NY eCommerce Sales Tax Not So Bad?

After the New York State Department of Taxation and Finance issued a Technical Services Bulletin (TSB-M-08(3)S) on May 8 regarding a new law requiring online merchants to collect state sales taxes, the tax counsel for the Direct Marketing Association, George Isaacson, said the legislation is now viewed as “less aggressive than what have been our greeatest fears....The TSB is more focused and, therefore, more helpful for direct marketers," according to Multichannel Merchant magazine.

After the new legislation was signed by Gov. David Paterson on April 15, DMA officials deemed the law unconstitutional because it contradicted a 1992 Supreme Court Decision, Quill v. 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 or warehouse in the state.

New York’s new law will require out-of-state online retailers to collect state and local sales taxes, though merchants collecting less than $10,000 per year from New York residents will be exempt. Amazon.com filed a lawsuit on May 2 against the state of New York, challenging the legislation.

Isaacson said the law isn’t as “broad-based” as initially thought, due to the Tax Services Bulletin (TSB). “The burden switches to the direct marketer to demonstrate that it doesn’t have nexus in the state,” he said. He said a direct marketer could defeat the presumption of nexus in New York, “even if in fact a Web link with New York residents exists. A pure vanilla affiliate marketing Web link arrangement can be defeated by showing that that Web link party is not engaged in any additional solicitation. That’s the good news in this TSB.”

What’s more, Isaacson said: “Where there are not any individuals within the state mailing referrals, issuing e-mails, encouraging people to come to the Website to place orders, then the rebuttal will be successful. That’s really key.”

But it raises the question: How do you demonstrate there is no additional activity? “You can include in your contract with the affiliate marketing network that you do not want any New York Websites engaged in any activity other than providing a Web link to your Website,” Isaacson said. “A contract can prove rebuttal success. That goes a long way in carrying your burden of proof.”

At its extremes, the new law is “clearly unconstitutional,” Isaacson said. But the TSB narrowed the definition. “There has to be a physical presence in the state that brings this back within the orbit of existing Supreme Court precedent,” he said.

In a May 15 letter to Mark Micali, the DMA’s vice president of government affairs, Isaacson said: "This more conservative position taken by the Department of Taxation and Finance is of critical importance to direct marketers. It means that if retailers are vigilant in monitoring their affiliate marketing relatonships to be certain that, other than the New York Website link, no additional in-state solicitation activity occurs on the part of the New York affiliate, then the mere Website link relationship should not create nexus."