When it comes to sales tax, it’s all about location. If you’ve got a brick-and-mortar store, things are easy. Everyone pays, unless the customer can produce a valid wholesaler certificate that says they are exempt from paying sales tax, and you don’t have to collect it on their purchase. But things get trickier online. If your business sells things online, where is your sales tax nexus now?
Typically the same logic still applies. Where does the sale happen? If you’re shipping from your basement in Ann Arbor, then any sales to Michigan-based consumers will be subject to sales tax and you’ll be responsible for collecting it, and paying it to the State of Michigan. If you sell through your website but the merchandise is direct-shipped from elsewhere, only sales in the same state the shipper is located in are taxable. So if your goods are shipped from Ohio, you’re only responsible for collecting sales from Ohio-based purchasers and sending that money to the Ohio Tax Department.
The State of New York is trying to change that, by going toe to toe with Amazon.com.
It’s no secret that our states are hurting for revenue, and are looking at all possible solutions. It’s no different in New York, which has long had a very aggressive stance when it comes to taxing income.
Recently the state enacted a new provision into state law that requires out-of-state retailers to collect and remit sales tax resulting from purchases by New York residents. The new statute presumes that you are “soliciting” sales in New York if any in-state business or person is compensated for directly or indirectly referring people to your retail operation.
In the case of Amazon, New York’s position is that many New York web-based businesses refer customers to Amazon by way of web links on their various sites. If you go to Amazon through these links and buy something, the New York-based website owners receive some kind of compensation. This, according to the New York Department of Taxation, equates to solicitation of sales on behalf of Amazon, and that makes Amazon liable under the new law to collect sales tax from New York residents.
As far as Amazon.com is concerned, the NY governments position is “invalid, illegal and unconstitutional.” It has no physical presence in New York and doesn’t actively solicit anything in that state. Amazon’s three main arguments are:
- The New York law violates the Commerce Clause of the U.S. Constitution because it imposes tax-collection obligations on out-of-state entities with no substantial nexus in New York;
- The New York law violates the Due Process CLauses of the U.S. and New York Constitutions because it effectively creates an irrebuttable presumption of “solicitation” that is overly broad and vague; and
- The New York Law violates the Equal Protection Clauses of the U.S. and New York Constitutions because it intentionally targets Amazon.
Personally, I’m glad that Amazon has deep pockets and can afford to fight this battle. If you are engaged in affiliate marketing, this case is probably something you want to keep an eye on. Even the supporters of the Streamlined Sales Tax (a proposed country-wide reporting system that will require all retailers to collect and remit sales tax to all 50 states) are not happy about New York jumping the gun on this one. If the case is overturned at trial, it could give the opponents of the SST a powerful weapon to use to get that proposed legislation derailed.