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February 07, 2013

Will New York's 'Amazon Tax' Survive its Day in Court?

By Steve Anderson, Contributing TMCnet Writer

A slow economy means cash crunches not just for households, but also for governments. Fewer businesses open means fewer businesses to tax, and when that happens it's time to look elsewhere for that oh-so-vital revenue to keep governments running.

New York, meanwhile, has turned to the Internet to find the solution to its shortfall, but companies like Amazon and Overstock aren't taking New York's advances lying down, so the state and the online companies are currently going to court to find out if New York is overstepping its bounds or simply thinking outside the box.

The case is currently in the State of New York Court of Appeals, and on Wednesday, attorneys for both Amazon and Overstock argued that requiring online companies to collect state sales taxes, a law New York put in place in 2008, was unconstitutional.

The issue of requiring online firms to collect sales taxes has been a thorny one for some time, with precedent in either direction going as far back as 1992.

In general, retailers who have a physical presence in a certain state must pay that state's sales taxes for sales made online as well as in stores.

But in 1992, Quill Corp. v. North Dakota, a case that went all the way to the Supreme Court, said retailers that didn't have what was called a "nexus" of operation in a certain state did not need to collect sales tax.

So with that precedent in mind, how could New York ever believe it had a right to sales taxes? They took the "nexus" concept and ran with it. What New York asserts, reportedly, is that when websites with purchase buttons for national retailers like Amazon offer products for sale – sometimes called affiliates – they act essentially as local agents, providing the "nexus" of operations required by Quill Corp. v. North Dakota.

Lower courts have generally agreed with New York's idea that, somehow, these affiliates make the required "nexus," but higher courts are reconsidering, looking at the affiliates less as local sales agents and more like advanced newspaper advertising.

Considering the amount of revenue at stake here – from 2008 to February 2012, online-only retailers have paid New York $360 million in sales taxes – it's not surprising that New York is fighting for that money. Many states are doing the same, calling it an issue of fairness; why should brick-and-mortar retailers have to pay taxes online sellers don't?

It's equally unsurprising that online firms are fighting to prevent having to pay it; that represents extra revenue in their own pockets as opposed to the state's – revenue they can use to improve offerings, reduce prices and compensate shareholders.

While this particular issue isn't likely to go away any time soon – legislation has already been introduced regarding this concept but hasn't yet come to a vote, and indications are that this could go as far as the Supreme Court – both sides have a clear interest in their own cases. With that kind of money at stake, someone's got to come out on top on this one. The only question, of course, is who.

Edited by Braden Becker
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