New York Targets Internet Retailers

by | May 18, 2008

The State of New York has passed a new law scheduled to go into effect June 1, 2008, requiring internet retailers to collect sales taxes. The new law is expected to generate an additional $78 million of revenue per year for the state. Several other states, including California, are considering similar laws.

For any state to impose a tax on interstate commerce, the state must establish the taxpayer’s connection to the state (the so-called nexus requirement). In the case of this new law (dubbed the “Amazon” law as it primarily targets, the presence of Amazon’s affiliates within the state of New York is the nexus that New York is relying on.

Amazon’s “affiliates” are independent website operators who place links to Amazon on their websites and collect a fraction of each sale generated by a consumer who clicked through to Amazon from one of these websites. Because affiliates are independent business operators and are not Amazon’s agents, New York would have a difficult time proving that the new law does not impose an undue burden on interstate commerce. The presence of in-state affiliates certainly would allow New York to impose an income tax on Amazon’s stream of income from those affiliates who are located within the State of New York, but that may not be enough for sales tax purposes. Federal case law dealing with the Commerce Clause and the Due Process clause draws a distinction between the minimum necessary contacts that a taxpayer must have with the state for income tax collection jurisdiction versus sales tax jurisdiction.

If these laws are proven to be Constitutional, they are likely to be enacted in all the states. That may have a profound impact on the state of internet commerce.

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