Amazon Challenges NY eCommerce Sales Tax

New York Gov. David Paterson signed into law on April 15 a provision that will require out-of-state online retailers to collect state and local sales taxes. The measure, expected to raise about $50 million for the state budget, contradicts a 1992 Supreme Court Decision, Quill Corp. vs. North Dakota, that said states are not allowed to require out-of-state companies to collect sales taxes unless that company has a physical presence, such as a store, warehouse, in the state. A provision states that companies collecting less than $10,000 per year from New York residents will be exempt.

The big question is, will the law survive the imminent litigation? And, if so, will the other 44 states that have a state sales tax jump on the bandwagon? Before the ink on the bill had even dried, Amazon.com filed a suit challenging the new law, which is based on a novel definition of what constitutes a presence in the state: it includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon, of course, has hundreds of thousands of affiliates, ranging from big publishers to tiny blogs, that feature links to its products. Amazon says that its affiliates are not agents but simply sites on which it places advertising. The commissions it pays the sites are simply one method of paying for those ads, it argued.

Tom Bergin, a spokesman for the New York State Department of Taxation, said that department would not comment on the suit until it filed a formal reply with the court. The state’s defense will be coordinated by the New York attorney general’s office.

The new tax law requires that all online retailers "doing business in New York" register with the state to collect sales taxes by June 1, 2008. Those who do not register will face audits for quarters prior to the deadline.

A recent discussion on Webpronews featured a recurring theme: the seemingly daunting task of enforcing the law. How does the New York Dept. of Taxation expect to administer this new tax law? How will they ferret out the numerous small and large businesses that have affiliates residing in New York? None of this has been addressed by the state so far and it seems that the time and money needed to make sure the tax collection takes place could far outweigh the revenue benefit.

Ironically, NY had passed an Internet sales tax last year, which was rescinded by then-governor Elliot Spitzer in December, just before going into effect....