New York Legislation Makes Certain Online Retailers Subject to Sales Tax

New official guidance has been issued under Technical Services Bureau (TSB) memorandum TSB-M-08(3)S as supplemented by TSB-M-08(3.1)S by the New York State Department of Taxation and Finance, explaining sales tax legislation that was effective on April 23, 2008.

Under existing law, solicitation through employees, salespersons, independent contractors, agents, or other representatives in New York usually subjects an out-of-state seller to tax collection responsibilities. Under the new legislation, a seller is presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on a Website or otherwise, to the seller. The presumption can be rebutted.

The new law provides that if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement are $10,000 or less in the preceding four quarterly periods ending on the last day of February, May, August, and November, the presumption will not apply.

Further, the presumption may also be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy constitutional nexus requirements.

The TSB gives examples of instances where the out-of-state seller is presumed to be soliciting sales through an in-state representative. In addition, the TSB sets forth the conditions that must be met in order for the state not to assess sales tax and or related penalty and interest for periods prior to June 1, 2008.

The new law is designed to target larger out-of-state online retailers, such as Amazon.com, that pay New York advertisers a commission for sales generated from advertisements that link to the seller’s Website. Amazon.com has challenged the new law in court, claiming that the company is not subject to the retail sales tax imposed on New York residents because it does not have a physical presence in the state. Online retailer Overstock.com has also filed suit challenging the constitutionality of the new law. The lawsuit was filed after the company cut off its payments to New York advertising companies on June 1, 2008 in order to avoid the tax. Ryan will follow developments in these cases as they proceed through the New York State Courts.

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