders); Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62, 65 (1939) (sales agents, permitted to employ sub-agents, rented office space in the taxing state and, by contract, were required to “devote [their] entire time and attention to soliciting orders for plaintiff”). -37- of its sales personnel’s direct solicitation of retailers through visits to their stores in New York, subject only to approval of all orders in Vermont,” id. at 179, which was further established by the fact that the sales personnel visited New York “‘in a loop’, suggesting systematic visitation to all of its as many as 19 wholesale customers on the average of four times a year,” id. at 180.19 Thus, in Orvis, there was purposeful, targeted and personal solicitation physically conducted in New York by the vendor’s employees to maintain established customer relationships and generate additional sales. In contrast, the Internet Tax applies in the absence of such intentional and directed activity, and applies to vendors who do not approach the physical presence found by the Court in Orvis. Consequently, the statute does not even require “demonstrably more than the slightest presence” in New York.20 19 The First Department also cites Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443 (2003), to establish the appropriate standard of review, as discussed in detail below. See R.xxviii (15). Moran has no other relevance here as Moran concerned a “privilege of doing business in New York” tax on fuel consumed by vessels engaged in interstate commerce while in New York waters where the substantial nexus was satisfied because the taxed entities were New York corporations doing business in New York. See Moran, 99 N.Y.2d at 446, 447. Moreover, the Court expressly stated that it did not reach the issue of whether the tax would be constitutional if it were applicable to a “foreign business whose only connection with the state is . . . in the course of interstate commerce.” Id. at 451. 20 “While a physical presence of the vendor is required, it need not be substantial,” but “must be demonstrably more than a slightest presence.” Orvis, 86 N.Y.2d at 178 (internal quotation marks omitted). -38- Accordingly, the First Department did not provide any authority to support the view that presumed solicitation, based upon nothing more than links through the internet, can satisfy the bright-line, physical presence rule set by the Supreme Court in Quill. Rather, the court found a physical presence based only upon its restricted construction of the statute under which an in-state resident is actually, physically soliciting. However, as demonstrated above, such a narrow reading cannot be justified. Further, if the Internet Tax were truly so limited, then it would serve no purpose and be superfluous; vendors who have representatives actually soliciting on their behalf in the State are already subject to tax collection obligations under the Tax Law as it stands, without the addition of the Internet Tax. See Tax Law § 1101(b)(8)(i)(C)(I-II) (defining “vendor” to include any “person who solicits business either: (I) by employees, independent contractors, agents or other representatives; or (II) by distribution of catalogs or other advertising matter, without regard to whether such distribution is the result of regular or systematic solicitation, if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution”); see also Hewlett Assoc. v. City of New York, 57 N.Y.2d 356, 369 (1982) (“Given this apparent conflict between two provisions of the same legislation, we must, if possible, -39- resolve the conflict in a manner which effectuates the legislative intent, but which avoids rendering one of the provisions superfluous.”). Overstock, like most internet retailers, advertises by posting advertisements in the form of links and banners on other websites. By the very nature of the internet, these advertisements reach the advertiser’s general viewing audience and do not target any specific geographic area. “Once a provider posts content on the Internet, it is available to all other Internet users worldwide . . . [and a] speaker [on the internet] thus has no way of knowing the location of the recipient of his or her communication.” Am. Libraries Ass’n v. Pataki, 969 F. Supp. 160, 167 (S.D.N.Y. 1997) (internal quotation marks omitted); see Tiffany (N.J.) Inc. v. eBay, Inc., 576 F. Supp. 2d 463, 527 (S.D.N.Y. 2008) (observing that the internet has “created new ways for sellers and buyers to connect to each other and to expand their businesses beyond geographical limits”). The only difference between the placement of advertisements in newspapers and the placement of links or banners on the internet is that internet advertisements are interactive, and therefore allow a potential customer to view the advertisement and proceed immediately to the virtual store to instantly purchase the retailer’s products. Moreover, the technology of the internet allows advertising through that medium to more accurately account for effective advertising. See, e.g., Note, Sajjad Matin, Clicks Ahoy! Navigating Online Advertising in a Sea of Fraudulent -40- Clicks, 22 BERKELEY TECH. L.J. 533, 549 (2007) (describing cost-per-action advertising model as “promis[ing] advertisers a near-perfect use of their advertising dollars to attract legitimate customers”). The internet affords retailers the opportunity to use “performance marketing” tools to pay only for internet advertisements that lead a customer to make actual purchases. Baez, 64 TAX LAW. at 810. At base, all advertisements are designed to refer consumers to a seller for the purpose of generating business. Whether paid for by commission, flat fee or otherwise, an advertisement is still just that – an advertisement. There is no dispute that under the Tax Law, an out-of-state retailer does not become a “vendor” when it places an advertisement in a national newspaper based in New York, such as The New York Times, or even a newspaper targeted to New Yorkers, such as the New York Post. See, e.g., R.xxxviii (25) (“An advertisement in a newspaper is clearly not solicitation.”). Further, the parties appear to agree that The New York Times does not become a representative or independent contractor that solicits business for an out-of-state retailer by the placement of an advertisement in the newspaper. The New York Times also maintains a website that features interactive banners and links. It necessarily follows that The New York Times would not suddenly become a representative or independent contractor that solicits business for an out-of-state retailer merely because the retailer chose to -41- pay the Times on a commission basis through interactive advertisements posted on the Times’ website. Yet, the Internet Tax clearly presumes solicitation based upon even these kinds of advertisements, and potentially imposes tax collection obligations on any and/or every out-of-state advertiser. See § 1101(b)(8)(vi). Simply because technology allows internet businesses to track sales through a given advertisement, and thus compensate those with whom it places the advertisement on a commission basis, does not mean that the placement of that advertisement suddenly rises to the level of a “substantial nexus.” See, e.g., St. Tammany Parish Tax Collector v. Barnesandnoble.com, 481 F. Supp. 2d 575, 581 (E.D. La. 2007) (“That [an out-of-state company] may have derived a benefit from [in-state representative’s advertising] . . . is not sufficient to impute its presence to [the out-of-state retailer].”). Indeed, Quill explicitly rejected the North Dakota Supreme Court’s conclusion that technology has changed the rules of the game in such a manner as to warrant a departure from the bright-line rule of Bellas Hess. See Quill, 504 U.S. at 317 (citing Runyon v. McCrary, 427 U.S. 160, 190-91 (1976) (Stevens, J., concurring)). Thus, the plain language of Internet Tax demonstrates that it is unconstitutional on its face because it imposes tax collection obligations on out-of- state vendors for pure advertising activities without a substantial nexus. -42- C. The Internet Tax Employs An Invalid Presumption The Internet Tax clearly and unambiguously establishes a mandatory presumption. The statute states that a seller “shall be presumed to be soliciting business” each and every time that an advertiser, pursuant to a written or oral “agreement” for which compensation through “a commission or other consideration” is paid, “directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller.” N.Y. Tax Law § 1101(b)(8)(vi); see also R.xxxv (22). Pursuant to the remainder of § 1101(b)(8)(vi), the burden is on the seller to rebut the presumption through unidentified “proof” of non-solicitation. The Internet Tax presumption does not merely allow a trier of fact to infer that a seller is soliciting business through a resident if the various factors above are met; rather, the trier must find this to be the case unless the seller sufficiently rebuts the presumption. The First Department concedes that the presumption sweeps broadly and includes within its reach “passive advertising” where there is no solicitation, no physical presence, and, thus, no substantial nexus. R.xxxvi (18) (“[T]here must be solicitation, not passive advertising. While the Tax Law . . . creates the presumption that the in-state agent will solicit, it provides the out-of-state vendor with a ready escape hatch or safe harbor” by rebutting the presumption.); R.xxxvi -43- (23) (“In the event, however, the in-state representative wishes to chance success merely on luck and good fortune, without expending initiative [i.e. passive advertising], the statute permits it to offer proof it did not engage in solicitation.”).21 Thus, the statute violates the Commerce Clause. Indeed, in light of the impermissible reach of the statute, the First Department relies heavily, if not exclusively, upon the purported ability to rebut the presumption as a “safe harbor” or “escape hatch” to save the statute from invalidity. However, the allegedly rebuttable nature of the presumption is unavailing. The State has exceeded its legitimate taxing authority and intentionally brought within its scope activity that clearly falls on the other side of the bright- line rule of Quill. The State’s initial overreaching is not rendered constitutional because an entity may have an opportunity to attempt to rebut the unconstitutional presumption. The statute is void ab initio.22 As set forth more fully above, and as the Supreme Court explained in Quill, the concerns that inform the Commerce Clause and its nexus requirement are not those “about fairness for the individual defendant [but rather about] structural 21 The trial court made the same concession. See R.26 (finding that the statute “is carefully crafted to ensure that there is a sufficient basis for requiring collection of New York taxes and, if such a basis does not exist, it gives the seller an out”) (emphasis added). 22 Additionally, the fact that the legislature included a rebuttable presumption provision serves only to further demonstrate the invalidity of the statute because no such “safe harbor” would be necessary if the tax was appropriately within the legislature’s power. -44- concerns about the effects of state regulation on the national economy.” Quill, 504 U.S. at 312; see also Hughes, 441 U.S. at 325-26; Dutchess, 51 N.Y.2d at 674-75. Thus, the interest protected by the Commerce Clause is the integrity of the national economy, not the rights of the individual taxpayer. Accordingly, it is the fact that the State has exceeded is taxing authority that renders the statute unconstitutional, regardless of the liability of individual entities. Consistent with the purpose of the dormant Commerce Clause, a state must draft its tax statutes to apply to out-of-state entities only when there is a substantial nexus. See Stevens, 130 S. Ct. at 1592 (rewriting a statute to conform to constitutional requirements will “sharply diminish [a legislature’s] incentive to draft a [constitutional] law in the first place”) (internal quotation marks omitted); see also Red Earth LLC v. United States, 728 F. Supp. 2d 238, 247 (W.D.N.Y. 2010) (“The Commerce Clause forbids states to levy taxes that discriminate against or burden interstate commerce . . . .”) (citing MeadWestvaco, 553 U.S. at 24). Moreover, “‘[A] constitutional prohibition cannot be transgressed indirectly by the creation of a statutory presumption any more than it can be violated by direct enactment.’” Speiser v. Randall, 357 U.S. 513, 526 (1958) (quoting Bailey v. Alabama, 219 U.S. 219, 239 (1911)). “‘The power to create presumptions is not a means of escape from constitutional restrictions.’” Id. (quoting Bailey, 219 U.S. at 239). -45- Imposing tax collection obligations on out-of-state retailers who advertise in-state places an undue burden upon interstate commerce. See, e.g., Quill, 504 U.S. at 313 n.6 (“On its face, North Dakota law imposes a collection duty on every vendor who advertises in the State three times in a single year.”) (citing Bellas Hess, 386 U.S. at 759-60); Miller Bros., 347 U.S. at 346-47 (relying upon, in part, “the incidental effects of general advertising”). That the statute does so by operation of a presumption, regardless of the ability or willingness of the retailer to attempt to escape the presumption, does not make it any less a violation of the Commerce Clause. However, even the statute’s alleged rebuttable presumption violates the Commerce Clause. The notion that an out-of-state seller with no substantial nexus in the State must subject itself to the administrative authority of a State agency and attempt to comply with various, potentially ephemeral, requirements on an annual basis just to establish that it is not actually subject to the law is not only absurd, but places its own unreasonable burden on entities engaged in interstate commerce.23 Essentially, the Internet Tax requires out-of-state retailers to choose between one of two undue burdens: either collect and pay taxes from New York residents despite a lack of substantial nexus or physical presence, or seek to rebut the 23 As discussed above, supra at 14-15, although the form of proof required is not set forth in the statute, the State has provided guidance in TSB-M-08(3.1)S on what it currently finds to be potentially sufficient to rebut the presumption. See R.69-70. -46- presumption by complying with the costly and time-consuming hurdles of obtaining annual certifications from every advertiser, inserting State-mandated contractual terms into every advertising agreement and requiring non-profit and charitable organizations to post use tax warnings on their websites. R.69-70. Additionally, the out-of-state retailer would become subject to the authority and discretion of DTF. See id. at 70. These requirements, standing alone, place an undue burden on interstate commerce and impose significant obstacles and restrictions that violate the purpose of the Commerce Clause. See THE FEDERALIST NOS. 7, 11 (Alexander Hamilton); Quill, 504 U.S. at 312; see also Bellas Hess, 386 U.S. at 760; Red Earth, 728 F. Supp. 2d at 246-47. A recent Colorado case, Direct Marketing Ass’n v. Huber, No. 10-cv-01546, 2012 WL 1079175 (D. Colo. Mar. 30, 2012), in which the court held that a Colorado statute imposing reporting obligations upon out-of-state retailers was unconstitutional, is squarely on point. The statute at issue “require[d] retailers that sell products to customers in Colorado, but do not collect and remit Colorado sales tax on those transactions, to report certain information about the customers’ purchases from the retailer to each customer and to the Colorado Department of Revenue.” Id. at *1. Although Huber involved a discrimination claim under the Commerce Clause, the court observed that Quill’s undue burden inquiry “drives the analysis of the Act and the Regulations in relation to the plaintiff[’s] -47- discrimination claim.” Id. at *4. The court found that compliance with the statute would impose burdens on out-of-state retailers, “including costs of compliance and possibly lost sales, on out-of-state retailers.” Id. at *5. In Huber, the State argued that the act and regulations were not discriminatory because “out-of-state retailers may choose between two alternatives: comply with the Act and the Regulations or voluntarily collect and remit Colorado sales tax.” Id. at *5. For reasons that are clearly relevant to this appeal, the court rejected Colorado’s argument, concluding that “[t]he state’s creation of this option does not resolve the problem. Under Quill Colorado may not condition an out-of-state retailer’s reliance on its rights on a requirement that the retailer accept a different burden . . . .” Id. at *5. Here, although the Court is not presented with a discrimination-based challenge, the court’s analysis in Huber is directly applicable. By giving out-of- state retailers the option to either collect and pay sales tax from New York residents or attempt to invoke the costly and time-consuming “escape hatch,” the State has merely forced out-of-state retailers to choose a burden. Either option violates the Commerce Clause. Moreover, the burdens presented by the Internet Tax are amplified when one considers that “similar obligations might be imposed by the Nation’s 6,000-plus taxing jurisdictions.” See Quill, 504 U.S. 313 n.6. Indeed, numerous other states -48- have enacted legislation similar to the Internet Tax. See supra n.11. It is not hard to imagine that, if the Internet Tax is upheld, out-of-state retailers will need to comply with “rebuttable presumption” regulations in hundreds, if not thousands, of taxing jurisdictions, thus subjecting those engaged in interstate commerce to the “‘virtual welter of complicated [tax] obligations’” that the Framers clearly intended to prevent. See Quill, 504 U.S. at 313 n.6 (quoting Bellas Hess, 386 U.S. at 759- 60). Accordingly, as the statute violates the Commerce Clause, the fact that an individual vendor may attempt to rebut the presumptions in the statute does not repair the statute’s constitutional infirmity, but only imposes its own undue burdens on interstate commerce. The First Department’s decision should therefore be reversed, and the Internet Tax declared unconstitutional on its face. D. Moran Towing Does Not Set Forth The Proper Standard For Analyzing A Facial Challenge Under The Commerce Clause The courts below based their rejection of Overstock’s facial challenge under the Commerce Clause, at least in part, upon this Court’s holding in Matter of Moran Towing Corp. v. Urbach, 99 N.Y.2d 443 (2003). Moran relied upon and quoted the Supreme Court case United States v. Salerno, 481 U.S. 739, 745 (1987), in concluding that, in order to successfully challenge the facial constitutionality of -49- a statute, “‘the challenger must establish that no set of circumstances exists under which the Act would be valid.’” Moran Towing, 99 N.Y.2d at 448. In light of this nearly insurmountable hurdle, the First Department concluded that “there is a set of circumstances under which the [Internet Tax] would be valid, i.e., when a New York representative uses some form of proactive solicitation which results in a sale by Amazon, and a commission to the representative; and the representative has an in-state presence sufficient to satisfy the substantial nexus test.” R.xxxiii (20). However, the “no set of circumstances” test created in Salerno and adopted by this Court in Moran is not the appropriate standard for reviewing facial constitutional challenges to a statute.24 Since its inception, the Salerno language has been diminished, disregarded, and in some instances, rejected not only by the Supreme Court, but also by numerous federal and state courts that have been confronted by the issue. Instead of applying Salerno to determine the validity of a facial attack, the Supreme Court has relied upon the substantive applicable doctrinal law. Moreover, the Salerno standard is particularly inapplicable to a facial challenge under the Commerce Clause, which, in the context of this case, serves to 24 The Appellate Division all but ignored Overstock’s argument on this point when presented below, relegating to a footnote its erroneous conclusion that, “in the absence of any unequivocal holding to the contrary, we conclude that continued reliance on the ‘no set of circumstances’ standard is warranted.” See R.xxvii (14 n.3). -50- “limit the reach of state taxing authority so as to ensure that state taxation does not unduly burden interstate commerce.” Quill, 504 U.S. at 313. In other words, Salerno has no role in a Commerce Clause challenge because when a state legislature exceeds its constitutional authority by enacting a statute that unduly burdens interstate commerce, the statute is void ab initio; a hypothetical scenario where the statute may be applied without unduly burdening interstate commerce cannot somehow render the enactment valid. Accordingly, Overstock respectfully submits that the Court should revisit Moran and hold, for the reasons below, that the criteria set forth in Quill are the proper standard for evaluating a facial challenge under the Commerce Clause and Salerno’s “no set of circumstances” test does not apply. 1. The Salerno Standard Is Dicta And The United States Supreme Court Has Not Followed It As a preliminary matter, it must be noted that the Salerno standard was not a holding of the Supreme Court, but rather dicta that was unsupported by any precedent or authority. Indeed, nearly ten years after Salerno was decided, Justice Stevens observed that its “no set of circumstances” rule was “unsupported by citation or precedent. It was also unnecessary to the holding in the case, for the Court effectively held that the statute at issue would be constitutional as applied in a large fraction of cases.” Janklow v. Planned Parenthood, Sioux Falls Clinic, 517 -51- U.S. 1174, 1175 (1996) (denial of petition for certiorari). Justice Stevens further stated that “the dicta in Salerno ‘does not accurately characterize the standard for deciding facial challenges,’ and ‘neither accurately reflects the Court’s practice with respect to facial challenges, nor is it consistent with a wide array of legal principles.’” Id. (quoting Michael C. Dorf, Facial Challenges to State and Federal Statutes, 46 STAN. L. REV. 235, 238 (1994) (“The proper disposition of a facial challenge is intimately bound up in questions of substantive constitutional law, institutional competence, and statutory interpretation.”)).25 Justice Stevens also explained that because the Salerno rule was “unwise dictum [that] has been properly ignored in subsequent cases,” there was “no need for this Court affirmatively to disavow that unfortunate language.” 517 U.S. at 1175-76. An examination of the Supreme Court’s treatment of facial challenges between 1987, when Salerno was decided, and 1996, when Justice Stevens wrote his opinion in Janklow, affirms his observation that the “no set of circumstances” test had not been adopted by the Court as the standard for facial challenges. Indeed, only one year after the Salerno opinion was issued, in Bowen v. Kendrick, 487 U.S. 589 (1998), the Court rejected a facial challenge to a statute under the Establishment Clause, yet the constitutionality of the statute was 25 In a dissenting opinion, Justice Scalia argued that the Salerno standard “cries out for [the Court’s] review” and that if Justice Stevens was correct that the Salerno rule was a “dead letter,” it was “all the more reason to grant certiorari and make that clear.” Janklow, 517 U.S. at 1179, 1180. -52- assessed without invoking the “no set of circumstances” standard. Instead, the Court relied upon the long-standing analysis for examining facial challenges under the Establishment Clause as formulated by the Court in Lemon v. Kurtzman, 403 U.S. 602 (1971). See Bowen, 487 U.S. at 602 (“As in previous cases involving facial challenges on Establishment Clause grounds, we assess the constitutionality of an enactment by reference to the three factors first articulated in Lemon.”) (internal citations omitted). Moreover, in a dissenting opinion authored by Justice Blackmun, the four dissenting justices agreed with the majority in declining to invoke the Salerno standard, observing that: The Court, however, rejects the application of such a rigid analysis in Establishment Clause cases . . . . Indeed the [Salerno] test is wholly incongruous with analysis of an Establishment Clause challenge under Lemon, which requires our examination of the purpose of the legislative enactment, as well as its primary effect or potential for fostering excessive entanglement. Although I may differ with the majority in the application of the Lemon analysis to the AFLA, I join it in rejecting the [Salerno] approach which would render review under the Establishment Clause a nullity. Even in a statute like the AFLA, with its solicitude for, and specific averment to, the participation of religious organizations, one could hypothesize some ‘set of circumstances . . . under which the Act would be valid,’ as, for example, might be the case if no religious organization ever actually applied for or participated under an AFLA grant. The Establishment Clause cannot be eviscerated by such artifice. -53- Id. at 627 n.1 (emphasis added). Thus, immediately after Salerno was issued, the Court made it explicitly clear that the “no set of circumstances” test does not apply in all cases.26 A year later, in Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, 634 (1989), the Court was faced with a challenge to a forfeiture statute in which the petitioner argued that the statute was invalid under the Sixth Amendment and the Due Process Clause of the Fifth Amendment. Id. at 619. In rejecting the petitioner’s claim that the potential for abuse of the statute by a prosecutor could offend due process, the Court observed, quoting Salerno, that ‘“[t]he fact that the . . . Act might operate unconstitutionally under some conceivable set of circumstances is insufficient to render it . . . invalid.’” Caplin, 491 U.S. at 634 (quoting Salerno, 481 U.S. at 745). This sentence, as Justice Stevens stated, “correctly summarized a long established principle of [the Court’s] jurisprudence.” Janklow, 517 U.S. at 1175. Notably, however, the Court did not rely upon – or even cite – the prior sentence in Salerno containing the “no set of 26 It is worth noting that Chief Justice Rehnquist, the author of Salerno, delivered the majority opinion for the Court in Bowen, yet the majority opinion does not even reference Salerno’s test. -54- circumstances” language, which Justice Stevens described as having gone “well beyond that [long established] principle.” Id.27 In Rust v. Sullivan, 500 U.S. 173, 183 (1991), the Court cited the Salerno standard at the outset, but it did not serve as the basis for the Court’s analysis or conclusion. After a lengthy examination of the statutory and constitutional issues surrounding a challenge to the United States Department of Health and Human Services regulations that limited the ability of Title X fund recipients to engage in abortion-related activities, the Court held that the regulations were “a permissible construction of Title X” and did not violate either the First or the Fifth Amendment. Id. at 203.28 Significantly, in Kraft General Foods, Inc. v. Iowa Department of Revenue & Finance, 505 U.S. 71 (1992), the Court was faced with a facial challenge under 27 While it may appear initially that the two sentences referenced from Salerno are simply mirror images of each other, there is, in fact, a distinct and significant difference, as Justice Stevens asserted. The true reverse of the Court’s undisputed summary of jurisprudence, i.e., “[t]he fact that the . . . Act might operate unconstitutionally under some conceivable set of circumstances is insufficient to render it . . . invalid,” would be: the fact that the act might operate constitutionally under some conceivable set of circumstances is insufficient to render it valid. 28 Similarly, in Reno v. Flores, 507 U.S. 292 (1993), the Court disposed of a facial challenge to an immigration regulation governing the release of detained alien juveniles. Although the majority cited the Salerno test, it was not outcome-determinative. See 507 U.S. at 315 (“On its face, INS regulation 242.24 accords with both the Constitution and the relevant statute.”); see also id. (“[W]e reverse the decision of the Court of Appeals because the INS program challenged here, on its face, complies with the requirements of due process.”) (O’Connor, J., concurring). -55- the Commerce Clause in which the petitioner argued that an Iowa statute was unconstitutional because it treated dividends received from foreign subsidiaries less favorably than those received from domestic subsidiaries. The Court reviewed the statute, and ultimately held that it was facially invalid without any reference to Salerno’s “no set of circumstances” test, let alone its application.29 See id. at 82. And, although Quill apparently was initiated as an as-applied challenge, the Court, also in 1992, reviewed the statute in the manner of a facial attack, holding unconstitutional the North Dakota law in its entirety, and did not apply Salerno. See also W. Lynn Creamery, Inc. v. Healy, 512 U.S. 186, 199 (1994); C & A Carbone, Inc. v. Clarkstown, 511 U.S. 383, 389-94 (1994). The same year, in Planned Parenthood of Southeastern Pennsylvania v. Casey, 505 U.S. 833 (1992), in considering a facial challenge to Pennsylvania regulations concerning abortion, the Court ignored the Salerno standard in favor of an undue burden standard, holding that “[a] finding of an undue burden is a shorthand for the conclusion that a state regulation has the purpose or effect of placing a substantial obstacle in the path of a woman seeking an abortion of a nonviable fetus.” Id. at 877. Since Casey, the Court has used the “undue burden” standard, and eschewed the “no set of circumstances” test, when evaluating statutes 29 Indeed, the dissenting opinion acknowledged that the majority had not considered Salerno. See Kraft, 505 U.S. at 82-83. As discussed in greater detail below, Kraft also demonstrates that the Salerno test is not applicable to challenges under the Commerce Clause. -56- regarding abortion. See, e.g., Fargo Women’s Health Org. v. Schafer, 507 U.S. 1013 (1993) (“In striking down Pennsylvania’s spousal-notice provision [in Casey], we did not require petitioners to show that the provision would be invalid in all circumstances.”) (emphasis in original). Thus, the Court again identified yet another set of cases to which Salerno is not applicable.30 Accordingly, it is clear that in the years between Salerno and Janklow, the Court did not view the “no set of circumstances” standard as the sine qua non of facial challenges, and instead made significant departures from that rule. Further, Justice Stevens’ observation in 1996 that Salerno’s “no set of circumstances” language did not accurately characterize the Supreme Court’s standard for deciding facial challenges remained accurate in the nearly two decades of Supreme Court jurisprudence that followed. For example, in Romer v. Evans, 517 U.S. 620 (1996), the Court struck down, on Equal Protection grounds, a Colorado statute that prohibited municipalities from enacting legislation that banned discrimination against homosexual citizens. Once again, the majority did not hold the petitioners to the Salerno rule, despite the protest of three dissenting justices. See id. at 643. 30 The Court cited Salerno in dicta in one additional case. In Anderson v. Edwards, 514 U.S. 143 (1995), the Court rejected a facial challenge to a California public benefits statute without invoking the Salerno test, holding that “the California Rule does not violate any of the three federal regulations on which the Court of Appeals relied.” Id. at 155. The “no set of circumstances” language was only mentioned in a footnote regarding a claim that was not properly before the Court. See id. at 155 n.6. -57- Instead, relying upon well-established substantive law, the Court concluded that the challenged statute “classifies homosexuals not to further a proper legislative end but to make them unequal to everyone else. This Colorado cannot do. A State cannot so deem a class of persons a stranger to its laws. [The statute] violates the Equal Protection Clause.” Id. at 635. Similarly, in the context of a First Amendment overbreadth challenge to the Communications Decency Act, the Court struck down provisions of the Act as violative of free speech without reliance upon Salerno. See Reno v. Am. Civil Liberties Union, 521 U.S. 844, 849 (1997). Justice O’Connor, who concurred with the majority but dissented in part, observed that Salerno does not apply to a First Amendment claim in which the challenger argues that the statute is facially invalid “because it is ‘substantially overbroad’ – that is, it ‘sweeps too broadly . . . [and] penaliz[es] a substantial amount of speech that is constitutionally protected.’” Id. at 894 (quoting Forsyth Cnty. v. Nationalist Movement, 505 U.S. 123, 130 (1992)) (brackets in original). This refusal to apply Salerno in First Amendment cases has been consistent. See Nat’l Endowment for the Arts v. Finley, 524 U.S. 569, 618 (1998) (“[Q]uite apart from any question that might be raised about [the Salerno standard] as a general rule, it is beyond question, as the Court freely concedes, that it can have no application here, it being well settled that the general rule does not limit challenges brought under the First Amendment’s -58- speech clause.”) (Souter, J., dissenting) (collecting First Amendment overbreadth cases); Virginia v. Black, 538 U.S. 343 (2003) (observing that Salerno standard was not applicable to First Amendment challenge) (Scalia, J., dissenting in part); Stevens, 130 S. Ct. 1577, 1587 (same). As for challenges under the Commerce Clause, the Supreme Court continued to ignore the Salerno standard, as it had in Katz, discussed above. In United States v. Lopez, 514 U.S. 549, 551 (1995), the Court held, without reference to Salerno, that the Gun-Free School Zones Act of 1990 was unconstitutional under the Commerce Clause. Similarly, in United States v. Morrison, 529 U.S. 598, 601 (2000), the Court struck down the Violence Against Women Act as invalid under the Commerce Clause without invoking, or even mentioning, Salerno.31 Indeed, in Gonzales v. Raich, 545 U.S. 1, 15-22 (2005), the Court rejected an as-applied claim under the Commerce Clause, indicating that Commerce Clause challenges are more appropriately raised on facial grounds. See id. at 23 (noting that “both Lopez and Morrison, [where the] parties asserted that a particular statute 31 The Courts in Lopez and Morrison did not explicitly state that they were considering the facial constitutionality of the challenged statutes. However, the cases make clear that the statutes were analyzed on their face, and were invalidated on that basis. See Gonzales v. Raich, 545 U.S. 1, 23 (2005) (observing that, “in both Lopez and Morrison, the parties asserted that a particular statute or provision fell outside Congress’ commerce power in its entirety”); United States v. Nascimento, 491 F.3d 25, 41 (1st Cir. 2007) (“Lopez and Morrison involved facial challenges to federal statutes: in each case, the parties asserted that a particular statute or provision fell outside Congress’s commerce power in its entirety.”). -59- or provision fell outside Congress’ commerce power in its entirety,” were proper challenges). Additionally, in the due process context, the Court in Washington v. Glucksberg, 521 U.S. 702 (1997), denied, without reliance upon Salerno, a facial challenge to a state statute that prohibited assisted suicide.32 See id. at 735 (“We therefore hold that [the statute] does not violate the Fourteenth Amendment, either on its face or as applied to competent, terminally ill adults who wish to hasten their deaths by obtaining medication prescribed by their doctors.”) (internal quotation marks omitted). Only Justice Stevens discussed Salerno, in his concurring opinion, where he wrote that “I do not believe the Court has ever actually applied such a strict standard, even in Salerno itself, and the Court does not appear to apply Salerno here.” Id. at 740.33 Two years later, in City of Chicago v. Morales, 527 U.S. 41 (1999), a case in which the Court struck down a Chicago ordinance as unconstitutionally vague, the plurality of the Court went even further, observing that “[t]o the extent we have 32 It is again worth noting that Chief Justice Rehnquist, the author of Salerno, delivered the opinion of the Court, which Justices Scalia and Thomas, among others, joined. 33 Justice Stevens further observed that, “[i]f the Court had actually applied the Salerno standard in this action, it would have taken only a few paragraphs to identify situations in which the Washington statute could be validly enforced. In Salerno itself, the Court would have needed only to look at whether the statute could be constitutionally applied to the arrestees before it; any further analysis would have been superfluous.” Glucksberg, 521 U.S. at 740 n.6. -60- consistently articulated a clear standard for facial challenges, it is not the Salerno formulation, which has never been the decisive factor in any decision of this Court, including Salerno itself.” Id. at 55 n.22. Since then, the Supreme Court has consistently decided facial challenges without resort to Salerno. See, e.g., John Doe No. 1 v. Reed, --- U.S. ----130 S. Ct. 2811, 2817 (2010) (citing Stevens, 130 S. Ct. 1577, not Salerno, as the applicable standard for the facial challenge in which Washington State’s disclosure requirements for referenda petitions were held not violative of the First Amendment); Graham v. Florida, --- U.S. ----, 130 S. Ct. 2011, 2048 (2010) (holding facially invalid, without reliance on Salerno, a Florida statute imposing sentence of life without parole on juvenile offender who did not commit homicide); Boumediene v. Bush, 553 U.S. 723, 821 (2008) (holding facially unconstitutional a provision of the Military Commission Act that denied federal courts jurisdiction to hear habeas corpus actions for aliens detained as enemy combatants without consideration of Salerno); Cutter v. Wilkinson, 544 U.S. 709, 714 (2005) (upholding the Religious Land Use and Institutionalized Persons Act against an Establishment Clause facial challenge on the basis of substantive Establishment Clause precedent without reference to Salerno); United States v. Booker, 543 U.S. 220, 226 (2005) (holding that certain provisions of the Federal Sentencing Guidelines were facially invalid under the Sixth Amendment without -61- considering Salerno); Nevada Dep’t of Human Res. v. Hibbs, 538 U.S. 721, 740 (2003) (rejecting facial challenge to Family and Medical Leave Act under § 5 of the Fourteenth Amendment without reliance upon Salerno); Santa Fe Indep. Sch. Dist. v. Doe, 530 U.S. 290, 317 (2000) (invalidating a policy requiring school prayer via public address system “on its face” under the Establishment Clause without reference to Salerno). While the Court has sporadically cited to the “no set of circumstances” test, those cases do not warrant its adoption as a rule of law. Indeed, in Washington State Grange v. Washington State Republican Party, 552 U.S. 442 (2008), the case upon which the Appellate Division relied in rejecting Overstock’s challenge to the viability of the Salerno standard, the Court cited Salerno and then immediately stated, “[w]hile some Members of the Court have criticized the Salerno formulation, all agree that a facial challenge must fail where the statute has a ‘plainly legitimate sweep.’” 552 U.S. at 449 (quoting Glucksberg, 521 U.S. at 739-40 & n. 7 (Stevens, J., concurring)).34 Thus, the Court recognized that the Salerno test was far from settled law and that a more lenient standard was the only 34 The majority’s citation to the concurrence in Glucksberg, where Justice Stevens asserts that Salerno has never actually been applied, is instructive: “In other cases and in other contexts, we have imposed a significantly lesser burden [than Salerno] on the challenger. The most lenient standard that we have applied requires the challenger to establish that the invalid applications of a statute ‘must not only be real, but substantial as well, judged in relation to the statute’s plainly legitimate sweep.’” Glucksberg, 521 U.S. at 740 n.7 (quoting Broadrick v. Oklahoma, 413 U.S. 601, 615 (1973)) (emphasis added). -62- standard upon which the Court could rest. Notably, Justice Thomas, writing for the majority, explained that, “[i]n determining whether a law is facially invalid, we must be careful not to go beyond the statute’s facial requirements and speculate about ‘hypothetical’ or ‘imaginary’ cases,” id. at 449-50, an inquiry that Salerno arguably requires.35 Moreover, in Washington State Grange, which was an election law challenge concerning associational rights, the Court did not actually apply the Salerno test, but rather asserted that the statute was facially constitutional under either the strict or more lenient standard, and proceeded to the merits. Id. at 449.36 Thus, in light of the fact that Washington State Grange was not a Commerce Clause case, the Court’s recognized uncertainty over the Salerno standard, and the 35 In Sabri v. United States, 541 U.S. 600, 604 (2004), where petitioner argued that a federal bribery statute was facially unconstitutional, the Court noted that the petitioner had argued that “his attack meets the demanding standard set out [in Salerno],” but the Court did not comment further on Salerno and did not base its rejection of the facial challenge on the Salerno test. See id. at 604. Instead, the Court rendered its decision upon the substantive constitutional doctrine, e.g., that Congress has the power under the Necessary and Proper Clause to “see to it that taxpayer dollars . . . are in fact spent for the general welfare, and not frittered away in graft or on projects undermined when funds are siphoned off or corrupt public officers are derelict about demanding value for dollars.” Id. at 605. 36 As recently stated by the United States Court of Appeals for the Tenth Circuit, “Grange merely supports the approach to facial challenges which involves an examination of whether the terms of the statute itself ‘measured against the relevant constitutional doctrine, and independent of the constitutionality of particular applications, contain[ ] a constitutional infirmity that invalidates the statute in its entirety.’” Doe v. City of Albuquerque, 667 F.3d 1111, 1127 (10th Cir. 2012) (quoting Marc E. Isserles, Overcoming Overbreadth: Facial Challenges and the Valid Rule Requirement, 48 AM. U. L. REV. 359, 387 (1998)) (brackets in original). -63- Court’s failure to apply the Salerno test, the Appellate Division’s reliance upon Washington State Grange was misplaced. More recently, the Supreme Court acknowledged in United States v. Stevens that the standard to apply “in a typical [facial challenge] is a matter of dispute.” 130 S. Ct. at 1587 (citing Salerno and Glucksberg). However, the Court declined to address the issue because Stevens was a First Amendment free speech challenge to which neither the Salerno test nor the Glucksberg formulation applied. Id. Finally, in the two years since Stevens, the Supreme Court has not once cited Salerno for its “no set of circumstances” test. Accordingly, it is abundantly clear that the Salerno standard has been consistently disregarded by the Supreme Court in the majority of cases involving facial challenges in the 25 years since Salerno was decided and, in certain contexts, has been explicitly rejected by the Court. The Court’s jurisprudence demonstrates, at the very least, that Salerno does not represent the standard that must be applied to a facial challenge and that Salerno definitely does not apply to challenges under several constitutional provisions, e.g., free speech, the Establishment Clause, Equal Protection, abortion rights, and, as relevant here, the Commerce Clause. Instead, it is the “relevant constitutional doctrine” that applies in order to determine whether there exists “a constitutional -64- infirmity that invalidates the statute in its entirety.” Doe, 667 F.3d at 1127; see supra I.D.1.37 2. Recognizing That Salerno Is Not The Proper Standard, Other Courts Have Rejected It, And This Court Should Not Follow It In light of the Supreme Court’s treatment of Salerno, numerous other courts have rejected its application. For example, in Doe v. City of Albuquerque, a challenge to an ordinance prohibiting registered sex offenders from entering public libraries, the United States Court of Appeals for the Tenth Circuit observed: 37 This Court addressed briefly the continuing validity of the Salerno standard in People v. Stuart, 100 N.Y. 2d 412 (2003), albeit in the limited context of a due process vagueness challenge. In that case, the Court rejected a facial challenge to New York’s stalking statute. The Court concluded that the statute at issue was not unconstitutionally vague as applied to the defendant, and that “because there exists at least one constitutional application of the statute, it is not invalid on its face.” Id. at 429. Then-Chief Judge Kaye, in a concurring opinion, agreed with the rejection of the facial challenge “because the language of the statute provides persons of ordinary intelligence with fair notice,” but urged the majority to reject the “no set of circumstances” test, observing that it “is not even the Supreme Court’s rule.” Id. at 429-30 (citing Morales, 537 U.S. at 55 n.2). Judge Kaye noted that “a facially vague statute fails to give anyone notice of its limits, even though everyone might understand its core, and even though it may not be unconstitutional as applied to this core.” Id. at 432 (emphasis in original). As discussed, Judge Kaye’s observations were accurate under the Supreme Court precedent discussed herein. However, addressing the Chief Judge’s “cogent and important” concurrence, the Court stated that [w]e cannot agree that the Court’s approach forecloses the possibility of successful facial challenges in the future. . . . If a defendant can show that the statute is so vague that it specifies no standard of conduct at all or leaves the police with arbitrary rather than proper standards for enforcement, we would, most assuredly, address and sustain a facial challenge because under those circumstances the statute could never be applied constitutionally. Id. at 424-25 n.10. The majority’s logic also applies to Overstock’s challenge under the Commerce Clause. Because the legislature has exceeded its authority, the Internet Tax has no constitutional applications. -65- The idea that the Supreme Court applies the ‘no set of circumstances’ test to every facial challenge is simply a fiction, readily dispelled by a plethora of Supreme Court authority. Following Salerno, the Court has repeatedly considered facial challenges simply by applying the relevant constitutional test to the challenged statute without attempting to conjure up whether or not there is a hypothetical situation in which application of the statute might be valid. 667 F.3d at 1124 (collecting cases) (emphasis in original). As a result, the court concluded: Salerno’s language thus is accurately understood not as setting forth a test for facial challenges, but rather as describing the result of a facial challenge in which a statute fails to satisfy the appropriate constitutional standard. . . . The relevant constitutional test, however, remains the proper inquiry. Id. at 1127; see also Rothe Dev. Corp. v. Dep’t of Def., 413 F.3d 1327, 1337-38 (Fed. Cir. 2005) (“Because, as we held before and hold again today, the strict scrutiny doctrine sets forth the test for determining facial unconstitutionality in this case, Salerno is of limited relevance here, at most describing a conclusion that could result from the application of the strict scrutiny test.”); Mineral Policy Ctr. v. Norton, 292 F. Supp. 2d 30, 40 (D.D.C. 2003) (“Thus, based upon the uneven application of the no-set-of-circumstances test, [and] the confusion surrounding the doctrine, . . . . the court declines to rely upon Salerno here.”); Lerman v. Bd. of Elections in City of New York, 232 F.3d 135, 144 n.10 (2d Cir. 2000) (“It is not even clear that Salerno’s ‘no set of circumstances’ test articulates an exclusive -66- standard for making facial challenges outside the First Amendment context . . . .”) (emphasis in original).38 Additionally, the fact that this case arises from a state court, and not from federal court, provides another reason to reject the application of the Salerno standard. In Morales, discussed above, the plurality observed not only that the Salerno standard “has never been the decisive factor in any decision of this Court,” 527 U.S. at 55 n.22, but also that [w]hen asserting a facial challenge, a party seeks to vindicate not only his own rights, but those of others who may also be adversely impacted by the statute in question. In this sense, the threshold for facial challenges is a species of third party (jus tertii) standing, which we have recognized as a prudential doctrine and not one mandated by Article III of the Constitution. Morales, 527 U.S. at 55 n.22. Thus, the plurality concluded that “state courts need not apply prudential notions of standing created by this Court” and stated that the “assumption that state courts must apply the restrictive Salerno test is incorrect as a matter of law.” Id. On these grounds, state courts have declined to invoke the Salerno test, and so should this Court. See, e.g., Com v. Ickes, 582 Pa. 561, 569 (2005) (“The Salerno test . . . is based on dicta and is not controlling for state 38 Of course, because Salerno has not been expressly overruled in every circumstance, other courts continue to rely on it, see, e.g., United States v. Flath, No. 11-CR-69, 2012 WL 113804, at *2 (E.D. Wisc. Jan. 13, 2012), while other courts invoke the standard recognizing Salerno’s potential infirmity, see, e.g., United States v. Laurent, No. 11-CR-322, 2011 WL 6004606, at *15 (E.D.N.Y. Dec. 2, 2011). -67- courts”) (citing Morales); Robinson v. City of Seattle, 102 Wash. App. 795, 807-08 (2000) (“[T]he U.S. Supreme Court clarified that Salerno does not require a party mounting a facial challenge in state court to establish that no set of circumstances exists under which the challenged statute would be valid.”) (citing Morales). 3. The Salerno Standard Does Not Apply In The Context Of The Commerce Clause As set forth above, the Supreme Court has never applied Salerno to a challenge involving the Commerce Clause. See Kraft, 505 U.S. 71; Lopez, 514 U.S. 549; Morrison, 529 U.S. 598. The fact that the Supreme Court has not made the “no set of circumstances” test part of its Commerce Clause jurisprudence was reaffirmed more recently in the context of challenges to the recently enacted national health care law, the Patient Protection and Affordable Care Act (“PPACA”). See Nat’l Fed’n of Indep. Bus., et al. v. Sebelius, et al., Case No. 11- 393; U.S. Dep’t of Health & Human Servs., et al. v. Florida, et al., Case No. 11- 398; Florida, et al. v. Dep’t of Health & Human Servs., et al., Case No. 11-400. Although, as of this date, the Court has not yet issued a decision, it is worth noting that nowhere in the briefing submitted by the Solicitor General of the United States did the Government argue that the Court should invoke Salerno as a basis to deny the challenges to the statute. One certainly would expect that, if the Solicitor General believed that Salerno had any viability in the Commerce Clause -68- arena, the United States would have raised it as an argument in an attempt to defeat the challenge to the PPACA, one of the crowning achievements of the current presidential administration. Similarly, during the unprecedented three days of oral argument concerning the PPACA, not one of the Supreme Court justices, including, for example, Justice Thomas, who consistently has been a proponent of the Salerno standard, asked whether the challenges to the PPACA should be subject to the Salerno test.39 The Salerno standard does not apply in the Commerce Clause context, as it does not in the First Amendment context, because of the purpose of the Clause and the interest that it serves. The Commerce Clause is a limitation on state legislative power, and when a legislature exceeds its authority the statute is rendered void ab initio. As the Court explained in Quill, the purpose of the Commerce Clause is to “firmly establish[] . . . boundaries of legitimate state authority,” Quill, 504 U.S. at 315, and “the Commerce Clause and its nexus requirement are informed not so by concerns about fairness for the individual defendant,” as in the due process context, but rather “by structural concerns about the effects of state regulation on the national economy,” id. at 312; see also David L. Franklin, Facial Challenges, Legislative Purpose, and the Commerce Clause, 92 IOWA L. REV. 41, 78 (2006) 39 The briefs submitted by the Solicitor General are available at http://www.justice.gov/ osg/briefs/2011/3mer/2mer/toc3index.html, and the transcripts of oral argument are available at http://www.supremecourt.gov/oral_arguments/argument_transcripts.aspx. -69- (observing that, when faced with a challenge that concerns the scope of a state’s legislative authority, “[t]he court’s task is to adumbrate the boundary that separates authorized from unauthorized regulations, not to excise discrete zones of exempted conduct”). Thus, a state taxing statute either unduly burdens interstate commerce or it does not. The fact that there may be a scenario in which interstate commerce is not unduly burdened cannot undo the burdens otherwise imposed. Allowing an exception to control the analysis would result in a plethora of state taxes and duties imposed upon commerce between the states so long as at least one hypothetical valid application could be conceived. Such an approach would eviscerate the Founders’ intent, impede the function of the Commerce Clause and return the nation to the days of the Articles of Confederation. See Bowen, 487 U.S. at 627 n.1 (“The Establishment Clause cannot be eviscerated by such artifice.”) (Blackmun, J., dissenting); see also Quill, 504 U.S. at 312 (“Under the Articles of Confederation, state taxes and duties hindered and suppressed interstate commerce”); id. at 313 n.6 (observing that, without a bright-line rule, “similar obligations might be imposed by the Nation’s 6,000-plus taxing jurisdictions”). Indeed, like the other constitutional doctrines discussed above, to which the Supreme Court has declined to extend the “no set of circumstances” test, it must be recognized that the Salerno standard does not comport with the purpose of the -70- Commerce Clause.40 See Van Orden v. Perry, 545 U.S. 677, 700 (2005) (“[A]s in all constitutional cases, [legal judgment] must reflect and remain faithful to the underlying purposes of the Clauses, and it must take account of context and consequences measured in light of those purposes.”) (Breyer, J., concurring). As explained in a recent decision issued by the United States Court of Appeals for the Sixth Circuit concerning the PPACA under the Commerce Clause, “[i]f Congress exceeded its authority by enacting the mandate, then the mandate is ‘legally stillborn’ and cannot be valid in any application.” Thomas More Law Cntr. v. Obama, 651 F.3d 529, 566, 567 (6th Cir. 2011) (Graham, J., concurring in part and dissenting in part) (“Federal courts have the duty to construe and enforce the ‘outer limits’ of congressional power.”) (quoting Lopez, 514 U.S. at 566-67); see also United States v. Wilkinson, 626 F. Supp. 2d 184, 188 (D. Mass. 2011) (declining to invoke Salerno standard in Commerce Clause case, recognizing that “the Supreme Court has not applied the Salerno test to every facial challenge to every statute” and that “[m]ost significantly, the Supreme Court has not applied the Salerno test to facial challenges in Commerce Clause cases at least since Lopez”). 40 The Commerce Clause is, again, similar to the First Amendment in that both provisions “reflect[] a judgment by the American people that the benefits of [their] restrictions on the Government outweigh the costs. . . . The Constitution is not a document ‘prescribing limits, and declaring that those limits may be passed at pleasure.’” Stevens, 130 S. Ct. at 1585 (quoting Marbury v. Madison, 5 U.S. 137, 178 (1803)). -71- In Virginia ex rel. Cuccinelli, II v. Sebelius, 728 F. Supp. 2d 768, 774 (E.D. Va. 2010), another case involving the PPACA, the court observed that Salerno focused “on the impact or effect of the enactment at issue,” while the case involving the PPACA “questions the authority of Congress – at the bill’s inception – to enact the legislation. The distinction is somewhat analogous to subject matter jurisdiction, the power to act ab initio.” 728 F. Supp. 2d at 774 (abrogated on other grounds). A number of state supreme courts have reached similar conclusions. In Caterpillar v. Commissioner of Revenue, 568 N.W.2d 695 (Minn. 1997), the Minnesota Supreme Court upheld a tax statute under a Commerce Clause challenge. However, in so doing, the Court declined to apply the Salerno standard, observing that “[a]lthough Salerno has not been expressly overruled, the Supreme Court failed to apply this test in Kraft. This suggests that the Salerno principle does not accurately characterize the standard for deciding facial challenges to state tax statutes.” Id. at 700 n.8 (internal citations omitted); see also Conoco, Inc. v. Taxation & Revenue Dep’t of State of N.M., 122 N.M. 736, 743 (2000) (“The mere fact that there may be a set of circumstances in which the tax operates constitutionally will not suffice under Kraft to uphold the statute against a challenge to its constitutionality on Foreign Commerce Clause grounds.”); Caterpillar Inc. v. N.H. Dep’t of Revenue Admin., 144 N.H. 253, 258 (1999) -72- (“Even if Salerno correctly stated a test for facial challenges, the Supreme Court failed to apply it to a recent facial challenge to Iowa’s tax statute . . . putting into doubt its applicability in this area of law.”) (citing Kraft); Robinson v. Seattle, 102 Wash. App. 795, 808 (2000) (rejecting “the ‘no set of circumstances’ test as inappropriate for a taxpayer challenge under the state constitution. Instead, we will apply the test dictated by the nature of the challenge.”). Thus, the appropriate constitutional standard is that set forth by the Supreme Court in Quill, and discussed fully above, i.e., whether the Internet Tax crosses the “bright-line” that “firmly establishes the boundaries of legitimate state authority to impose a duty to collect sales and use taxes . . . .” Quill, 504 U.S. at 315. * * * In sum, given the United States Supreme Court’s near abandonment of Salerno’s “no set of circumstances” standard, together with the fact that the Court has never invoked that standard in the context of a Commerce Clause challenge, Overstock respectfully submits that the rule of Moran, based directly upon Salerno, should be reconsidered. Doing so would be consistent not only with the jurisprudence discussed herein, but also with the very purpose of the Commerce Clause. -73- E. The Internet Tax Is Unconstitutional Even Under The “No Set Of Circumstances” Standard Even if the Court declines to modify its holding in Moran, it is apparent that the Internet Tax is unconstitutional in every application.41 First, as the Internet Tax exceeds the State’s authority, it is void ab initio and there simply is no set of circumstances under which the enactment would be valid. Here, as discussed above in Part I.A-C, supra, the Internet Tax impermissibly transgresses Quill’s bright line and unduly burdens interstate commerce. Therefore, the “statute fails to satisfy the appropriate constitutional standard, Doe, 667 F.3d at 1124, and there is no situation in which it could be validly applied. “In other words, where a statute fails the relevant constitutional test . . . , it can no longer be constitutionally applied to anyone – and thus there is ‘no set of circumstances’ in which the statute would be valid.” Doe, 667 F.3d at 1127; see also Thomas More Law Center, 651 F.3d at 566 (Graham, J., dissenting). Accordingly, even under Moran and Salerno, the Internet Tax must fail. Second, as explained above, the plain language of the statute and the legislative history demonstrate that the Internet Tax applies only to out-of-state internet retailers who utilize in-state websites for advertising. Indeed, because all instances in which a vendor would have the constitutionally-required “substantial 41 Both the trial court and the Appellate Division ignored this argument. -74- nexus” were already governed by the version of the Tax Law in effect prior to the enactment of the Internet Tax, it necessarily serves no other purpose than to impose tax collection obligations upon retailers with no substantial nexus to the State. For example, the “set of circumstances under which the statute would be valid,” as identified by the First Department, R.xxxiii (20), would likely require the imposition of tax collection obligations under the old Tax Law. See N.Y. Tax Law §§ 1101(b)(8)(i)(C)(I-II) (defining a “vendor” as “a person who solicits business either . . . by employees, independent contractors, agents or other representatives . . . .”). In the hypothetical suggested by the Appellate Division, R.xxxiii (20), the out-of-state vendor would also appear to have “demonstrably more than a slightest presence” in the State sufficient to trigger tax collection obligations under this Court’s analysis in Orvis. See 86 N.Y.2d at 178 (internal quotation marks omitted). The legislative history surrounding the Internet Tax confirms that the legislature passed the statute intending to compel out-of-state internet retailers to collect and pay New York sales tax, even though those internet retailers would not otherwise be required to collect taxes under the Commerce Clause. See R.145 (stating that statute “forc[es] out of state internet retailers to collect and remit New York State sales tax if New York based websites advertise their site in return for -75- commissions on sales”); R.147 (stating that statute “redefine[s] ‘vendor’ to include internet retailers that actively encourage web site owners residing in New York State to advertise for the internet retailer in return for a commission on sales resulting from the followed link”); R.159 (stating that purpose of statute is to “[e]stablish an evidentiary presumption that certain sellers using New York residents to solicit sales in the State are ‘vendors’ required to collect sales and use tax”). Accordingly, it is abundantly clear that the Internet Tax exceeds the State’s legitimate taxing authority, was designed only to target out-of-state internet retailers by establishing an artificial constitutional nexus, and therefore, there is no set of circumstances in which the statute can be constitutionally applied.42 POINT II THE INTERNET TAX VIOLATES DUE PROCESS In addition to its unconstitutionality under the Commerce Clause, the Internet Tax does not comport with the guarantee of basic fairness provided by the Due Process Clauses of the United States Constitution and the New York 42 The “plainly legitimate sweep” language mentioned by the Supreme Court in Glucksberg, 521 U.S. at 740 n.7, and later in Grange, 552 U.S. at 449, has never been articulated by the Supreme Court as a standard that must be applied to facial challenges. See Stevens, 130 S. Ct. at 1587 (declining to address the issue). In any event, for all of the reasons discussed herein, the Internet Tax has no legitimate sweep. -76- Constitution because the statute’s presumptions are unreasonable and effectively irrebuttable.43 A. Applicable Law In order for a statutory presumption to survive a constitutional challenge, “there [must] be a rational connection between the facts which are proved and the one which is to be inferred with the aid of the presumption.” People v. Leyva, 38 N.Y.2d 160, 165 (1975);44 see also Speiser, 357 U.S. at 526 (“‘[A] constitutional prohibition cannot be transgressed indirectly by the creation of a statutory presumption any more than it can be violated by direct enactment.’”) (quoting Bailey, 219 U.S. at 239). Further, “[s]tatutes creating permanent irrebuttable presumptions have long been disfavored under the Due Process Clauses of the Fifth and Fourteenth Amendments.” Vlandis v. Kline, 412 U.S. 441, 446 (1973). The Supreme Court “has held more than once that a statute creating a presumption which operates to 43 At base, “the [Due Process] clauses [of the respective constitutions] are formulated in the same words and are intended for the protection of the same fundamental rights of the individual and there is, logically, no room for distinction in definition of the scope of the two clauses.” Cent. Sav. Bank in City of New York v. City of New York, 280 N.Y. 9, 10 (1939) (per curiam). 44 While Leyva is a criminal case, that distinction is of no moment; the bedrock principles underlying presumptions apply equally in civil and criminal cases. See, e.g., Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 28 (1976) (citing both civil and criminal cases in discussion of the standard for evaluating presumptions outside the Due Process and Equal Protection contexts). Moreover, in the decision below, the First Department cited Leyva for precisely the same proposition as Appellant does here. See R.xxxv (22). -77- deny a fair opportunity to rebut it violates the due process clause of the Fourteenth Amendment.” Heiner v. Donnan, 285 U.S. 312, 329 (1932); see also Strauss v. The City Univ. of New York, Index No. 111900/2011, 2012 WL 1576457 (Sup. Ct. N.Y. Cnty. Apr. 25, 2012) (recognizing that irrebuttable presumptions have long been disfavored and concluding that city university’s fee policy “is an unconstitutional deprivation of due process”). If a presumption is unreasonable and conclusive of the rights of the person against whom it is raised, it will be held to violate due process. See Eff-Ess, Inc. v. N.Y. Edison Co., 237 A.D. 315, 317 (1st Dep’t 1932). As the First Department recognized, “the validity of the presumption turns on whether it is more likely than not that the fact presumed flows from the fact proven. . . . In New York, the test is even higher, i.e., ‘the connection must assure a reasonably high degree of probability[] that the presumed fact follows from those proved directly.’” R.xxxv (22) (quoting Leyva, 38 N.Y.2d at 166) (additional internal quotation marks and citation omitted). However, in contrast to the court’s conclusion, the presumption contained within the Internet Tax does not meet these standards because it is both unreasonable and effectively irrebuttable. A presumption typically falls into one of two categories: permissive or mandatory. A permissive presumption merely “allows – but does not require – the trier of fact to infer the elemental fact from proof by the prosecutor of the basic one -78- and which places no burden of any kind on the defendant.” Cnty. Court of Ulster, N.Y. v. Allen, 442 U.S. 140, 157 (1979). On the other hand, a “mandatory presumption is a far more troublesome evidentiary device” because “it tells the trier that he or they must find the elemental fact upon proof of the basic fact, at least unless the defendant has come forward with some evidence to rebut the presumed connection between the two facts.” Id. (emphasis in original). Whether viewed with the required elevated scrutiny or not, the mandatory presumption fails to meet the “rational connection” standard. There is little degree of probability, let alone the reasonably high degree required under New York law, that the presumed fact, i.e., solicitation, follows from those proved directly, i.e., compensation for advertising services. See, e.g., Quill, 504 U.S. at 313 n.6, 317; St. Tammany Parish, 481 F. Supp. 2d at 581. B. The Presumption Is Unreasonable Both the First Department and the trial court improperly adopted the State’s assertion that internet advertising, as a result of its commission-based payment structure, incentivizes New York-based website administrators to actively solicit fellow New Yorkers through in-person discussions, telephone calls, emails and other “legal methods to enhance earnings.” R.xxxvi (23). However, this presumption is unsupported and inconsistent with how the internet works. -79- The presumption ignores the realities of the internet itself, which is modeled upon passive advertising and the inherent disregard for internet users’ geographic location. There is little basis, other than the State’s claim, upon which to conclude that in-state affiliate advertisers will solicit their friends, neighbors and colleagues to visit their websites for the purpose of purchasing items from Overstock. Common sense dictates that it is far more likely that in-state residents who maintain a website encourage internet users, irrespective of the viewer’s location, to visit their site not for the purpose of enticing those users to shop from a retailer like Overstock, but rather to view the non-advertising content posted on the website. If, as a consequence of that visit to the website, a purchase happens to be made with one of the website’s advertisers, then the in-state resident receives a commission. The example of traditional print advertising illustrates the point. Publishers of magazines and newspapers entice readers to buy and read their magazines not because of the advertisements contained therein, but because of the substantive content of the publication itself. Such would be the case even if the advertisements included a means by which the publication could be paid on commission, such as a coupon code or referral code. Indeed, one cannot seriously imagine a publisher of a newspaper or magazine directly soliciting on behalf of its advertisers. Nor is it -80- realistic to presume that website owners will seek viewers based upon the site’s affiliate advertisements. Further, the actual location of the viewer is irrelevant to both the website administrator and Overstock. Indeed, the use of commission-based payments through performance marketing further renders the viewer’s location irrelevant because, as explained above, its purpose is to allow retailers like Overstock to only pay affiliates for the sales that a linked ad generates, regardless of whether it comes from a sale to viewer in California or New York. Additionally, even if the First Department were correct in its assumption that “the in-state representative will engage in various legal methods to enhance earnings,” R.xxvi (23), the type of “solicitation” that would occur is not solicitation on behalf of the out-of-state retailer such that the in-state residents become a de facto “sales force” for companies like Overstock. If anything, the in-state residents are encouraging visitors to shop from out-of-state retailers so that the website owner or non-profit will receive a commission payment. In other words, they are soliciting for themselves, not for the out-of-state retailers, unlike the salespeople described in cases like Orvis and Scripto who were specifically employed to engage in direct solicitation. Further distinguishing the salespeople in those cases, it is highly likely that a website, just like a print publication, will contain advertisements for more than one retailer, and it is irrational to assume that the -81- owner of a New York website would be soliciting for each of those retailers, just as it is irrational to assume that a magazine publisher would become a solicitor for each of its print or online advertisers. Nevertheless, the First Department accepted the State’s unsupported assertion that internet advertising, as a result of its commission-based payment structure, incentivizes New York-based internet advertisers to actively solicit their fellow New Yorkers through means completely separate from the posting of the internet advertising link, i.e., through in-person solicitation, telephone calls, emails and other purposeful means. However, the fact that an advertiser is paid by commission corresponding to the sales generated as a result of a buyer clicking through the advertisement and actually completing a purchase does not permit the illogical leap to automatic solicitation. See N.Y. Tax Law § 1101(b)(8)(vi). No such inference can be drawn under the Internet Tax, especially when it is viewed in light of the reality of the internet. See supra Part I.B.2; St. Tammany Parish, 481 F. Supp. 2d at 581; Matin, 22 BERKELEY TECH. L.J. at 549; Baez, 64 TAX LAW. at 810. By way of comparison, the Tax Law contains numerous examples of proper presumptions, where, unlike the Internet Tax, the fact presumed reasonably flows from the fact proven. For example, with respect to corporate income and franchise tax returns, corporate taxpayers generally are required to file a combined return -82- with their foreign corporate subsidiaries, and the sales made by such subsidiaries are presumed to occur in New York for tax reporting purposes where the transfer of possession of the property occurs in New York or the transfer occurs outside of New York but the destination of such property is New York. See N.Y. Tax Law § 210(3)(a)(2); 20 N.Y.C.R.R. 4-2.2. This presumption is plainly logical. Similarly, in the non-tax context, the Court in Casse v. New York State Racing & Wagering Board, 70 N.Y.2d 589, 595 (1987), determined that a statutory presumption was valid where it presumed that a racehorse’s trainer is responsible and subject to penalty if the racehorse tests positive for restricted substances. The Court concluded that “[t]he connection upon which the presumption stands, and from which the inference of responsibility may fairly be drawn, is the obligation of the trainer, imposed by operation of the rules under which he is licensed, to oversee the condition of the horse at all times . . . .” Id.; cf. W. & A.R.R. v. Henderson, 279 U.S. 639, 644 (1929) (holding that collision between a train and a car does not give rise to a presumption that the railroad company was negligent where the “[r]easoning does not lead from the occurrence back to its cause”). Consequently, there is no “substantial assurance,” and certainly no “reasonably high degree of probability” that the Internet Tax’s presumption of solicitation follows from the fact of commission-based, or other, internet advertising. Leyva, 38 N.Y.2d at 165-66; see also United States v. Romano, 382 -83- U.S. 136, 139 (1965) (“Where the inference is so strained as not to have a reasonable relation to the circumstances of life as we know them it is not competent for the legislature to create it as a rule governing the procedure of courts.”) (citation omitted). C. The Presumption Is Effectively Irrebuttable Not only is the presumption unreasonable, but because the presumption itself consists of a legal conclusion that cannot be rebutted with facts, it is also irrebuttable. The Internet Tax provides that its presumption “may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution.” N.Y. Tax Law § 1101(b)(8)(vi). However, while an out-of-state retailer may try to rebut the facts underlying the presumption, the presumption itself – that mere internet advertising creates a substantial nexus – is, as discussed above, an incorrect legal conclusion that cannot be rebutted. In other words, under the terms of the Internet Tax, the out-of-state retailer can do no more than offer evidence that it has not engaged in activities listed in the statute. But, for as long as the statute contains a presumption that those activities, e.g., internet advertising, create a substantial nexus, the ultimate conclusion remains unassailable. -84- Further, the standard that a retailer must meet to rebut the presumption remains unclear. Out-of-state retailers must prove that New York residents “did not engage in any solicitation . . . that would satisfy the nexus requirement of the United States constitution.” N.Y. Tax Law § 1101(b)(8)(vi). Yet, whether a retailer has provided sufficient evidence to “satisfy the nexus requirement of the United States constitution” is not a discernible standard. Indeed, as Quill and the First Department noted, even the Supreme Court has struggled with such a determination. See R.xxx (17 n.4) (quoting Quill, 504 U.S. at 315-16). Yet, the decision as to whether and what proof is sufficient to satisfy that requirement is the left to tax agency personnel, who have unfettered discretion to decide what constitutes prohibited activity and what is acceptable proof of the lack of such activity. The Appellate Division avoided addressing these arguments by reference to TSB-M-08(3.1), R.xvii (5), which purports to explain how the Internet Tax may be rebutted. However, reliance upon that TSB-M was improper because here the “question is one of pure statutory reading and analysis, dependent only on accurate apprehension of the legislative intent.” Lorillard Tobacco Co., 99 N.Y.2d at 322; see also Kurcsics, 49 N.Y.2d at 458-59. Although the Appellate Division concluded that to rebut the presumption a “vendor merely has to include in its contract with the in-state vendor a provision prohibiting the in-state representative -85- from ‘engaging in any solicitation activities in New York that refer potential customers to the seller[,’] and the in-state representative must provide an annual certification that it has not engaged [in solicitation],” R.xxxi-xxxii (18-19) (quoting TSB-M-8(3)S) (footnote omitted), there is no certainty that such proof will be ultimately satisfactory to the State agency, see R.70, or that, given that the TSB-Ms are subject to change by DTF at any time, it will remain satisfactory every year, see R.67; R.70. Finally, in the event the seller cannot provide all the documents specified, TSB-M-08(3.1) states that “[i]n weighing the significance of a seller’s reliance on certifications from fewer than all its New York resident representatives, the Tax Department will apply the standard for constitutional nexus set forth in Quill[] and Orvis[].” R.70. Thus, sellers, especially those who may have thousands of in-state affiliates, are left once again without the ability to meaningfully rebut the Internet Tax. In sum, because the Internet Tax’s purportedly rebuttable presumption is, in effect, irrebuttable, and provides complete discretion to enforcement personnel, it cannot withstand constitutional scrutiny and should be held invalid under the Due Process Clause. -86- CONCLUSION For the reasons set forth above, the decision of the Appellate Division, First Department should be reversed and the Internet Tax should be declared unconstitutional. Dated: New York, New York May 21, 2012 Respectfully submitted, BRACEWELL & GIULIANI LLP By: /s/ Daniel S. Connolly Daniel S. Connolly 1251 Avenue of the Americas New York, New York 10020 (212) 508-6100 Attorneys for Appellant Overstock.com, Inc. Of Counsel: Daniel S. Connolly Rachel B. Goldman David J. Ball David A. Shargel CERTIFICATE FOR IDENTICAL COMPLIANCE I, Ramiro A. Honeywell, certify that this electronic Record on Appeal is identical to the filed original printed materials, except that they need not contain an original signature. Dated: May 21, 2012 _______________________ Ramiro A. Honeywell /s/ Ramiro A. Honeywell
