California-Based Online Retailer Won’t Collect New York Sales Tax

Published October 10, 2008

Newegg, a California-based online retailer of consumer electronics, announced on August 21 it would not collect sales taxes required by an Internet sales tax measure adopted by New York state. The company is leaving it to its customers who live in the Empire State to report their purchases and pay their own sales taxes—a practice few customers follow.

Newegg’s move essentially puts the legal ball in New York state’s court, requiring the government to sue Newegg if it wants the company to collect sales taxes.

Ball in New York’s Court filed suit against the state of New York last May, arguing the New York state budget, signed by Gov. David Paterson (D), is unconstitutional. Two months later sued the state on similar grounds.

The companies argue the tax, dubbed the Amazon Tax, unfairly targets some companies, violating the equal protection clause of the U.S. constitution and contradicting a Supreme Court ruling.

Law Skirts Court Ruling

“This change is constitutional,” said Jeffrey Gordon, a press official in Paterson’s division of budget. “New York enacted a requirement that Amazon and others begin collecting sales tax on the basis of Amazon having established a presence in New York State by using in-state affiliates that are encouraging sales through Amazon by linking to its site.”

Kristina Rasmussen, director of government affairs for the National Taxpayers Union, strongly disagrees.

“In 1992 the Supreme Court ruled that ‘remote sellers’—at that time, mail-order firms—didn’t have to collect taxes on purchases made by inhabitants of states where the businesses had no ‘bricks-and-mortar’ establishments,” Rasmussen noted.

New Definition of ‘Presence’

Neither Amazon nor Overstock has bricks-and-mortar establishments in the state of New York, and according to the 1992 Supreme Court decision Rasmussen cited (Quill Corp. v. North Dakota [91-0194], 504 U.S. 298), that exempts them from having to pay the New York state sales tax.

The Amazon Tax attempts to avoid this decision by requiring online retailers to pay sales tax if any Web site based in New York earns a referral fee for sending customers to the retailer. Amazon has thousands of such affiliates across the country.

Prior to the Amazon tax, individual New Yorkers were responsible for reporting online purchases to pay the state sales tax. Few New Yorkers have actually filed taxes on items they have bought online.

The new state law aims to collect taxes directly from online retailers such as Amazon and Overstock instead of from individual purchasers. Gordon said this is fair for businesses because it levels the tax playing field between online retailers and bricks-and-mortar ones and collects the tax money that existing state law already required New Yorkers to pay.

“This should not concern New York businesses, which are at a competitive disadvantage when consumers bought through Amazon to escape paying the tax,” Gordon argued.

“In reality,” Gordon said, “all consumers are liable for purchases they make online, and should be remitting tax for purchases they make in other states. In fact, there is a line on the New York State tax form for taxpayers to declare the tax on purchases they make for which they have not paid tax.”

Taxation Without Representation

Rasmussen says the new tax law doesn’t withstand constitutional scrutiny.

“Collecting more taxes from individuals who live outside a given jurisdiction, such as tourists and online purchasers, is attractive to some politicians because they can pile on the taxes without suffering local wrath on Election Day,” said Rasmussen.

“But as clever as New York may think it’s being, other states should be wary about following in lockstep,” Rasmussen warned. “Audacious tax grabs like this one have a decent record of being thrown out by the courts, thanks to the lawsuits brought by injured taxpayers and businesses.”

Overstock declined to comment, saying only the firm was “confident” in its position opposing the new law.

Aleks Karnick ([email protected]) writes from Indianapolis.