Overstock joins Amazon in suing N.Y. over online taxes

Contends new law requiring online retailers to collect state taxes is unconstitutional

Overstock.com Inc. has filed a lawsuit against the state of New York over a new law that requires certain online retailers to collect taxes from consumers living in the state, according to a statement.

Overstock is the second online company to challenge the constitutionality of the law that requires certain online Internet retailers to collect and pay the taxes to the state even if they have no physical presence or nexus in New York. Overstock joins Amazon.com Inc., which brought its lawsuit on the same grounds in April. The law went into effect yesterday.

Overstock and Amazon maintain that they don't have brick-and-mortar stores in the state and therefore are not required to collect state taxes under a 1992 U.S. Supreme Court ruling.

However, according to the state of New York, an online company has a physical presence if it operates through local affiliates. According to the state, local companies putting an online company's affiliate code on their Web sites amounts to the online company having a physical presence in New York. Affiliates make money by referring customers to the online company.

In the court documents, Salt Lake City-based Overstock said it has no physical presence in New York and sells exclusively through the Internet and is therefore exempt from collecting New York state taxes under the state and federal constitutions.

On May 15, Overstock said it notified more than 3,400 New York-based affiliate advertisers that as of June 1, they could no longer provide advertising for Overstock because of the new law. According to Overstock, if it had not taken the action, it would have been required to collect the 8.75% state sales tax on all its sales to New York customers. If its lawsuit succeeds, Overstock said it anticipates resuming its affiliate advertising program in the state.

Overstock's complaint was filed Friday in the New York Supreme Court against the New York State Department of Taxation and Finance, Tax Commissioner Robert Menga and Gov. David Paterson. The complaint asks the court to issue an injunction and to declare the law unconstitutional.

"I am confident of our position in the suit," said Mark Griffin, Overstock's general counsel, in the statement. "The applicable United States Supreme Court cases on the question of whether the state can collect taxes under these circumstances make it clear that New York cannot constitutionally require Overstock.com to collect these taxes."

A spokesman for the New York State Department of Taxation and Finance could not be reached for comment.

Copyright © 2008 IDG Communications, Inc.

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