How the Big Apple Started the Internet Sales Tax Debate


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11-4-2010-1

Back in April of 2008, New York lawmakers were looking for ways to make up some ground in tax collections. The Internet, with its billions in untaxed retail sales, looked to be a great target. So, they designed and enacted a law, commonly known as the Amazon Tax law, one that that has fundamentally changed how Internet retailers operate.

New York was looking to get around a Supreme Court decision, (Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992). In this case, the highest court in the country said that a physical standard must be met for sales taxes. In simple terms, unless your company had some kind of physical connection – an office, employees, repair department, and so on – in a state, you weren’t required to collect sales taxes in that state. But unfortunately, Quill predated the Internet sales boom and lawmakers have been looking to find a way around it ever since.

New York’s approach was novel. Amazon had (and continues to have) an extensive network of affiliates. These are individuals and businesses who set up websites promoting Amazon products, and providing links back to the Amazon.com website. If you go through someone’s website link, and wind up buying products from Amazon.com, that affiliate gets a commission.

There are thousands of affiliates all across the country. Together, the affiliate network helps to promote and sell Amazon products – and the products of most other major and minor Internet retailers – not to mention helping thousands of people to earn a healthy living.

For New York lawmakers, the idea that Amazon had relationships with thousands of affiliates who were living in New York, was just what they were looking for. By claiming that the Amazon-affiliate relationship was close enough to create physical nexus, they were able to make a claim for nexus. The law was written to require all Internet retailers who had NY-based affiliates to collect and pay sales tax on sales that originated through a NY-based affiliate website.

Internet retailers argued strenuously that the simple fact of passive advertising wasn’t enough to create nexus, and that the casual affiliate relationship wasn’t enough to meet the Quill test. Amazon sued, however, they lost the first couple of rounds, and the case is now in the appeals court, awaiting a decision. In the meantime, Amazon is collecting tax from NY customers, and it sits in an escrow account, pending the outcome of the court battle.

Two other states, North Carolina and Rhode Island, both jumped on the bandwagon and enacted legislation of their own, along the same lines as NY law. It hasn’t terminated the affiliate marketing program in NY, although it did terminate the NC and RI programs immediately, along with Colorado. However many other merchants reacted by terminating their affiliate marketing programs, including Overstock

Other states have looked at NY’s law, as well as with Colorado’s approach (which I’ll talk about tomorrow). Unless NY loses, and loses badly, with no opportunity to appeal, we’ll continue to see more action taken at state level. It’s going to take Congress and a new federal law to clean things up, and so far, that doesn’t seem likely to happen.



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