Out of Control Policy Blog

Second íNet Retailer Challenges NY Sales Tax

Overstock.com has become the second online retailer to challenge New York State's overstretch of a sales tax law, filing a lawsuit this week in an attempt to have the overturned as unconstitutional because it violates both the commerce clause and equal protection provisions.

Last month, Amazon.com challenged the new tax law on similar grounds.

Braden Cox, policy council at the Association for Competitive Technology write at Technology Liberation Front that,

Overstock's complaint highlights the disconnect that regulators have with how technology creates new ways to drive business and enhance revenues. Overstock has affiliates, which are websites that contain a link to Overstock.com in exchange for the possibility of earning a commission from purchases made by those visitors who access the Overstock website form the affiliate's website. New York says these websites, if in New York, are soliciting business sufficient to create a legal nexus for sales tax purposes. Overstock says it's just advertising.
Here's where technology makes it interesting. Overstock says:
-- It can't determine whether affiliates are actual legal residents of NY
-- It doesn't control the affiliate websites, and can't determine whether a specific ad is a direct or indirect solicitation for business.
-- Websites aren't location specific. Are New York websites even soliciting New York consumers?

Cox goes onto cite a new technical bulletin from the New York State Department of Taxation that makes things more convoluted. I'm not tax expert, but here's essentially what how the department specifies that if an online merchant pays the operator of a New York-based web site a direct commission on any sales to site visitors who click through, say through a link on an ad banner, the online merchant must register as having a nexus in New York.

However, there are exceptions. For example, if the online merchant simply pays the partner web site a flat fee that is not tied to sales generation, the online merchant does not have a nexus in the state. Second, and here's where things get hinky, even if a commission is paid, if the parent web site does nothing to promote its relationship with the out-of-state online merchant, then the out-of-state merchant does not have a nexus. The bulletin uses an example of a ski club whose web site links to a retailer of skiing equipment. If the ski club, through flyers, brochures and emails, actively urges its members to link to the retailer through the ski club web site, and collects a commission on sales it generates, then the online retailer is liable for collecting sales taxes. If, however, the ski club does nothing that could be construed as "referring" members to the retailer, and simply sets up a link so its members can link, as if serendipitously, to the retailer, the retailer is not liable for sales tax. Yeah, I don't get it either. But it seems that the state determined retailer compliance on the actions and decisions of the third party in the state (whether or not that third party promotes the retailer beyond its web site), not the retailer itself.

As this would force online retailer to monitor the actions of every website partner, down to the laser printed flyers they might print off their PCs, it certainly can fit within the complexity that the U.S. Supreme Court wrote of in Quill Corp. vs.North Dakota, which essentially barred efforts by states to collect sales taxes from out-of-state merchants.


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