New York’s Ham-Handed Attempt at Taxing Internet Commerce

Article update: the New York law to require web sites to collect sales tax has been signed in to law, ands it is now drawing lawsuits from e-commerce sites.


image: i love new yorkLast week, New York Governor Eliot Spitzer introduced–and quickly withdrew–plans to require Internet retailers who use affiliate marketers in that state to collect sales tax payments.

This would not have technically been a new tax on New Yorkers, who are already required to pay sales tax on goods purchased online. The state, however, lacks an effective collection mechanism for this, and although residents are asked to report such purchases on their annual tax forms, few ever do. So while it would not be a new tax, it would certainly result in new revenue.

Internet retailers generally have been exempted from collecting state sales tax under the US Supreme Court’s 1992 ruling in Quill Corp. v. North Dakota. It holds that “sales tax collection requirements cannot be imposed on an out-of-state corporation that does not have a substantial physical presence within the state.”

However, Internet commerce sites such as Amazon traditionally give commissions to other sites that send them traffic resulting in sales. New York Department of Taxation officials contended that these affiliate marketers function as agents, and therefore create a sufficient nexus to subject their sites to sales tax collection requirements. Once this status was established, commerce sites would be required to collect taxes for all purchases made by New Yorkers–not just those arriving from affiliate sites.

Maud Newton published an excerpt from the Department of Taxation’s memo, which shows they really did mean to make this happen right away. They threatened criminal penalties, and interest on back taxes, on any retailer not actively collecting tax for the state by December 7th 2007. The message to retailers was: Do it now, or big fines are headed your way.

As Internet commerce continues to grow, states are increasingly focused on finding ways to enforce the collection of sales tax. And change is in the air, with industry pundits such as Dave Taylor now asking if it’s time to reconsider the taxation of Internet purchases as a no-longer “sacred cow” of new commerce promotion.

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