The Return of Tax-Free Shopping in New York?

For online retailers cranky about a controversial new law in New York requiring them to collect sales tax on purchases shipped to that state, Newegg has an solution: don’t do it.

Newegg, a Web-only merchant that sells computers, accessories and consumer electronics products, has reversed its policy of collecting sales tax on New York purchases, the company confirmed.

When the law took effect June 1, Newegg began collecting the tax like other retailers. It was not immediately clear what prompted the change, and company spokespeople did not respond to requests for comment.

The tax provision sits in a murky legal area that online retailers and some tax-policy analysts say places an unreasonable burden on interstate commerce. Amazon, which is collecting the tax, has filed a lawsuit against New York, charging that the measure is “invalid, illegal and unconstitutional.”

The most relevant precedent is a 1992 Supreme Court ruling involving a mail-order company that concluded that a business must have a physical presence in a state in order to be responsible for collecting sales tax on purchases shipped there. Under the new law, New York is requiring online retailers that derive sales through referrals from affiliates who live in the state to collect the tax, even if they have no employees or operations there.

Like many online retailers, Newegg maintains an affiliate program. Web site owners who post banner ads and links promoting Newegg earn commissions of 1 percent to 2 percent of the sales they refer.

The new law led one store,, to drop its affiliate program in New York. Overstock has joined Amazon in its legal dispute against the state.

New York estimates that the provision will generate $50 million in revenue for the state in the fiscal year. Tax experts look to other cash-strapped states to adopt similar measures if the New York law holds up in court.

Newegg collects sales tax on purchases shipped to California, where it is headquartered, and New Jersey and Tennessee, where it maintains operations.

On the policy page of its Web site, Newegg states that, “Sales tax is only required for orders shipping into states where we have or may have nexus for state tax purposes under applicable laws.”

When companies don’t collect sales taxes on out-of-state purchases, the consumer is still responsible for paying it in the form of a use tax that is reported on the state income tax return. Most people either don’t know about that rule or ignore it.

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