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Newegg Stops Collecting New York Sales Tax
August 23, 2008
Thomas Mennecke
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Online shopping has many advantages over brick and mortar shops - selection, price, and the lack of irritating sales people. Combine all these with cheap, or better yet, free shipping, it's little wonder how the Internet has become a massive economic powerhouse.

This world of cheap products quickly came crashing down on New York State residents, when on June 1st, "Amazon Tax" law went into effect. This law required out of state vendors with affiliate links in New York to collect sales tax.

Amazon responded by filing a lawsuit against the state of New York State Department of Taxation and Finance, while many other merchants withdrew their affiliate relationships from the state - to the shock and dismay of small business owners. informed its consumer base of the impending change, and on June 1st, began collecting sales tax to the massive disappointment of its community. The State of New York, in a bid to generate tax revenue, instead only succeeded in crippling Internet commerce.

"Accordingly, if a business located outside New York State solicits sales of taxable tangible personal property or services through employees, salespersons, independent contractors, agents, or other representatives located in New York State, the business must register as a vendor and obtain a Certificate of Authority for New York State sales tax purposes," an advisory memo explaining the amendment reads. Emphasis on "solicits" added.

Now Amazon, and no doubt the other big online retailers, read that and asked how can one state regulate a business located in another? Amazon did ask this question in their lawsuit, but they didn't question whether charging sales tax for an online purpose was legal. Instead, Amazon asked if New York State can force an entity with no physical presence (or nexus) in New York to collect and charge sales tax. The State of New York argued that because online retailers have affiliate links with representatives based in New York, they are entitled to their cut of the transaction. Affiliate representatives are compensated by Amazon (or whoever) when an online sale is made. Does that give Amazon a presence in New York?

Amazon countered in their lawsuit that New York's law would require Amazon to collect sales and use taxes on "all of its sales to New Yorkers or face hefty civil and criminal penalties" - a task Amazon feels is impossible to fulfill. According to the advisory memo on the tax law:

"The seller enters into an agreement or agreements with a New York State resident or residents under which, for a commission or other consideration, the resident representative directly or indirectly refers potential customers to the seller, whether by link on an Internet Web site or otherwise. A resident representative would be indirectly referring potential customers to the seller where, for example, the resident representative refers potential customers to its own Web site, or to another party's Web site which then directs the potential customer to the seller's Web site."

In other words, let's say Amazon has an affiliate link with a site in New York City. That site has an affiliate link for a laptop a New York resident really wants. Instead of purchasing it through the link, the consumer instead waits a few hours, and then goes back online directly to and buys the laptop. According to the new law, would be on the hook to collect tax. Amazon also takes issue with the Constitutionality of the law, challenging that it imposes a tax obligation on an out of state retailer, violates Due Process clauses of both federal and state constitutions, and intentionally targets

The lawsuit tactic by Amazon, coupled by merchants removing their affiliate ties, appears to have put New York on the defensive. The New York State Senate has already passed a bill which repeals the amendment. As of June 24, the Bill is still waiting for the State Assembly's Ways and Means committee.

The cutoff of affiliate representatives had a much more significant impact overall, as small businesses in New York became worried that their revenue stream would be destroyed. On June 30th, an updated advisory memo was released, which gave merchants and affiliates the ammunition they needed to restore their agreements. Affiliate representatives in New York organized against the bill, and after meeting with merchants, found a solution that will enable affiliate links to resume in New York. The thought of small businesses suffering because of the tax amendment will likely resonate with New York's leadership.

Affiliates and merchants were able to use a safe harbor provision of the advisory memo that permitted outside merchants to avoid collecting tax, and to resume their relationship with affiliates. They could do this as long as their only presence was through a web link on the affiliate site. As part of the agreement between merchants and affiliates, two conditions have to be met as per the memo. The first, merchants must add a condition to their terms of service that prohibits affiliates from soliciting sales. From Newegg's affiliate terms of service for New York residents:

"Non-Solicitation: You agree, warrant and represent that for as long as You participate in one or more of Newegg's Advertiser Programs, You shall not engage in any solicitation activities in the State of New York that specifically seek to target or refer potential customers who are residents of New York State to Newegg (or its affiliates or subsidiaries) including, but not limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending e-mails. If You are an organization, You further agree, warrant and represent that, for as long as You participate in one or more of Newegg's Advertiser Programs, You shall maintain on Your website information alerting Your members to the prohibitions on solicitation set forth in the previous sentence."

In return, the affiliate must submit to the merchant "proof of compliance" with the above, by attesting that the affiliate has not solicited sales outside the scope of the agreement. From the updated memo which allows web links:

"...the Tax Department will deem the presumption rebutted where the seller is able to establish that the only activity of its resident representatives in New York State on behalf of the seller is placing a link on the resident representatives' Web sites to the seller's Web site. In addition, none of the resident representatives may engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller."

As long as a New York affiliate doesn't go beyond a web link to their merchants, they should be able to continue business as usual. Newegg, to the delight of many New York residents, emailed their customers, informing them that as of August 21, they would no longer collect New York State sales tax.

"After careful review and consideration, we are pleased to inform you that we have stopped collecting New York sales tax, effective August 21, 2008. This decision was driven by your direct and candid feedback and our continued commitment to you as our valued customers."

The organization and cooperation between merchants and small business affiliates seems to have turned the tide in their favor. Newegg's email reminds individuals that " may still have an obligation to pay New York State use tax on your purchases." That hasn't changed. Newegg, with its significant online presence and equally impressive reputation, has made a significant announcement and further shoved New York State's tax policy in a corner.

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Technology News :: Other

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