Online Retailers Sue Over N.Y. Internet Sales Tax

Published September 1, 2008 informed more than 3,400 New York-based affiliate advertisers that they can no longer provide ads for Overstock. On May 13, it wrote its affiliates informing them of the situation, saying, “We now believe it prudent to discontinue, temporarily, our current relationships with our New York affiliates while the battle over the constitutionality of the New York legislation is contested in the courts.”

Two major online retailers are suing New York state over a law requiring online businesses to pay sales tax on all purchases by customers in the state. filed suit last May, contending the New York state budget, signed by Gov. David Paterson (D), is unconstitutional. Two months later sued the state on similar grounds.

The companies say the so-called “Amazon Tax” unfairly targets some companies, violating the equal protection clause of the U.S. Constitution and contradicting a 1992 Supreme Court ruling in Quill Corp. v. North Dakota.

Law Skirts Court Ruling

The change clearly is unconstitutional, says Kristina Rasmussen, director of government affairs for the National Taxpayers Union.

“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.

“This change is constitutional,” countered 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.”

New Definition of ‘Presence’

Neither Amazon nor Overstock has bricks-and-mortar establishments in the state of New York. Under the Quill decision, that exempts them from having to pay the New York state sales tax.

The Amazon Tax attempts to circumvent the 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.

Before enactment of the Amazon Tax, individual New Yorkers were responsible for reporting online purchases to pay the state sales tax. Few have actually reported such purchases or paid taxes on them.

The new state law aims to collect taxes directly from online retailers instead of from individual purchasers. Gordon said doing so levels the tax playing field between online retailers and bricks-and-mortar ones and collects the tax money that previously 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 said.

“In reality,” Gordon explained, “all consumers are liable for purchases they make online and should be remitting tax for purchases they make in other states. 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.

“As clever as New York may think it’s being,” Rasmussen continued, “other states should be wary about following in lockstep. 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.