New York goes after online booksellers for sales tax
November 12, 2007 | Comments Off
New York’s taxing agency is fixing to open up a can of whoop-ass on Internet retailers like Amazon that traditionally have been protected from sales tax collection requirements and liability because they lacked nexus with, or a “physical presence” in, the state. (For background, see my 2003 comments on the “Internet Tax Freedom Act” at MobyLives. Many thanks to GMB for bringing this to my attention.)
Supreme Court case law allows states to require an out-of-state seller to register for and collect sales tax where the seller has an agent or representative soliciting sales in the state. And now the New York Department of Tax & Finance is claiming that nexus exists because of affiliate marketing programs like (though it is not named) Amazon Associates.
John Smith is the author of a guide book to kayaking on New York lakes and rivers. The book is listed for sale on an e-commerce retail Web site. Mr. Smith maintains a Web site that contains a variety of information on kayaking and also contains a link to the e-commerce retail Web site through which visitors to his site may purchase his book. For each visitor that follows this link and purchases his book from the e-commerce retail Web site, Mr. Smith is entitled to receive compensation from the e-commerce retailer. Mr. Smith regularly speaks on the subject of kayaking at forums within the State. In the interest of earning commissions from the ecommerce retailer, he actively markets his book at these events by referring attendees to his Web site, where potential purchasers can click on the link to the e-commerce retailer’s Web site and purchase his book.Based on this arrangement, the e-commerce retailer is considered to be soliciting business through Mr. Smith, who is acting as an independent contractor, agent or other representative of the e-commerce retailer, and making sales of taxable tangible personal property to persons within New York State. Therefore, the e-commerce retailer must register as a New York sales tax vendor, collect the New York State and local sales taxes, and file the required sales tax returns.
Any bookseller or other retailer offering these kinds of incentives should read the Department’s memorandum very closely. I used to work in this area on the government side (for a state other than New York), and while there will undoubtedly be arguments about what constitutes an agent or representative, and other aspects of the state’s position, I think New York ultimately wins on this.
Another interesting facet of the memo:
This memorandum is intended to clarify current policy and does not reflect any change in requirements for vendors doing business in New York State. If an out-of-state business should have been registered based solely on the information contained within this memorandum, but was not registered, the department will not assess any prior sales taxes due or any civil or criminal penalties or interest for the failure to collect and remit any prior sales tax due, if the business registers and begins collecting sales tax by December 7, 2007.
Translation: Register and start collecting by December 7, or we’re going after you for all prior years.
Quick clarification: If you’re a link affiliate of Amazon or some other bookseller, please don’t panic. The Department is going after the retailers, not after you.
And a further update: The Governor apparently has told the Department not to pursue this, after all. I just left this comment beneath Times’ announcement:
Despite insinuations to the contrary from the New York Sun and others, in no way did this policy announcement amount to the imposition of a new tax.Contrary to popular belief, the Internet Tax Freedom Act does not shield Internet purchases from tax. It is entirely misleading to say, as Danny Hakim so glibly does here, that the administration announced a plan to “start charging sales tax on Internet purchases.”
Indeed, New York residents owe tax on every book, CD, and other physical item they purchase from a web-based retailer who does not charge the tax. The trouble is that most people are not aware of their obligation to pay the tax — which in this instance is called a use tax — and it is a logistical nightmare for the state to enforce it. (Next time you’re filling out your New York income tax form, pay attention and you’ll notice that the Department actually asks you to list any purchases ordered online for which you did not pay tax. This line was added several years ago in the hope that it would increase residents’ awareness of their use tax obligations.)
The failure of Amazon and other big-box Internet retailers to collect and remit the tax penalizes both mom-and-pop establishments in the state and other major retailers like Barnes & Noble, which, due to its physical locations in the state, does collect the tax.
Affiliates of Internet retailers as described in the memorandum are representatives of the retailers under Supreme Court precedent that goes back decades to the case of Scripto v. Carson. Retailers with these programs benefit from the solicitation activities of their representatives in the state and therefore should be required to collect taxes on their sales into the state.
I’m disappointed that the Governor has tied the Department’s hands here.
Thus concludes our posting on the MaudNewton.com Tax Obsession of 2007.