Watch Out: Use Tax is Rearing Its Ugly Head Again
For the most part, multichannel marketers who don’t operate national retail chains have had it pretty good since the industry beat back North Dakota — and, effectively, the other 49 states — nearly 16 years ago in Quill v. North Dakota. This, of course, was the landmark case that upheld the law that it’s unconstitutional for states to require out-of-state merchants with no physical presence in such states to collect sales, or use, taxes on remotely placed purchases.
But earlier this month, the state of New York passed the Internet Sales Tax provision, which requires out-of-state online merchants to collect sales taxes from New York residents. The state law could have national ramifications and make life difficult for direct marketers. Remember: The big hassle with regard to the use tax battle isn’t so much having to charge customers more than just the purchase price plus shipping and handling. It’s the hassle of having to adopt so many different state tax structures and having to communicate that to customers.
In a nutshell, the New York law is giving out-of-state e-merchants until June 1 to register with the state and start collecting taxes. But it’s also left some of those in the know on tax issues scratching their heads. This nexus-expanding legislation is “an odd statutory creature to say the least,” Catalog Success’ Legal Matters columnist George Isaacson tells me. That’s because this legislation is based on an “agency nexus” theory. As Isaacson explains, the state treats out-of-state marketers as having an in-state physical presence because of the sales activity of in-state sales representatives.
Many Loopholes
There are plenty of warning signs to come out of this, but at the same time, there are plenty of loopholes.
* Marketers who earn less than $10,000 in New York sales through affiliate referrals are exempt from it;
* it also assumes that New York-based companies that take part in Internet affiliate marketing programs with out-of-state marketers are representative of the out-of-state sellers;
* a key component of the law is that the New York-based company providing a link on a Web site must receive a commission or other consideration for its referral of customers;
* the legislation includes a provision that protects e-retailers from back-tax liability based on a new Web-link nexus theory if they register for use tax collection by June 1 — New York tax authorities will probably start issuing tax assessments to some out-of-state retailers after June 1, Isaacson notes; and
* the law provides that the presumption of nexus “may be rebutted by proof”; that the affiliate marketing activity wouldn’t “satisfy the nexus requirement of the United States Constitution.”
In other words, as Isaacson points out, an e-merchant issued a sales/use tax assessment by the New York Department of Taxation and Finance “can present facts and legal arguments that, despite its links to New York Web sites, the relationship is not sufficient to meet constitutional nexus standards.”
That’s all well and good. But even though the New York law approaches the issue rather tentatively, it’s still alarming, because, as Isaacson points out, “no other state has adopted such an aggressive stance regarding affiliate marketing programs.”
Beyond the most serious concern of other states grabbing hold of this law and running all the way to Washington with it, the alarming thing about New York’s actions is how some of these loopholes will be treated by New York tax administrators and courts.
For instance, as Isaacson wonders, what standard might New York apply “in determining whether a remote seller has met its burden of proof in showing the absence of constitutional nexus?”
No doubt, this is one of those ugly issues that the average cataloger/multichannel merchant hasn’t had to deal with much lately. But New York has drawn it back, and this industry best take note.
