Online Sales Tax Update; Bad News For Internet Retailers?

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Back in April of 2008, the state of New York enacted a new tax law which required out-of-state retailers to collect and remit sales tax if they have a commission agreement with an in-state resident (that means affiliates) if earnings totaled more than $10,000 in revenue annually.

Is this a major setback for the tax free Internet retail? Perhaps, but not yet. The bad news came yesterday as a New York judge dismissed the case and claims of both Amazon and Overstock who filed lawsuits to stop the Internet sales tax collection. Count on both Amazon and Overstock, however, to appeal the rulings.

According to Judge Eileen Bransten, "In the end, the Commission-Agreement Provision does not broadly tax any and all Internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair share of the tax collection burden when using New Yorkers to earn profit from other New Yorkers."

Should Amazon and Overstock ultimately lose their appeals, it is possible that you may see the end of affiliate advertising programs in their current iteration from retailers like Amazon and Overstock.

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1 comment

RobertA 01-20-2009 2:11 AM

There are several issues here.

First the internet is already taxed via communication taxes at various levels of government.

Second, this is another attempt by state of New York to collect a tax that is probably already on the books or to create another source of revenue.  In Florida, they tried this once, to bully out of state businesses into to collecting sales tax.

Florida as in other states, have a use(sales) tax that is supposed to be paid by residents of Florida on purchases made out of state via mail order.  This tax is supposed to be paid to the Florida Department of Revenue.  The problem is getting residents and businesses alike to pay this tax.

This applies (or should also apply) for internet sales.  Mail order catalogs are printed media and internet websites are electronic media.

Also there is the problem of physical presence (usually this refers to a brick and mortar location which collects sales tax. i.e. Sears) and jurisdictional boundaries.

Usually, when a commission is paid it is considered income subject to state and federal taxes.  Affiliates usually do not take possession of goods and therefore aren’t required to have a sales tax certificate to collect sales tax.  The only way to collect the tax is require the affiliate or individual to collect the tax or go to Federal court to compel the company that shipped (and issued the sales receipt) the goods to collect and pay the sales tax.

Then there is the issue of the goods being shipped from one state to another state and falls under interstate commerce.  And, does this interfere does constitute interference with interstate commerce.

So there are issues involved.


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