New York Copycats - More States Try to Grab Remote Vendors

In April 2008, New York enacted a law that became informally known as the "Amazon tax " act. The legislation creates a presumption that sellers are soliciting business in the state and thus are 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 Web site 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. [For more details, see Grabbing Remote Vendors (7/08).]

The result in New York is that Amazon, started collecting sales tax and Overstock terminated agreements with its New York associates. Both companies filed suit on the basis that the legislation was unconstitutional.

Decisions were issued in both cases in January 2009. The Supreme Court of New York dismissed the claims for failure to state a cause of action in that there was no way the companies could prevail to find the law unconstitutional.

The court found a high degree of probability that NY-based Amazon "associates" earning a commission when customers begin their Amazon purchase from their website are interested in generating income and thus, will encourage sales. "It is also highly probable that New York residents will more likely than not have ties to other New York residents and it is not irrational to presume that at least some of them will actively solicit business for the remote seller from within the State from others within the State." The court also noted that Amazon and Overstock could rebut such presumption.

Per the court in the Amazon case: "[the rule] does not broadly tax any and all Internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair-share of the tax-collection burden when using New Yorkers to earn profit from other New Yorkers."

It is interesting that the court continues to refer to Amazon.com as an out-of-state seller despite the decision. When a vendor has an agent or representative in a state, typically, that is viewed as, in effect, making the vendor present in the state -- and subject to sales tax collection. The wording may be due to the fact that Amazon did not try to rebut the presumption.

[Links to the Amazon decision from The Public Law Library (free).]

Well, states are eager for revenues to address budget shortfalls. So far, subsequent to the 1/12/09 decisions, at least 4 states have introduced legislation mirroring what New York enacted and at least 1 state has a draft proposal. The States:

• California - ABX3 27 / status
• Connecticut - SB 806 / status (has a $5,000 threshold rather than $10,000)
• Hawaii - HB 1405 / status
• Minnesota - HF 401 / status
• North Carolina - draft

Considerations:

• What about the appeal of the Amazon and Overstock decisions?
• Is this the best way to write tax laws - create rebuttable presumptions that are so difficult to rebut that you either need to change your business practices (as Overstock did) or start collecting the sales tax (and reduce the state's worries about how to get its residents to rightfully pay the use tax they owe)?
• Will this mean that states might not be as interested in the Streamlined Sales & Use Tax Agreement? Perhaps, but the legislation won't grab online vendors who don't use the associates arrangement or who stop using it as Overstock did.
• States still need to do a better job educating their residents about the use tax and making it easy to collect (such as by having it reported on income tax returns with the option of calculating it using a table) [for more info - click here]

Hard times can lead to desperate measures. This isn't really the legislative approach to improve the operation of a sales and use tax in an Internet era. It doesn't solve all of the sales and use tax collection issues and the bills will likely lead to litigation and confusion among consumers.

What do you think?