You’ve likely read that New York Governor David Paterson has signed legislation that will require out-of-state Internet merchants who have on-line affiliates located in the state to collect sales tax from customers there. The requirement, which goes into effect on June 1, was included in the state budget passed by the New York Legislature this April. The tax would be turned over to New York State and is expected to generate $50 million a year in added revenue.
This blog post is intended help online retailers better understand online retail tax and the issues related to this development.
Summary
States are eager to collect tax revenue from out-of-state sales - this is only being amplified in today’s down economy. Whether you support the collection of out-of-state sales tax or not - the New York law, which will likely be emulated by more states, is a worst-case scenario. Not only will all retailers now be required to collect sales tax, but the cost burden for the collection process rests 100% with retailers. The Streamlined Sales Tax Project, which Shop.org’s parent organization, the National Retail Federation, supports would reimburse all retailers for the cost of collection.
Background and History
Under a 1992 U.S. Supreme Court ruling, merchants cannot be required to collect sales tax from a customer in another state unless the retailer has a “physical presence” in the customer’s state, usually defined as a store, office or warehouse. With more than 7,600 state and local sales tax jurisdictions, each with varying rates, lists of taxable items and definitions of items, the court reasoned that a retailer otherwise couldn’t be expected to know how much tax to charge.
Streamlined Sale Tax (SST) Takes Shape
NRF and a number of state governments responded to the 1992 ruling by drafting the Streamlined Sales and Use Tax Agreement. The spirit of SST is to make collecting sales tax as easy and inexpensive as possible.
Implemented by about two dozen states so far (but, not by New York), the agreement sets uniform definitions of taxable items, provides retailers with software and databases to tell them how much to charge, and sets up mechanisms to facilitate collection of sales tax across state lines. Legislation is pending in Congress that would let states that participate in the agreement make collection mandatory regardless of physical presence.
When the federal SST law passes, SST will offset any burden by reimbursing ALL sellers for the cost of collection, require NY to simplify its sales taxes before it can force out-of-state seller collection, provide protection from aggressive audits, eliminate penalties for honest mistakes in collection, and eliminate nexus as a standard to overcome the constitutional hurdle. Yes, SST will take another year or two to fully achieve, but the long-term results are reliable, fair and better for retailers.
How the New York Law Effects SST
The New York law, which was supported by bricks-and-mortar bookstores who feel that the current sales tax collection system puts them at an average 6-10% non-negotiable price disadvantage, takes the position that affiliate sellers located in New York constitute a “physical presence” on behalf of the out-of-state seller.
Some on-line retailers, Amazon.com to start, have filed suit against New York on the grounds that an affiliate does not constitute a physical presence and that the New York law would therefore violate the 1992 Supreme Court decision. We expect to see more states take this approach – particularly in a sluggish economy when states are seeing revenue sources such as property taxes shrink. This will lead to more legal challenges.
NRF and other supporters of sales tax simplification are concerned that the New York law’s emphasis on physical presence could undermine efforts to make physical presence a moot point.
While NRF sees this as an interesting approach, New York’s expansion of their physical presence definition of nexus to include “affiliates” – a term left undefined in the budget bill – is a short-cut attempt to generate revenue that provides no protections for sales tax collectors, contrary to the SST effort. A quick comparison between the New York Approach and SST to consider:
| |
New York Approach |
SST |
| Nexus (physical presence)/Constitutionality |
Expands Nexus; Questionable authority of state; Ignores Quill restrictions on burden; Suit challenging law filed in state court |
Eliminates nexus as the collection standard; authorization comes from Congress thru its Commerce Clause authority as directed by the court in the Quill decision |
| Scope of Tax |
Potentially any business with an “affiliate” in NY; NY tax officials and courts to decide |
After federal law passes, ALL SELLERS for sales made into states that have adopted the SST agreement; States must simplify before the requirement applies |
| Protections / Mitigation of Burden |
N/A |
Federal bill REIMBURSES sellers for collection costs; Sellers held harmless for errors caused by states; Audit limitations |
The New York law is being challenged in court on constitutional grounds, and while it may generate some new monies for the state, it will be costly to collect, and New York auditors will have to be aggressive to get it. By expanding the physical nexus term, the law radically expands the authority of the NY sales tax regulators. It provides no simplifications to the sales tax system, and no protections for businesses either NY-based or out-of-state. Likewise, there is a big question about how much if any new money this will raise for the state, so what net gain is there for in-state retailers or the NY budget?
No one likes taxes. Not paying them, and certainly not collecting them. But whether you like taxes or not, they are necessary funding source to provide fundamental public services. So assuming sales tax collection for all sellers is not a matter of if, but when – perhaps it is best to focus on how it is best done. NRF believes that SST is the better approach to fair, burden-free tax collection for all sellers.
Maureen B. Riehl is Vice President, Government and Industry Relations Counsel for the National Retail Federation.
