E-commerce News

The absence of state sales taxes has always been one of the clearest benefits to online shopping and a huge reason for the steady growth of internet purchases year after year. While this system is widely loved by consumers, it is equally loathed by traditional brick and mortar retailers who feel it is unfair to them and a threat to their businesses. Nevertheless, the debate on the issue has largely been a back-page item for most of this decade. Times were good, and there was enough of the pie to go around for everyone.

In today’s shaky economic climate though, government bureaucrats at every level are increasingly “shaking the tree” in an attempt to boost their coffers and narrow budget deficits. Perhaps nowhere is this more apparent than in the state of New York, which over the last year has attempted to tax everything from MP3 downloads to soft drinks. It is the state’s ongoing battle over online sales taxes with Amazon.com and other e-tailers, however, that has garnered national attention and could have lasting effects on e-commerce operations everywhere.

The background:
In 1992, the U.S. Supreme Court ruled that 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 (defined generally as a store, office or warehouse).

In response, the National Retail Federation and a number of state governments drafted the Streamlined Sales and Use Tax Agreement (SST), designed to facilitate the process of collecting sales taxes. The SST sets uniform standards for the definition of taxes, provides mechanisms to ease the collection of sales taxes across state lines and would offset the burden for any retailer collecting taxes with reimbursements.

Flash forward to last year. New York governor David Patterson signed legislation that would require out-of-state internet merchants who have on-line affiliates in the state to collect sales tax from customers there. Estimated to net an additional $50 million a year in added revenue, similar legislation has been considered in several other states. Amazon then filed a lawsuit against New York on the grounds that an affiliate does not constitute a physical presence in a state and thus the New York law would violate the Supreme Court’s 1992 decision.

It’s difficult to disagree that state governments need to generate more revenue given the economic pitfalls they all face, thus making the likelihood of some online sales tax being implemented soon. It can certainly be argued, however, that the model New York is using is indeed the worst case scenario that many of the plan’s critics have said it is, and one that could have disastrous results if copied by other states.

New York’s plan would not only require all retailers to collect sales tax, but the burden and cost associated with the collection process would fall squarely on those very retailers as well. Whereas the SST clearly dictates that retailers are to be reimbursed for the costs of tax collection, New York’s law adds additional financial and logistical burdens to these retailers, at a time when some of them are barely surviving.

By adding affiliates to the inherent definition of physical presence, the law brazenly expands the reach of the state’s sales tax regulators. Furthermore it makes an already murky sales tax system even more confusing and offers zero protections for businesses affected by it, both in New York and out-of-state. Finally there are many who question if implementing this law will actually result in revenue for the state. If the math doesn’t work out, what’s the point? The SST model is sensitive to retailers’ long-term sustainability while addressing the need for more state sales tax revenue.

No one likes taxes but they are an inevitable reality for all of us. If the days of tax-free internet shopping are truly over, then lawmakers in New York and elsewhere would be wise to implement common-sense changes that do not unfairly burden retailers by bogging them down further at an inopportune economic time. Governor Patterson and his colleagues in Albany got this one wrong. Let’s hope it’s a mistake that isn’t repeated.