New York State of Mind

During a Direct Marketing Association seminar last week, marketers alike tried to wrap their arms around just what New York state’s new Internet tax law means for their businesses. Jerry Cerasale, the seminar’s host and senior vice president of government affairs for the DMA, and the organization’s tax counsel, George Isaacson, provided the 85 members in attendance with answers on what this development means for their industry. Here’s a sampling of some of the tips, thoughts and observations gleaned from the event:

* “This is very aggressive, nexus-expanding legislation,” Isaacson said, referring to the law which requires out-of-state online retailers to collect sales (or use) tax from New York residents, and which he believes was passed in large measure to “grab the attention of direct marketers.” Cerasale warned that the reach of this bill may soon “extend far beyond the state of New York.” That’s why it’s so important for direct marketers to get involved now, he said.

* The biggest concern for direct marketers is their relationships with affiliate marketing programs located within New York. Under the new law, these agreements are deemed as in-state, commissioned sales representatives, thus creating nexus and making the out-of-state merchant liable to collect sales tax on all purchases as a result of these affiliate programs. This includes links to New York-based Web sites, which the state views as an electronic form of a sales representative, Isaacson said.

* So what steps should merchants take to protect themselves from future tax assessments? Isaacson provided three possible options.

1. Terminate all affiliate marketing relationships with New York companies. This will obviously be easier for some than others, he noted, depending on the number of relationships you currently have established or the amount of business you receive from New York.

2. Assume the risk of an assessment. This is sort of the wait-and-see approach. With the constitutionality of this new law still very much up for debate, per the Supreme Court’s ruling in the Quill v. North Dakota case, which states that it’s unconstitutional for states to require out-of-state merchants with no physical presence in such states to collect sales taxes on remotely placed purchases, Isaacson believes direct marketers have a solid argument to rebut the presence of nexus in the state. But he also warns the burden is on the direct marketer to prove that the presumption of nexus doesn’t meet the standards of the U.S. Constitution.

This process can also be very time-consuming, Isaacson added. Furthermore, the case will have to be decided in state court, not federal, per the Tax Injunction Act, which says federal courts don’t have jurisdiction to state tax challenges. There’s also no criteria in this law as to what you have to prove, which makes a legal challenge difficult, Isaacson said.

3. Register your business for voluntary tax collection prior to June 1. Why June 1? Because there’s a grace period, or amnesty, for all businesses until June 1 of this year. If your business isn’t registered by this date, you then become eligible for an assessment back to April 15 of this year, when the bill was signed into law. If registered prior to June 1, you’ll be protected from back-tax liability up to that point as long as you’re meeting the current restrictions.

* This new law doesn’t apply to all direct marketers, Isaacson noted. Those out-of-state merchants who don’t reach a threshold of $10,000/year (includes shipping and handling fees) in New York sales from these link or referral arrangements are exempt from the law. This threshold is determined retrospectively on a quarterly basis, Isaacson said. So every quarter you need to look back and see if you’ve reached the $10,000 threshold to determine your liability.

* In response to a question from Kent Knoll of Omaha Steaks on whether a space ad in the New York Times would create an affiliate relationship with someone in New York, Isaacson answered that there’s no legal authority for space ads to create legal nexus. He further advised the audience that to get as low a risk as possible, avoid performance-based advertising, which is more closely tied to affiliate relationships.

* Echoing a concern of many, Paula Beck, CFO of Country Curtains, and Darryl Scott, president of Venus Swimwear, each inquired about affiliate relationships between search engines such as Google and Yahoo and their businesses. Isaacson responded that under the statute, both are considered New York businesses since they’re doing business in New York state. And buying keywords and pay-per-click arrangements with these companies would make you liable for the tax.

* Conduct your own nexus self audit, Isaacson advised. “Any relationship where you’re interacting with an in-state company should be scrutinized,” he said.