New York Affiliate-Based Sales Tax Law - IMPORTANT!

[Linda Buquet]

Complete Coverage of the New York Affiliate Tax Issues Here

I hoped this New York Affiliate Sales Tax problem that Elliot Spitzer started right before the hooker episode would die out, but looks like it could go through. I'll link to places with more info for those that haven't followed this but in a brief nutshell... Up until now eTailers only needed to collect sales tax on purchases in states where the merchant has a physical presence, such as a storefront or sales office. The proposed tax law, "would require online retailers based outside of the state to collect and remit sales tax on customer orders received through affiliate web sites based within New York."

The bill which is expected to be passed June 1 is an effort to raise $50 million in tax revenue from online retailers with no brick and mortar presence in New York that would normally not have to charge customers any sales tax at all.

Internet Retailer - New York says web site affiliates are basis for sales tax collection "The proposed provisions to the law expand on the definition of nexus to cover New York-based web site affiliates that forward customers to an out-of-state online or catalog retailer. “The provisions cover certain Internet retailers that we believe have a physical presence in New York, and the provisions have determined that New York-based affiliates of remote online sellers qualify as a brick-and-mortar presence,” a spokesman for the state’s Department of Taxation says.

The spokesman mentioned Amazon.com Inc. as a particular target of the provisions because it’s a large retailer that doesn’t collect sales in the state like other large retailers with physical stores as well as retail e-commerce sites."

I wasn't too worried because I thought once Spitzer was out this would all go away and because it affected one state. However if this is passed there could be a ripple effect where other states try it. Plus you have to wonder... if charging tax significantly reduces a merchant's revenue due to lost sales, would Amazon or other merchants just prohibit New York affiliates from joining to try to avoid having to charge the tax?

Shawn has talked about this too. Here are some of his thoughts.

Will Amazon Stop Working with NY Affiliates? "If it passes legal challenges, I would imagine many other states would follow with similar plans, which could be bad for online merchants and affiliates.

Anyhow, if the whole tax is based on affiliates living in New York, I would imagine (note - I am not a lawyer, and I am simplifying things as a layman) that if Amazon were to cease working with affiliates in New York, such a tax would be invalidated."

[fitnfree]

Grief! This taxation crap is getting so out of control and NY always seems to lead the way deeper into tax he**!!

[niles]

Companies did not charge sales tax to residents of Ohio in the past. But, they do now.

[wisejoker]

Then wouldn't NY affiliates use another account, which is not based in NY? Go register a different address or something or use a PO box. Anything to evade the tax. So it's not really gonna generate that much tax.

[Linda Buquet]

Well since it's not the affiliate that pays the tax I'm sure affiliates aren't going to go to all that trouble. If a few affiliates did it would not matter because if there are any other affiliates in NY consumers will have to pay tax. That's if this goes through.

[Linda Buquet]

NOTE: This is big news that could affect our industry in many ways.
Be sure to read 2nd quote down.

Amazon Sues New York State Over Affiliate Related Sales Tax

In case you haven't heard New York State did pass that new tax law, I blogged about a couple weeks ago. The new law, dubbed the 'Amazon Tax', states that if companies like Amazon have even one affiliate in New York they must charge all customers sales tax, even though Amazon has no office, store or employees in the state. So in essence the State of New York is considering affiliates the same way they would a company that had a physical store in the State, even though affiliates are not employees or even independent sales reps.

Collecting this additional sales tax is expected to bring the state an extra $50 million this year. That will hike the consumer price up by 8.375% for goods bought through Amazon, which will cause some customers to buy from other eTailers that don't have to charge sales tax. So Amazon is fighting back!

See copy of the actual complaint Amazon filed against the State of New York.

New York Times: Amazon Sues New York State to Void Sales Tax Rules

"Amazon said that its affiliates are not agents but simply sites on which it places advertising. The commissions it pays the sites are simply one method of paying for those ads, it argued.

The online retailer further claimed that the new rules violate the equal protection clause of the constitution because it specifically targeted Amazon. “It was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes,” the complaint says, noting that “state officials have described the statute as the ‘Amazon Tax'."

NOTE: I'm adding to this story as I find good info. So keep checking back!

Newsday: Amazon, or online, tax will hurt small business
"But the reality is that Amazon and other merchants with affiliate programs won't bother adding the additional capability to collect New York tax; instead, they'll take the far easier step of blocking any New York-based site from their affiliate programs. The result will be a tremendous loss of income for the numerous small New York businesses now participating in affiliate programs.

The law will also hurt companies like New York City-based LinkShare, which generates revenue by managing others' affiliate programs. And it may make it harder for New York-based online retailers to find their own affiliates."

Another big concern as I mentioned in my 1st blog post about this a couple weeks ago is that if New York gets away with changing the law regarding tax nexus, other states are sure to follow.

[frugalwench]

It seems like sort of double dipping to me. If the person ordering lives in NY, I can see them having to pay sales tax. I think there are similar state laws elsewhere on mail order. But how do they intend to do the affiliate tax thing? I really don't understand it. Is it if the affiliate is in New York that they have to tax every sale he makes, whether the buyer is in NY or not? Presumably, in the states that have state income tax, they are collecting that from the affiliates, right? What does sales tax have to do with affiliate income?

I personally don't mind the states getting their fair tax share on internet sales. I think internet buyers have had it good for way too long on taxes. However, if it would mean that we had to be taxed by the state where the business is located, AND the state where we live, that's too much. One or the other, not both.

There has to be a way to work this out. For instance, a company can't just go open up shop in a no sales tax state and expect to ***** the other states out of their money. It's not fair, really, and it hurts too many people who benefit from that tax base.

[Linda Buquet]

"If the person ordering lives in NY, I can see them having to pay sales tax. I think there are similar state laws elsewhere on mail order. But how do they intend to do the affiliate tax thing? I really don't understand it. Is it if the affiliate is in New York that they have to tax every sale he makes, whether the buyer is in NY or not? Presumably, in the states that have state income tax, they are collecting that from the affiliates, right? What does sales tax have to do with affiliate income?"

YOur 1st sentence is correct the rest isn't. I know it's complicated.

"I think there are similar state laws elsewhere on mail order."
No the only time companies have to charge sales tax according to current laws everywhere is IF the company has an office or store in that state.

The tax is not charged to the affiliate or just the affiliate sales at all.

The issue in simple terms is that EVEN THOUGH Amazon has no sale office, store or employees in New York, they are going to have to add sales tax to every New York consumer's purchase. The loophole NY is using to get all that extra sales tax for every NY Amazon sale, is that Amazon has affiliates in the state. So NY is considering affiliates as if they were employees and saying therefore Amazon has to charge tax.

So now if you are a NY consumer and want to buy a digital camera, you research and shop at Amazon, but when you see 8.3% sales tax added to your order, you may abandon your cart and buy instead from ABC Camera because they don't have to charge New York tax. Why? They aren't a NY company either, but they don't have an affiliate program, therefore they don't have to charge NY tax like Amazon does.

[Linda Buquet]

Yikes,

I don't know how closely anyone has been following this but it's getting knarly.

New York Goes Gangsta With Tax Law

"If the seller registers and starts collecting sales tax by June 1, the seller will not be liable for
tax not collected for sales tax quarters prior to June 1. Conversely, if you don't register
and it is later determined that you should have, you could be subject to tax dept audit
for quarters prior to June 1."

So they are saying this doesn't just START June 1st, but if companies with affiliates in New York DO NOT start collecting tax by June 1 they can be hit for BACK taxes. Note: The company only has to have affiliate sales of 10K a year to be liable for the tax.

AS A RESULT COMPANIES ARE ALREADY STARTING TO CANCEL ALL THEIR NEW YORK AFFILIATES. According to Sam, a notice just went out to Drs. Foster and Smith affiliates letting them know all New York affiliates were being removed from the program until this is cleared up or the law is possibly reversed or Amazon wins their suit against the state and gets this reversed.

Since New York stands to gain $50 million from this tax, they aren't going to give up easily.
And again, if this law is not challenged and ruled against, other states will adopt it, then merchants could start removing affiliates that reside in other states.

[wisejoker]

Making it expensive to do affiliate marketing? Who benefits the most? There's gotta be some kind of ulterior motive to this. Possibly they want to discourage local New York residents from purchasing stuff from outside New York. More people buy local, and the businesses thrive and the state gets more tax money.

But, then again, locals will just buy from stores with no affiliate program (cheaper price), or networks can just remove all their new york affiliates and continue not collecting tax for each referral sale from new york.

This means that in the end, no tax will be collected. New York affiliates lose a big chunk of their income from affiliate marketing. People will move out of New York?

What's the final goal here? Perhaps they are hoping that Amazon will fight this, not charge tax on June 1 and get the money from backtaxes.