Taxing provision for direct merchants

May 01, 2008 9:30 PM  By

Use-tax is rearing its head once again: New York Gov. David Paterson signed into law on April 15 a provision that will require out-of-state online retailers to collect state and local sales taxes.

The measure, expected to raise about $50 million for the state budget, contradicts a 1992 Supreme Court Decision, Quill v. North Dakota, that said states are not allowed to require out-of-state companies to collect sales taxes unless that company has a presence, such as a store or warehouse, in the state. The Quill ruling upheld most of National Bellas Hess v. Illinois Department of Revenue. That 1967 decision ruled that a state cannot collect use tax from a direct marketer unless the marketer has nexus — a physical presence — a store, a warehouse, or sales reps — in that state.

New York is the first state to require out-of-state Internet companies to comply with its sales tax law. Companies collecting less than $10,000 per year from New York residents will be exempt from the provision. With 44 other states carrying a sales tax, what could this new law mean to the catalog industry?

“That is the $64,000 question,” says Mark Micali, vice president of government affairs for The Direct Marketing Association. “We don’t know yet if other states will look to enact similar legislation.” But the DMA’s position on New York’s law is clear, he notes: “We believe this violates the Constitutional principle in the Quill decision.”

Micali testified in February in front of both the New York State Senate Committee on Finance and the New York State Assembly Committee on Ways and Means. He opposed former Gov. Eliot Spitzer’s legislative proposal requiring out-of-state marketers to begin collecting sales tax on deliveries made into New York, based merely on a link to the merchant’s Website. In his testimony, Micali called the proposed law, “an unabashed attempt by New York State government to expand the reach of its tax system across state borders to businesses, which have no physical presence in the state.”

The new law is the culmination of months of intense lobbying by the American Booksellers Association and its member bookstores, along with many other independent retailers and their trade associations. Booksellers in particular want to level the playing field in competing with the likes of online behemoth Amazon.com.

Do merchants have any recourse? “What can happen on these constitutionally questionable laws is that often there is a court challenge,” Micali says. “Certainly, the DMA may try to litigate against this and strike this down. Individual companies can litigate and make the same arguments.”

Micali says for now the DMA is going to wait and see how this plays out before taking action. “We’ll see how many companies are affected and how aggressive the New York Revenue Department is as far as enforcing this.”