States Reaching to Find Sales Tax Nexus

In April, New York changed its sales tax law to try to make a few large vendors subject to sales tax collection - most notably, Amazon.com. The new law creates a rebuttable presumption that a vendor is soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a website or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them. (Bill Summary, p. 10)

Amazon's "Associates Program" causes it to have many associates who may be New York residents. Amazon filed a lawsuit as soon as the law went into effect challenging the new law as unconstitutional. It also started collecting the tax!

Another company that fell under the law change is Overstock.com. Their remedy was to cancel its agreements with its New York affiliates who were helping Overstock.com advertise.

Arguably, the associates who have a link to Amazon or Overstock on their website are third party advertisers, not sales agents or representatives of these companies.

For more information on this law change and vendor reaction, see this short article - Grabbing Remote Vendors.

In a hard to find NY Senate bill - S 8638, senators voted on June 24 to repeal the provision. Here is information from the NY Legislative website:

"STATUS: S8638 RULES No Same as Tax LawTITLE....Repeals provisions of law relating to an evidentiary presumption to facilitate the administration of the sales and use tax
06/19/08
REFERRED TO RULES
06/24/08
ORDERED TO THIRD READING CAL.2231
06/24/08
PASSED SENATE
06/24/08
DELIVERED TO ASSEMBLY
06/24/08
referred to ways and means
BILL TEXT: STATE OF NEW YORK ________________________________________________________________________
8638
IN SENATE
June 19, 2008 ___________
Introduced by COMMITTEE ON RULES -- read twice and ordered printed, and when printed to be committed to the Committee on Rules
AN ACT to repeal subparagraph (vi) of paragraph 8 of subdivision (b) of section 1101 of the tax law relating to an evidentiary presumption to facilitate the administration of the sales and use tax where a person making sales of taxable property or services in the state uses resients in the state to solicit sales
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
1 Section 1. Subparagraph (vi) of paragraph 8 of subdivision (b) of 2 section 1101 of the tax law is REPEALED. 3 § 2. This act shall take effect immediately."

There appears to be no other action on this proposal. The April law change was estimated to generate $47 million in 2008/2009 and $73 million in 2009/2010 (see links in above article - Grabbing Remote Vendors). That's a lot of money. If this estimate is anywhere close to being accurate, it means that lots of New Yorkers are not self-remitting use tax on purchases they make from the vendors who are subject to the law change. (All states have similar problems - most people don't know what a use tax is or don't keep sufficient records to measure it every year or ignore it.)

All of this illustrates the challenges sales and use taxes face in e-commerce where it is very easy to have a physical location in just one state, but customers in all states. Such a vendor is only legally obligated to collect sales tax from customers in the state where the vendor resides (where they have a physical presence). Customers in other states must self-report their use tax on the purchases.

So, some states modify their sales tax laws to grab remote vendors by trying to connect them to some physical location in the state (such as Amazon's New York Associates). But, there are constitutional restraints that limit this. Given current case law, New York will likely have difficulties defending its law change.

States should do a better job educating their citizens about use tax and the benefits to the state (and its citizens) of collecting it. New York law allows individuals to use a table to estimate the use tax owed so they don't need to keep records. Given the revenue estimates attached to the April 2008 law change, compliance must be low. New York should take out some on-line ads to help buyers understand the use tax and how to pay it. In the long run, that would be better than enacting laws of questionable constitutionality that will be challenged in court.

Another option for states is to not allow the state or its agencies to purchase from sellers who do not collect sales tax. Unless a state has perfect recordkeeping (or doesn't require its agencies to pay sales tax), when purchases are made from remote vendors, it is possible that the use tax payment gets overlooked. Also, some schools and home-and-school clubs have Amazon links on their websites. Perhaps those sites should at least be told to include a note about the need to pay use tax (which in most states helps fund schools!).

What do you think states should do to get more of their residents to pay use tax?