New York’s About-Face on E-Commerce Taxation

Just when it looked like the tax-free ride was over for online shoppers in
New York, the state’s governor changed his tune.

Late this afternoon, Gov. Eliot Spitzer’s office released a statement
rescinding the new tax policy that would have required online retailers to
begin collecting state sales taxes starting Dec. 7.

“Governor Spitzer believes that now is not the right time to be
increasing sales taxes on New Yorkers. He has directed the Department of Tax
and Finance to pull back its interpretation that would require some Internet
retailers that do not collect sales tax to do so,” State Budget Director
Paul Francis said in the statement.

The policy would have directly affected retailers such as Amazon and
Buy.com that use affiliate marketing programs, where Web site operators
include a link to an online retailer and receive a portion of any sales
resulting from the click-through.

The governor’s office would not comment on whether the legal challenges
to the policy that the state could have faced played a role in Spitzer’s
decision.

“Gov. Spitzer probably sees the state as overreaching,” NetChoice Executive
Director Steve DelBianco wrote InternetNews.com in an e-mail.

Retailers would likely have challenged the tax policy on constitutional
grounds, although such a fight could have taken years, said Catherine
Fox-Simpson, tax partner at tax consulting firm BDO Seidman.

Spitzer’s move could have come from fears that the policy would have run
afoul of the 1992 U.S. Supreme Court ruling in Quill Corporation v.
North Dakota, which held 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.”

DelBianco predicted that the policy, if enacted, “would fail the Supreme
Court’s [1992] Quill test, which held that state and local sales tax regimes
are so phenomenally complex that they’re an unreasonable burden on
interstate commerce.”

Many experts were anticipating that the policy would have a far-reaching
impact with other states following New York’s lead. As they look for new
sources of revenue, more states can be expected to turn a hungry eye to the
thriving e-commerce market, according to Fox-Simpson.

The legal theory behind the move claimed that online retailers use
“representatives” to solicit sales. A representative can be a contractor, an
agent or anyone else who directs traffic to an online retailer, according to
the memo from the New York State Department of Taxation detailing the
policy.

The new policy would have required any e-commerce site with a
representative located in New York State to collect sales tax on items
purchased by New York residents.

Under the policy, affiliates would have been treated as representatives
of the company, which is enough to establish a physical presence in a state.
As it stands, Internet retailers are only deemed to have a physical presence
where they have established company operations, such as a distribution
center or a sales staff.

The physical presence rule, established by the Quill ruling, has exempted
a large portion of online transactions from state and local taxation. That
is the loophole that Gov. Spitzer was seeking to close with the new
tax policy.

One of the companies that would have felt the biggest impact from the new
policy is Amazon. Through its Associates affiliate marketing program, Amazon
provides more than 1 million Web sites with a link to its site in exchange
for commissions of up to 10 percent.

If just one of these site operators lives in New York, the Internet
retailer would have been required to register as a New York sales tax
vendor.

The companies that would have been most affected by the policy didn’t have a chance to react before Spitzer took it off the table.

Shortly before Spitzer’s reversal, Patty Smith, a spokesperson for Amazon, told InternetNews.com that
the company had only recently heard of the policy and that its tax division
was looking into the matter.

“We haven’t had a chance to evaluate the memo,” Smith said, adding that it would undergo an internal review before the company would consider
legal action or any changes to its affiliate program, she added.

Significantly, state taxes would have applied to all purchases made
through the online retailer, not just those made by following a link from an
affiliate.

“Perhaps the governor realized that Amazon would have had to collect
sales tax on all their sales to all New York residents – not just sales
triggered by these independent affiliates,” DelBianco suggested.

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