NY Web Tax Law Not So Scary?

May 22, 2008 11:29 PM  By

After the New York State Department of Taxation and Finance issued a Technical Services Bulletin (TSB-M-08(3)S) on May 8 regarding a new law requiring online merchants to collect state sales taxes, the tax counsel for the Direct Marketing Association said the legislation is now viewed as “less aggressive than what have been our greatest fears.”

In light of the TSB, George Isaacson offered his interpretation of the new law during a conference call today. “On April 30 we had the legislation in raw form and there was speculation on the part of the industry in regard to how this legislation will be interpreted and its meaning for direct marketers,” he said. “The TSB is more focused and, therefore, more helpful for direct marketers.”

After the new legislation was signed by Gov. David Paterson on April 15, DMA officials deemed the law unconstitutional because it contradicted 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 physical presence, such as a store or warehouse in the state.

New York’s new law will require out-of-state online retailers to collect state and local sales taxes, though merchants collecting less than $10,000 per year from New York residents will be exempt. Online behemoth Amazon.com filed a lawsuit on May 2 against the state of New York, challenging the legislation. New York state officials estimate the new law – effective June 1 – will add $50 million in new taxes this year, and $73 million next year.

Mark Micali, the DMA’s vice president of government affairs, had 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. Micali 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 marketer’s Website.

Now, Isaacson said the law isn’t as “broad-based” as initially received, due to the TSB. “The burden switches to the direct marketer to demonstrate that it doesn’t have nexus in the state,” he said. He said a direct marketer could defeat the presumption of nexus in New York, “even if in fact a Web link with New York residents exists. A pure vanilla affiliate marketing Web link arrangement can be defeated by showing that that Web link party is not engaged in any additional solicitation. That’s the good news in this TSB.”

What’s more, Isaacson said: “Where there are not any individuals within the state mailing referrals, issuing e-mails, encouraging people to come to the Website to place orders, then the rebuttal will be successful. That’s really key.”

But it raises the question: How do you demonstrate there is no additional activity? “You can include in your contract with the affiliate marketing network that you do not want any New York Websites engaged in any activity other than providing a Web link to your Website,” Isaacson said. “A contract can prove rebuttal success. That goes a long way in carrying your burden of proof.”

At its extremes, the new law is “clearly unconstitutional,” Isaacson said. But the TSB narrowed the definition. “There has to be a physical presence in the state that brings this back within the orbit of existing Supreme Court precedent,” he said.

In a May 15 letter to Micali, Isaacson said: “This more conservative position taken by the Department of Taxation and Finance is of critical importance to direct marketers. It means that if retailers are vigilant in monitoring their affiliate marketing relatonships to be certain that, other than the New York Website link, no additional in-state solicitation activity occurs on the part of the New York affiliate, then the mere Website link relationship should not create nexus.”

Even though the TSB lessens the law’s impact on direct marketers, to some degree, the DMA’s stance toward the new law remains unchanged. “We oppose it,” says Sandy Cutts, the association’s public affairs director. “Amazon has filed suit, so we will wait and see what the outcome of that litigation is.”