Don't Mess With Taxes

Not to run the shopping theme into the ground, but it is that time of year.

And New Yorkers who buy online got a bit of an early holiday present when Gov. Eliot Spitzer (pictured) rescinded a tax policy proposed by the state's budget office that would have required certain e-retailers to begin on Dec. 7 collecting sales taxes.

"Governor Spitzer believes that now is not the right time to be increasing sales taxes on New Yorkers. He has directed the Department of Tax and Finance to pull back its interpretation that would require some Internet retailers that do not collect sales tax to do so," State Budget Director Paul Francis said in a statement.

The policy, targeted to start just as prime holiday shopping season begins, would have directly affected retailers such as Amazon and Buy.com that use affiliate marketing programs. Under these arrangements, Web site operators include a link to an online retailer and receive a portion of any sales resulting from the click-through.

Under existing law, Internet retailers are only deemed to have a physical presence if they have established physical company operations, such as a distribution center or a sales staff. With such a nexus, state sales tax then can be collected.

But New York's now-dead (or, given the way states keep trying to collect more money, perhaps "for-now dead" is more accurate) tax approach would have treated affiliates as representatives of the company, which is enough to establish a physical presence in a state.

Nudging the nexus limits: The physical presence standard was established by the 1992 U.S. Supreme Court ruling in Quill Corporation v. North Dakota. The Court held that "sales tax collection requirements cannot be imposed on an out-of-state corporation that does not have a substantial physical presence within the state."

By Quill guidelines, a large portion of online transactions have been exempted from state and local taxation. And that loophole was what state tax officials had hoped to close with the new tax policy.

Just days before Spitzer pulled the plug on the policy change, budget director Francis defended it, telling the New York Sun that stricter enforcement of the tax code is a way of "leveling the playing field" among online retailers and New York businesses. "It's not a new tax," Francis said. "It's simply collecting an existing tax."

Now, however, those online affiliate purchases by Empire State shoppers will stay tax-free.

So, too, should similar purchases in other states. Other state tax officials, just as hungry for new revenue sources, likely would have followed suit if New York had gone through with its e-tax move.

You can read more about Spitzer's change of heart in the previously cited Sun story, as well as in these articles from ecommerce-guide.com and internetnews.com.