“Amazon” Laws and Taxation of Internet
Sales: Constitutional Analysis
Erika K. Lunder
Legislative Attorney
John R. Luckey
Legislative Attorney
July 26, 2012
Congressional Research Service
7-5700
www.crs.gov
R42629
CRS Report for Congress
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“Amazon” Laws and Taxation of Internet Sales: Constitutional Analysis

Summary
As more and more purchases are made over the Internet, states are looking for new ways to
collect taxes on these sales. While there is a common misperception that states cannot tax Internet
sales, the reality is that they may impose sales and use taxes on such transactions, even when the
retailer is outside of the state. However, if the seller does not have a constitutionally sufficient
connection (“nexus”) to the state, then the seller is under no enforceable obligation to collect a
use tax. While the purchaser is still generally responsible for paying the use tax, the rate of
compliance is low.
Recent laws, often called “Amazon” laws in reference to the large Internet retailer, represent fresh
attempts by the states to capture taxes on Internet sales. States enacting these laws have used two
basic approaches. The first is to impose use tax collection responsibilities on retailers who
compensate state residents for placing links on the state residents’ websites to the retailer’s
website (i.e., online referrals or “click-throughs”). The other is to require remote sellers to
provide sales and tax-related information to the state and/or the in-state customers. New York was
the first state to enact click-through legislation, and Colorado was the first to pass a notification
law. These laws have received significant publicity, in part due to questions about whether they
impermissibly impose duties on remote sellers who do not have a sufficient nexus to the state.
Under Supreme Court jurisprudence, nexus is required by two provisions of the U.S.
Constitution: the Due Process Clause of the Fourteenth Amendment and the Commerce Clause.
The Court has held that, under the dormant Commerce Clause, a state may not impose tax
collection responsibilities on an out-of-state seller that does not have a physical presence in the
state. Importantly, physical presence is only required by the dormant Commerce Clause, which is
subject to congressional regulation, while the Fourteenth Amendment imposes a lesser
requirement. This means Congress may choose a different standard under its power to regulate
interstate commerce, so long as such standard is consistent with due process. Legislation
introduced in the 112th Congress—the Main Street Fairness Act (H.R. 2701 and S. 1452)—would
authorize states to impose tax collection responsibilities on remote sellers once the act’s
requirements relating to state adoption of the multistate Streamlined Sales and Use Tax
Agreement are met. The Marketplace Equity Act of 2011 (H.R. 3179), meanwhile, would allow a
state to impose tax collection responsibilities on large remote sellers once it implemented a
simplified tax administration system. The Marketplace Fairness Act (S. 1832) represents a hybrid
approach in that it would allow a state to impose sales and use tax collection duties on remote
sellers if the state were a member under the SSUTA or had adopted minimum simplification
requirements, as provided under the act.
Since Congress has not yet changed the physical presence standard under the Commerce Clause,
it remains the standard by which to judge the constitutionality of the states’ “Amazon” laws.
Already, both the Colorado and New York laws have been challenged on constitutional grounds.
The Colorado law, which applies mainly to companies without a physical presence in the state
and imposes burdens on them not imposed on in-state retailers, appears to be the more
constitutionally problematic approach, and it was recently struck down by a federal district court.
A state appellate court in New York, meanwhile, has rejected a claim that the New York law
violates both clauses on its face, but has kept alive an as-applied challenge. The constitutionality
of the New York law appears to primarily turn on whether state residents can be characterized as
engaging in a constitutionally significant level of solicitation on behalf of the Internet retailer so
that it can be treated as having a physical presence in the state.
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“Amazon” Laws and Taxation of Internet Sales: Constitutional Analysis

Contents
Constitutional Requirements............................................................................................................ 2
Nexus......................................................................................................................................... 2
Discriminatory Taxes................................................................................................................. 5
Congressional Authority to Act........................................................................................................ 5
Recent State Legislation .................................................................................................................. 7
Click-Through Nexus ................................................................................................................ 7
Required Notification ................................................................................................................ 9

Contacts
Author Contact Information........................................................................................................... 11
Acknowledgments ......................................................................................................................... 11

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“Amazon” Laws and Taxation of Internet Sales: Constitutional Analysis

ecently, several states have enacted legislation intended to capture use taxes on sales made
by out-of-state sellers to in-state customers. These laws are commonly referred to as
R “Amazon” laws, in reference to the large Internet retailer.
A use tax is the companion to a sales tax—the sales tax is imposed on the sale of goods and
services within the state’s borders, while the use tax is imposed on purchases made by the state’s
residents from out-of-state (remote) sellers.1 The purpose of the use tax is to dissuade residents
from purchasing goods and services from out-of-state merchants in order to avoid the sales tax.2
Two common misconceptions exist about the ability of states to impose sales and use taxes on
Internet sales. The first is that the Internet Tax Freedom Act, enacted in 1998, prevents such
taxation.3 This is not the case. The act contains a moratorium4 only on state and local
governments imposing “multiple or discriminatory taxes on electronic commerce,” as well as new
taxes on Internet access services. As a result of this law, a state may not, for example, impose a
tax on electronic commerce that is not imposed on similar transactions made through other means
(such as traditional “brick and mortar” stores).5 It remains permissible, however, for a state to
impose a sales or use tax that is administered equally without regard to whether the sale was face-
to-face, mail order, or Internet.6
The second misperception is that the U.S. Constitution prohibits states from taxing Internet sales.
States have the power to tax their residents, even when the seller is located outside of the state
and has no real connection with the state. What the Constitution restricts is the state’s ability to
require an out-of-state seller to collect the use tax. While the purchaser is still generally
responsible for paying the use tax, the rate of purchaser compliance is low. Thus, states have been
motivated to develop new ways in which they can capture the use taxes that are going uncollected
on Internet sales. This recent state activity and the constitutional limitations on it are the focus of
this report.

1 For information on state sales and use taxes, see CRS Report R41853, State Taxation of Internet Transactions, by
Steven Maguire.
2 See Miller Bros. Co. v. Maryland, 347 U.S 340, 343 (1954)(“The use tax, not in itself a relatively significant revenue
producer, usually appears as a support to the sales tax in two respects. One is protection of the state’s revenues by
taking away from inhabitants the advantages of resort to untaxed out-of-state purchases. The other is protection of local
merchants against out-of-state competition from those who may be enabled by lower tax burdens to offer lower
prices.”).
3 P.L. 105-277, Div. C, Title XI, 112 Stat. 2681-719, found at 47 U.S.C. §151 note (hereinafter Internet Tax Freedom
Act). For more information on the act, see CRS Report RL33261, Internet Taxation: Issues and Legislation, by Steven
Maguire and Nonna A. Noto.
4 The moratorium, which was originally set to expire in 2001, has been extended several times and is now in effect until
November 1, 2014. P.L. 107-75, §2, 115 Stat. 703 (the Internet Tax Nondiscrimination Act of 2001 extended the
moratorium through November 1, 2003); P.L. 108-435, §§2, 8, 118 Stat. 2615 (the Internet Tax Nondiscrimination Act
extended the moratorium retroactively from November 1, 2003, to November 1, 2007); P.L. 110-108, §2, 121 Stat.
1024 (the Internet Tax Freedom Act Amendments Act of 2007 extended the moratorium to November 1, 2014).
5 See Internet Tax Freedom Act, supra note 3, at §1105(2) (definition of “discriminatory tax”).
6 See id. at §1101(b) (“Except as provided in this section [imposing the moratorium] nothing in this title shall be
construed to modify, impair, or supersede, or authorize the modification, impairment, or superseding of, any State or
local law pertaining to taxation that is otherwise permissible by or under the Constitution of the United States or other
Federal law and in effect on the date of enactment of this Act.”).
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Constitutional Requirements
As discussed below under “Recent State Legislation,” several states have enacted legislation
aimed at collecting taxes from Internet sales by imposing tax collection or notification
requirements on Internet retailers. These laws potentially implicate two provisions of the U.S.
Constitution: the Fourteenth Amendment’s Due Process Clause7 and the dormant Commerce
Clause.8 The clauses have different purposes, and a state’s imposition of tax liability on a retailer
may be acceptable under one and not the other.9 The concern under the Due Process Clause is
whether imposition of the liability is fair; while the concern under the dormant Commerce Clause
is whether it unduly burdens interstate commerce. Together, these clauses impose two
requirements relevant for analyzing the states’ “Amazon” laws: (1) both require there be some
type of nexus between the state and remote vendor before the state can impose the liability; and
(2) the dormant Commerce Clause prohibits states from discriminating against out-of-state
sellers. An important point to emphasize at the outset is that Congress has the authority under its
commerce power to permit state taxation that would otherwise violate the dormant Commerce
Clause.10
Nexus
In order for a state to impose tax liability on an out-of-state business, a constitutionally sufficient
connection or “nexus” must exist between the state and business. Nexus is required by both the
Due Process Clause and the dormant Commerce Clause. Due process requires there be a
sufficient nexus between the state and seller so that the state has provided some benefit for which
it may ask something in return and the seller has fair warning that its activities may be subject to
the state’s jurisdiction.11 The dormant Commerce Clause, meanwhile, requires a nexus in order to
ensure that the state’s imposition of the liability does not impermissibly burden interstate
commerce.12

7 U.S. CONST. Amend. 14, §1 (“nor shall any State deprive any person of life, liberty, or property, without due process
of law ... ”).
8 U.S. CONST. art. 1 §8, cl.3 (“The Congress shall have Power ... To regulate Commerce with foreign Nations, and
among the several States, and with the Indian Tribes.”). The Supreme Court has long held that because the Constitution
grants Congress the authority to regulate interstate commerce, the states may not unduly burden such commerce—this
is known as the dormant, or negative, Commerce Clause. See Okla. Tax Comm’n v. Jefferson Lines, 514 U.S. 175, 180
(1995) (dormant Commerce Clause “reflect[s] a central concern of the Framers” that “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.”) The dormant Commerce Clause “prevent[s] a State from retreating
into economic isolation or jeopardizing the welfare of the Nation as a whole, as it would do if it were free to place
burdens on the flow of commerce across its borders that commerce wholly within those borders would not bear.” Id.;
Southern Pacific Co. v. Arizona, 325 U.S. 761, 768 (1945)(further rationale is that out-of-state entities subject to any
burden are likely not in a position to use the state’s political process to seek relief).
9 See Quill v. North Dakota, 504 U.S. 298, 312 (1992).
10 See id. at 318 (“[O]ur decision is made easier by the fact that the underlying issue is not only one that Congress may
be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter how we evaluate
the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our conclusions ...
Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden interstate mail-
order concerns with a duty to collect use taxes.”).
11 See id. at 308.
12 See Complete Auto Transit, Inc. v Brady, 430 U.S. 274 (1977).
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The nexus standard is not the same under both clauses. The Supreme Court has ruled that, absent
congressional action, the standard required under the dormant Commerce Clause is the seller’s
physical presence in the state,13 while due process imposes a lesser standard under which the
seller must have directed purposeful contact at the state’s residents.14
This was not always the case. The first time the Court articulated the physical presence
requirement, in the 1967 decision National Bellas Hess v. Dept. of Revenue of Illinois,15 it
grounded the requirement in both the Due Process and Commerce Clauses. The Court noted that
each required a similar connection between the state and seller liable for the tax: due process
required that “the state has given anything for which it can ask return,” while state taxes on
interstate commercial transactions were permissible when they represented “a fair share of the
cost of the local government whose protection [the seller] enjoys.”16 The Court held these
requirements meant that a state’s authority to impose tax collection responsibility was limited to
when the merchant had a physical presence in the state.17 The Court also noted that due to the
significant number of taxing jurisdictions across the country and the complexity of their
administrative and collection requirements, the imposition of the tax liability would create an
unacceptable burden on interstate commerce.18
By the late 1980s, it seemed possible that physical presence was no longer the rule because the
Court had modified its analysis of both the Due Process and Commerce Clauses. First, due
process was no longer interpreted to require an individual or entity’s physical presence in a state
before a state could exercise authority over the individual or entity; instead, liability could be
imposed when the individual or entity intentionally made a sufficient level of contact with the
state.19 Second, the Court, rather than enforcing bright-line prohibitions against certain types of
taxation on interstate commerce, developed a test to determine whether a tax placed an
unacceptable burden on interstate commerce.20 Since one reason the use tax responsibility was
unconstitutional was due to its burdensomeness, it was possible that technological advances had
reduced the complexity of collecting the taxes to an acceptable level under the new test.
However, in the 1992 case Quill v. North Dakota,21 the Supreme Court rejected the idea that
physical presence was no longer required and held that a state could still not impose use tax

13 See National Bellas Hess Inc. v. Dep’t. of Rev. of Illinois, 386 U.S. 753 (1967); Quill, 504 U.S. at 317-18.
14 See Quill, 504 U.S. at 308.
15 National Bellas Hess v. Dep’t. of Revenue of Illinois, 386 U.S. 753 (1967); see also Miller Bros. Co. v. Maryland,
347 U.S. 340, 347 (1954) (finding insufficient nexus, based solely on due process grounds, when the seller’s activities
did not involve the “invasion or exploitation of the consumer market in” the taxing state, with the Court contrasting
“active and aggressive operation within a taxing state” with the seller’s “occasional delivery of goods sold at an out-of-
state store with no solicitation other than the incidental effects of general advertising”).
16 Bellas Hess, 386 U.S. at 756.
17 Id. at 758.
18 Id. at 759-60.
19 Many of these cases addressed whether an individual or entity could be subject to suit in a state court. For example,
in Burger King v. Rudzewicz, 471 U.S. 462 (1985), the Court held that a Michigan franchisee without any contacts to
Florida could be subject to suit in Florida court after entering into a contract with a Florida corporation. The Court
wrote, “So long as a commercial actor’s efforts are ‘purposefully directed’ towards residents of another State, we have
consistently rejected the notion that an absence of physical contacts can defeat personal jurisdiction there [citations
omitted].” Id. at 476.
20 See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977).
21 Quill v. North Dakota, 504 U.S. 298 (1992).
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collection liability under the dormant Commerce Clause on a mail-order seller without a physical
presence in the state, absent congressional action. While the Court affirmed the holding in Bellas
Hess, it did not entirely adopt the same rationale. As in Bellas Hess, the Court found that
collecting the tax would be an impermissible burden on interstate commerce, absent
congressional action, and again noted the magnitude of the potential burden of such tax in light of
the numerous taxing jurisdictions across the country.22 The Court, however, altered its reasoning
from Bellas Hess by expressly rejecting the idea that due process requires physical presence. The
Court, noting that the two clauses served different purposes, found that its due process analysis
had evolved so that physical presence was not necessary so long as the seller had directed some
actions at the state’s residents.23 The Court found such purposeful contact existed in Quill since
the seller had “continuous and widespread solicitation of business” within the state.24
The Supreme Court has not revisited the issue since Quill. Nonetheless, several pre-Quill cases
provide guidance on determining when a state may impose tax collection responsibilities on out-
of-state retailers. Clearly, a state can impose such responsibilities on a company with a “brick and
mortar” retail store or offices in the state.25 This seems to be the case even if the in-state offices
and the sales giving rise to the tax liability are unrelated to one another. For example, the Court
has held that a state could require a company to collect use taxes on mail order sales to in-state
customers when the company maintained two offices in the state that generated significant
revenue, even though the offices were used to sell advertising space in the company’s magazine
and had nothing to do with the company’s mail-order business.26 The Court firmly rejected the
argument that there needed to be a nexus not only between the company and the state, but also
between the state and the sales activity. It reasoned that there was a sufficient connection between
the state and company as the two in-state offices had enjoyed the “advantage of the same
municipal services” whether or not they were connected to the mail-order business.27
Absent some type of physical office or retail space in the state, it also seems that having in-state
salespeople or agents is sufficient contact. In several cases pre-dating Bellas Hess and Quill, the
Court upheld the power of the state to impose use tax collection liabilities on remote sellers when
the sales were arranged by local agents or salespeople.28 For example, in one of these cases,
Scripto, Inc. v. Carson,29 which the Court later described as “represent[ing] the furthest
constitutional reach to date” of a state’s ability to impose use tax collection duties on a remote

22 Id. at 313.
23 See id. at 308.
24 Id. (“In ‘modern commercial life’ it matters little that such solicitation is accomplished by a deluge of catalogs rather
than a phalanx of drummers: The requirements of due process are met irrespective of a corporation’s lack of physical
presence in the taxing State.”).
25 See Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941)(upholding imposition of state use tax collection liability
on mail order sales when company had retail stores in the state); Nelson v. Montgomery Ward, 312 U.S. 373 (1941)
(same); see also D.H. Holmes Co., Ltd. v. McNamara, 486 U.S. 24, 32-33 (1988)(upholding imposition of use tax on
company with 13 stores in the state).
26 Nat’l Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551 (1977).
27 Id. at 561.
28 See Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960)(discussed infra); Felt & Tarrant Co. v. Gallagher, 306 U.S. 62
(1939) (upholding state imposition of use tax collection liability on company with two agents in the state); General
Trading Co. v. Tax Comm’n, 322 U.S. 335 (1944) (upholding state imposition of use tax collection liability on
company with salespeople in the state).
29 Scripto, Inc. v. Carson, 362 U.S. 207 (1960).
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seller,30 the Court held that a state could impose use tax collection liability on an out-of-state
company that had no presence in the state other than 10 “independent contractors” who solicited
business for the company. These individuals had limited power in that they had no authority to
make collections or incur debts on behalf of the company and merely forwarded the orders they
solicited to the company’s out-of-state headquarters, where the decision to fill the order was
made. Nonetheless, the Court held that there was a constitutionally sufficient nexus between the
company and the state because the individuals had conducted “continuous local solicitation” in
the state on behalf of the company.31 The Court also noted that their status as independent
contractors instead of regular employees was constitutionally insignificant.32
Discriminatory Taxes
The Commerce Clause also prohibits state laws that discriminate against interstate commerce.33 A
state law that “regulates even-handedly to effectuate a legitimate local public interest” and has
“only incidental” effect on interstate commerce is constitutionally permissible “unless the burden
imposed on such commerce is clearly excessive in relation to the putative local benefits.”34 On
the other hand, a facially discriminatory state law is “virtually per se invalid.”35 Traditionally,
such laws have only been permissible if they meet the high standard of “advanc[ing] a legitimate
local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”36
Thus, a state law that subjected remote sellers to tax-related burdens not imposed on in-state
sellers would appear to be facially discriminatory and, therefore, subject to a high level of judicial
scrutiny.
Congressional Authority to Act
The fact that the Supreme Court in Quill separated the nexus analysis under the Due Process
Clause from that under the dormant Commerce Clause has important ramifications for Congress.
Under its authority to regulate commerce, Congress has the power to authorize state action that
would otherwise be an unconstitutional burden on interstate commerce, so long as it is consistent
with other provisions in the Constitution.37 When the Court held in Bellas Hess that both the Due
Process and Commerce Clauses required physical presence, Congress could not have used its
commerce power to impose a lesser standard because the Fourteenth Amendment still required

30 Bellas Hess, 386 U.S. at 757.
31 Id. at 211.
32 See id.
33 See Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977); see also Oregon Waste Systems, Inc. v. Dep’t
of Environmental Quality, 511 U.S. 93, 98 (1994)(dormant Commerce Clause “denies the States the power
unjustifiably to discriminate against or burden the interstate flow of articles of commerce”).
34 Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
35 Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 575 (1997) (internal citations omitted); see
also Hughes v. Oklahoma, 441 U.S. 322, 336 (1979).
36 New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 278 (1988); see also Hughes v. Oklahoma, 441 U.S. 322, 336-
37 (1979)(imposing same test).
37 See Northeast Bancorp v. Board of Governors of Fed. Reserve Sys., 472 U.S. 159, 174 (1985)(“state actions [that
burden interstate commerce] which [Congress] plainly authorizes are invulnerable to constitutional attack under the
Commerce Clause. [citations omitted]”); see also Prudential Insurance Co. v. Benjamin, 328 U.S. 408, 434
(1946)(describing Congress’s Commerce Clause power as plenary and limited only by other constitutional provisions).
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physical presence. Since the Court in Quill found that the nexus standard for due process was less
than that required by the dormant Commerce Clause, this means Congress can permit state
taxation without physical presence, assuming the minimum connection necessary to satisfy the
Due Process Clause is met.38
Congress has thus far not defined the nexus standard, although legislation to do so has been
introduced in the 112th Congress: the Main Street Fairness Act (H.R. 2701 and S. 1452), the
Marketplace Equity Act of 2011 (H.R. 3179), and the Marketplace Fairness Act (S. 1832). As
with previous legislation,39 the Main Street Fairness Act is linked to the Streamlined Sales Tax
Project. The project was formed by state tax administrators in 2000 in order to simplify and make
uniform the administration of sales and use taxes among the states.40 In 2002, member states
adopted the Streamlined Sales and Use Tax Agreement (SSUTA),41 and efforts are now aimed at
each state’s adoption of changes to its taxing scheme in order to come into compliance with the
agreement. According to the project’s website, 44 states and the District of Columbia participate
in the project, and 24 states have enacted conforming legislation.42
The Main Street Fairness Act would authorize each SSUTA member state to impose sales and use
tax collection responsibilities on remote sellers (other than small sellers) for sales sourced to that
state under the agreement. The authorization would come into effect once 10 states comprising at
least 20% of the population of all states with a sales tax have become members under the SSUTA;
various operational aspects of the agreement have been implemented; and each member state has
met requirements relating to databases and taxability matrices. Additionally, the SSUTA would be
required to meet specified minimum simplification requirements (e.g., multistate registration
system; uniform definitions and rules for sourcing; single state-level administration of state and
local sales and use taxes). It appears at least one of the criteria—the population requirement—has
been met.43
The Marketplace Equity Act of 2011, meanwhile, would authorize a state to impose tax collection
responsibilities on large remote sellers once it implemented a simplified tax administration
system. The state’s sales and use tax system would have to meet minimum requirements relating
to streamlined return filing; uniform tax base and exemptions throughout the state; and the sales
and use tax rate structure. A state meeting the requirements could begin to require remote sellers

38 See Quill, 504 U.S. at 318 (“[O]ur decision is made easier by the fact that the underlying issue is not only one that
Congress may be better qualified to resolve, but also one that Congress has the ultimate power to resolve. No matter
how we evaluate the burdens that use taxes impose on interstate commerce, Congress remains free to disagree with our
conclusions ... Accordingly, Congress is now free to decide whether, when, and to what extent the States may burden
interstate mail-order concerns with a duty to collect use taxes.”).
39 Similar legislation has been introduced in prior Congresses. See, e.g., S. 1736 and H.R. 3184 (108th Cong.)(allowing
states to impose sales and use tax collection liability on large remote vendors once 10 states with at least 20% of the
total population of all states with a sales tax became member states compliant with the Streamlined Sales and Use Tax
Agreement and any necessary operational aspects of the Agreement were implemented).
40 See STREAMLINED SALES TAX GOVERNING BOARD INC., Frequently Asked Questions,
http://www.streamlinedsalestax.org/index.php?page=faqs [hereinafter Streamlined Sales Tax FAQ].
41 For discussion of the agreement, see CRS Report R41853, State Taxation of Internet Transactions, by Steven
Maguire.
42 These 24 states are: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada,
New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont,
Washington, West Virginia, Wisconsin and Wyoming. See Streamlined Sales Tax FAQ, supra note 40.
43 According to the project’s website, the 24 states that have enacted conforming legislation comprise 33% of the U.S.
population. See id.
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to collect the taxes on the first day of the calendar year that was at least six months after the state
published a public notice regarding the collection responsibilities. That notice would have to
include information relating to the state law requiring remote sellers to collect the taxes; the
criteria under which the taxes must be collected; the tax rate(s); the date taxes must start being
collected; and tax return filing and compliance.
Finally, the Marketplace Fairness Act represents a hybrid approach. It would authorize states to
impose sales and use tax collection responsibilities on sales sourced to that state if the state had
adopted the SSUTA or implemented minimum simplification requirements, as provided in the act.
As with the other bills, exceptions would exist for small sellers.
Recent State Legislation
Facing the ongoing economic recession, many states have considered legislation designed to raise
revenue by increasing the collection of use taxes from Internet sales. Two primary approaches
have developed: “click-through nexus” and notification requirements. This section examines
these approaches by focusing on the laws in the first states to enact legislation: New York’s click-
through nexus statute and Colorado’s required notification law.
Click-Through Nexus
One approach adopted by some states is “click-through nexus.” This term arises from the
“clickthroughs”—online referrals—that Internet retailers solicit through efforts such as Amazon’s
“Amazon Associates” program.44 In this type of program, an individual or business that operates a
website places a link on that website that directs Internet users to a different website that offers
products or services from an online retailer such as Amazon. In Amazon’s program, these
“associate” individuals or businesses receive, as compensation for their referral, a percentage of
the income Amazon realizes when an Internet user “clicks through” from one of these links and
purchases Amazon goods and services.
“Click-through nexus” statutes require an online retailer to collect use taxes on sales to customers
located in the taxing state based on the physical presence in that state of the retailer’s
“associates.” An example of such a law is the one enacted by New York in 2008.
Under New York law, vendors are required to collect sales and use taxes, with vendors defined to
include any entity which “solicits business” through “employees, independent contractors, agents
or other representatives.”45 The 2008 law added a statutory presumption that sellers of taxable
property and services meet this requirement:
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.46

44 See AMAZON ASSOCIATES, https://affiliate-program.amazon.com/gp/associates/join/landing/main.html.
45 N.Y. TAX LAW §1101(b)(8)(i)(C)(I) (McKinney 2011).
46 N.Y. TAX LAW §1101(b)(8)(vi) (McKinney 2011). For the presumption to apply, the cumulative gross receipts from
sales by the seller to in-state customers as a result of all referrals must exceed $10,000 during the preceding four
(continued...)
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According to guidance issued by the state’s tax agency, the presumption is not triggered by
placing an advertisement.47 For these purposes, advertising does not include placing a direct or
indirect link to the seller’s website if the consideration for such placement is based on the sales
generated by the link.48 Finally, the presumption may be rebutted by proof that the resident “did
not engage in any solicitation in the state on behalf of the seller that would satisfy the
[Constitution’s] nexus requirement” during the preceding four sales and use tax quarterly
periods.49
New York’s statute tries to capture more remote sellers in the gap between those that fall within
the Bellas Hess/Quill safe harbor, who clearly cannot be compelled to collect use taxes, and those
that maintain property or direct employees in the taxing state, which Amazon and other Internet
retailers have taken great care not to do. On the one hand, it might be argued that the law
complies with the Supreme Court’s jurisprudence by targeting only Internet retailers whose
“affiliate” programs create some degree of physical presence in the state and whose “affiliates”
solicit (i.e., do more than merely advertise) on the retailer’s behalf. Examined in this light, the
law might be characterized as similar to the one at issue in Scripto, where the Court upheld the
power of the state to require use tax collection by a remote seller whose sales were arranged by
local “independent contractors” who forwarded the orders they solicited to the company’s out-of-
state headquarters.50 In that case, the Court made clear that the individuals’ title was unimportant,
as was the fact that they had no authority over the sales (e.g., could not approve them).51 Rather,
the key factor in the Court’s decision was that the individuals had conducted “continuous local
solicitation” in the state on behalf of the company.52 By targeting those affiliates which solicit in
the state, it seems the argument could be made that the New York law is within the Court’s
Scripto holding and, therefore, is constitutional with respect to affiliates with sufficient
solicitation activities.
On the other hand, it might be argued there is reason to question whether linking on a website is
substantively similar to the “continuous local solicitation” conducted by the salespeople in
Scripto. It might be argued that the Scripto salespeople’s on-going activities are distinguishable
from the one-time action of placing a link on a website. A court examining whether this
difference is constitutionally significant might be particularly hesitant about extending Scripto’s
holding since the Bellas Hess Court referred to it as “represent[ing] the furthest constitutional
reach to date” of a state’s ability to require use tax collection by a remote seller.53 Another
question may be whether a court would find the New York law to be unconstitutionally

(...continued)
quarterly sales tax periods.
47 New York State Dept. of Taxation and Finance, Office of Tax Policy Analysis, Taxpayer Guidance Division, TSB-
M08(3)S: New Presumption Applicable to Definition of Sales Tax Vendor (May 8, 2008), available at
http://www.tax.ny.gov/pdf/memos/sales/m08_3s.pdf.
48 See id.
49 N.Y. TAX LAW §1101(b)(8)(vi) (McKinney 2011).
50 Scripto, Inc. v. Carson, 362 U.S. 207, 211 (1960). See also Felt & Tarrant Co. v. Gallagher, 306 U.S. 62 (1939)
(upholding state imposition of use tax collection liability on company with two agents in the state); General Trading
Co. v. Tax Comm’n, 322 U.S. 335 (1944) (upholding state imposition of use tax collection liability on company with
salespeople in the state).
51 See Scripto, 362 U.S. at 211.
52 Id.
53 Bellas Hess, 386 U.S. at 757.
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burdensome by requiring remote sellers to potentially monitor thousands of affiliates in order to
determine whether the nexus requirement has been met.54
Whether New York’s strategy of taxing Internet retailers based on the presence in the taxing state
of “affiliates” or “associates” will survive constitutional scrutiny and prove to be the “Holy Grail
of remote taxation,”55 as some have called it, remains to be seen. Amazon has filed suit in New
York state court, alleging facial and as-applied invalidity under, among other things, the
Commerce Clause and Due Process Clause. The company argues that the Supreme Court’s
jurisprudence stands only for the proposition that substantial nexus can be created by “active
solicitation” in the taxing state on behalf of an out-of-state retailer, a standard which “click-
through” referrals do not meet.56 After the trial court dismissed the case,57 the state appellate court
rejected the facial challenges under both clauses, but remanded the case with respect to the claim
of as-applied invalidity under both clauses.58 When rejecting the facial challenge under the
Commerce Clause, the appellate court found “the nexus requirement is satisfied” because the law
imposes tax collection responsibility on remote vendors “only where the vendor enters into a
business-referral agreement with a New York State resident, and only when that resident receives
a commission based on a sale in New York” and “does not target the out-of-state vendor’s sales
through agents who are not New York residents.”59 With respect to the facial due process
challenge, the appellate court rejected the claims that the law’s presumption was irrational and
irrebuttable and that the law was unconstitutionally vague.60
Required Notification
The second approach adopted by some states requires Internet retailers to provide information to
the state and/or customer, rather than requiring Internet retailers to collect the use taxes
themselves. This approach is illustrated by Colorado’s law, which was enacted in 2010.
Among other things, Colorado’s law imposes three duties on any “retailer that does not collect
Colorado sales tax.”61 Retailers must (1) inform Colorado customers that a sales or use tax is

54 Cf. Quill, 504 U.S. at 313 (imposing use tax collection liability was an impermissible burden on interstate commerce
due to potential burden of such tax in light of the numerous taxing jurisdictions across the country).
55 See Amazon Laws: The Rise of “Click-thru Nexus” for Sales Tax Collection, CBIZ (January 2011), available at
http://www.cbiz.com/page.asp?pid=9111.
56 Brief of Plaintiffs-Appellants, Amazon.com, LLC v. New York State Dep’t of Taxation and Finance, 913 N.Y.S.2d
129 (N.Y. App. Div. 2010) (Nos. 1534, 1538), 2009 WL 7868633 at *24-25.
57 Amazon.com LLC v. New York State Dep’t of Taxation and Finance, 877 N.Y.S.2d 842, 846 (N.Y. Sup. Ct. 2009).
58 Amazon.com, LLC v. New York State Dep’t of Taxation and Finance, 913 N.Y.S.2d 129, 143, 144 (N.Y. App. Div.
2010) (“Inasmuch as there has been limited, if non-existent, discovery on issue we are unable to conclude as a matter of
law that plaintiffs’ in-state representatives are engaged in sufficiently meaningful activity [under the Commerce
Clause] so as to implicate the State’s taxing powers, and thus find that they should be given the opportunity to develop
a record which establishes, actually, rather than theoretically, whether their in-state representatives are soliciting
business or merely advertising on their behalf,” and “we conclude that it would be premature to find that even as
applied the due process challenges are unavailing, whether because they create an illegal and irrebuttable presumption,
or because the language of the statute is so vague that plaintiffs cannot ascertain which transactions give rise to their
obligations to collect the sales tax” and therefore “we remand for further discovery so that plaintiffs can make their
record that all their in-state representatives do is advertise on New York-based Web sites.”).
59 Id. at 138.
60 See id. at 139-40.
61 COLO. REV. STAT. ANN. §39-21-112(3.5). “Retailer” is defined as “a person doing business in this state, known to the
trade and public as such, and selling to the user or consumer, and not for resale.” COLO. REV. STAT. ANN. §39-26-
(continued...)
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owed on certain purchases and that it is the customer’s responsibility to file a tax return; (2) send
each Colorado customer a year-end notice of the date, amount, and category of each purchase
made during the previous year, as well as a reminder that the state requires taxes be paid and
returns filed for certain purchases; and (3) provide an annual statement to the Colorado
department of revenue for each in-state customer showing the total amount paid for purchases
during the year. Unless the retailer can show reasonable cause, each failure to notify a customer
about the duty to file a state use tax return carries a $5 penalty, while each failure of the other two
duties carries a $10 penalty.62
The notification requirements apply only to companies that do not collect Colorado sales and use
taxes, which would appear to be primarily those retailers without a substantial nexus to the state.
In other words, the law applies to companies that do not have a physical presence in the state. The
first question is whether this violates due process. While the law targets companies without
physical presence in the state, it applies to “retailers” who, by definition, must be “doing
business” in the state.63 This means the notification law applies only to retailers who have some
type of contact with the state. However, there may be retailers for whom the “doing business”
standard would not result in the requisite minimum connection with the state.
Additionally, the Colorado statute raises two issues under the Commerce Clause. First, since the
law applies to companies that do not have a physical presence in the state, it would appear that
the notification requirements would have to be distinguishable from use tax collection
responsibilities in order to be permissible. On the one hand, some might distinguish between them
since the notification law does not actually impose any tax collection liability on remote sellers,
unlike the laws at issue in Bellas Hess and Quill. On the other hand, some might characterize the
laws as functionally similar since all are intended to increase use tax collection, in which case it
might be argued that the notification requirements are at least as burdensome as tax collection
responsibilities since both require similar types of recordkeeping and, unlike collection
responsibilities, the notification law also involves reporting information to the consumer. A court
adopting this characterization of the notification duties would likely find them to be an
impermissible burden on interstate commerce.

(...continued)
102(8). “Doing business in this state” is defined as “the selling, leasing, or delivering in this state, or any activity in this
state in connection with the selling, leasing, or delivering in this state, of tangible personal property by a retail sale as
defined in this section, for use, storage, distribution, or consumption within this state. This term includes, but shall not
be limited to, the following acts or methods of transacting business:(a) The maintaining within this state, directly or
indirectly or by a subsidiary, of an office, distributing house, salesroom or house, warehouse, or other place of
business; (b)(I) The soliciting, either by direct representatives, indirect representatives, manufacturers’ agents, or by
distribution of catalogues or other advertising, or by use of any communication media, or by use of the newspaper,
radio, or television advertising media, or by any other means whatsoever, of business from persons residing in this state
and by reason thereof receiving orders from, or selling or leasing tangible personal property to, such persons residing in
this state for use, consumption, distribution, and storage for use or consumption in this state. (II) Commencing March
1, 2010, if a retailer that does not collect Colorado sales tax is part of a controlled group of corporations, and that
controlled group has a component member that is a retailer with physical presence in this state, the retailer that does not
collect Colorado sales tax is presumed to be doing business in this state ... This presumption may be rebutted by proof
that during the calendar year in question, the component member that is a retailer with physical presence in this state
did not engage in any constitutionally sufficient solicitation in this state on behalf of the retailer that does not collect
Colorado sales tax.” COLO. REV. STAT. ANN. §39-26-102(4).
62 COLO. REV. STAT. ANN. §39-21-112(3.5)(c)(II), (d)(III)(A) and (B).
63 See definitions supra note 59.
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Second, by targeting remote sellers that do not have a physical presence in the state, the law
imposes duties on out-of-state business that are not similarly imposed on Colorado businesses.
Thus, it appears to be a facially discriminatory law. Under the Supreme Court’s jurisprudence,
facially discriminatory laws are “virtually per se invalid.”64 In order to be upheld against
constitutional challenge, they generally must meet the high standard of “advanc[ing] a legitimate
local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.”65
Whether the Colorado law would meet this high standard is open to question. While collecting
use tax on purchases made to in-state customers seems an obvious legitimate government
purpose, some might argue that there are other alternatives, such as collecting use tax from state
residents on the state income tax form.
The constitutionality of the Colorado law has already been challenged. In March 2012, a federal
district court held that the law violates the dormant Commerce Clause.66 First, the Court found
that the state law impermissibly discriminated against out-of-state vendors. The court explained
the only way a discriminatory law could be saved was if the state were able to show that its
legitimate interests could not be served by reasonable nondiscriminatory alternatives, which the
court found the state had completely failed to do.67 Second, the court found the notification
requirements were “inextricably related in kind and purpose” to the tax collection responsibilities
at issue in Quill and therefore subject to the physical presence standard.68 Since the Colorado
requirements applied to retailers without a physical presence in the state, the court concluded they
were in violation of the protections established by Quill and therefore unconstitutional.69


Author Contact Information

Erika K. Lunder
John R. Luckey
Legislative Attorney
Legislative Attorney
elunder@crs.loc.gov, 7-4538
jluckey@crs.loc.gov, 7-7897


Acknowledgments
Alexander Lutz, former Law Clerk in the American Law Division, contributed to this report.

64 Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U.S. 564, 575 (1997) (internal citations omitted).
65 New Energy Co. of Indiana v. Limbach, 486 U.S. 269, 278 (1988).
66 Direct Mktg. Ass’n v. Huber, Civil Case No. 10-cv-01546-REB-CBS, 2012 U.S. Dist. LEXIS 44468 (D. Colo.
March 30, 2012) (granting plaintiff’s motion for summary judgment).
67 See id. at *17-*20.
68 Id. at 26.
69 See id. at *26-*27.
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