Amazon vs. New York Tax Law: Are Big Changes in Store for Internet Businesses?

The State of New York’s new tax law requires that all online retailers “doing business in New York” register with the state to collect sales taxes by June 1, 2008. Those who do not register, will face audits for quarters previous to the deadline. Internet superstar Amazon is suing the New York State Department of Taxation and Finance (DTF)over this new tax law.

  More than one Supreme Court ruling has declared that an out-of-state retailer is not required to collect sales tax from customers unless they have a physical presence, defined as employees or property, within the state. The internet retailer declared suit because “Amazon has no physical presence in New York” and has no employees or physical property residing in the state and therefore the law is unconstitutional.

  Advertiser or Employee?

  New York State is attempting to get around the Supreme Court precedent by saying that the Amazon Associates Program, an affiliate program, makes Amazon liable to collect taxes for New York website affiliates. An affiliate is a website that runs an advertisement that links to the sponsoring company and receives a fee when a visitor “clicks thru” and purchases from the sponsoring company. Somehow New York State has equated Affiliate advertising with the word “employee” and this seems to be quite a stretch of interpretation.

  Most all of the states have been brainstorming for years on ways to generate revenue from internet enterprises and New York is just the first one to actually act upon it. If this law is upheld, we can expect all the other states to jump on the bandwagon.

  Is this enforcable?

  A recent discussion of this law suit on Webpronews received a great detail of responses and many insightful comments and questions came to light. One recurring theme was the seemingly daunting task of enforcing the law. How does the New York DTF expect to administer this new tax law? How will they ferret out the numerous small and large businesses that have affiliates residing in New York? None of this has been addressed by the state so far and it seems that the time and money needed to make sure the tax collection takes place could far outweigh the revenue benefit.

  This raises a question for me that I did not see mentioned out their on the Blogs…if this is going to be so hard to administer, and with the affiliate-employee connection so seemingly flimsy, are they just trying to scare businesses into registering with the audit threat to get a good chunk of cash before the Courts squash the tax law?

  It’s going to be hard for the New York DTF to get the courts to see affiliates as some kind of quasi-employee. Affiliate marketing is really advertising and if this law is upheld it could create a slippery slope situation for much broader taxation of internet businesses.

Goodbye New York Affiliates?

  It’s possible that New York could shoot themselves in the foot by discouraging businesses from using affiliates in New York State. Imagine Amazon changing its affiliate information to read:

  “We are always looking for quality affiliate partners to promote our products, unless you’re from New York.”

  With a recession happening, charging $100 or $108 for an item in a competitive industry can make or break the sale. Sorry, no New York Affiliates Allowed!

  For Digital Surgeons, this should be an interesting case to follow as it will impact how we conduct internet marketing strategies for our clients in the future. The online universe of ecommerce and promotion are constantly changing and, as always, we are on the look out for new ideas and creative ways to adapt to unfolding situations. For more of the latest information on the world of search engine marketing and ecommerce development, give us a call at (203) 672-6201 or explore our site at www.DigitalSurgeons.com.