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Since the dawn of US ecommerce, the question has been "to sales tax, or not to sales tax?"

Consumers and online retailers are squarely in the don't-tax camp, while state governments, which stand to reap the tax dollars, are of a differing opinion. New York state has been trying to get out of state sellers, such as Amazon, to collect and pay state sales tax on transactions, which could reap hundreds of millions of dollars in annual revenue for the cash-strapped government (particular now that once-lucrative Wall Street revenues are fading fast).

The rule of thumb has long been that if the online seller has a bricks and mortar local presence in the state, e.g. Apple.com has local Apple stores, state tax is levied on online transactions. Amazon, as well as other online-only retailers such as Overstock.com, challenged New York's attempt to get them to pony up 8.25 percent on all New York state transactions.

Yesterday, a NY State judge dismissed Amazon's suit as groundless.

Blame.....the affiliates?

Because Amazon generates more than $10,000 in referrals from New York-based affiliates, the judge's reasoning goes (ergo, New Yorkers to earn money from other New Yorkers) Amazon, as well as other out-of-state retailers with affiliate programs, are going to have to get on the state tax bandwagon.

And that's going to hurt. Not NY state, of course, but online retailers and consumers.

A seldom-discussed bit of accepted wisdom is that ecommerce is buoyed in no small part by its ability to enable buyers to avoid paying taxes on high ticket items (which also lessens the burden of shipping charges). Buying that new laptop on Amazon versus a local store can shave a couple hundred dollars in sales tax right off the price - a strong incentive to buy, particularly in tough economic times.

The aftermath of this ruling is going to be interesting. How much (more) will online retailing suffer, now that their tax amnesty status in New York is lifted? Will affiliate programs be designed on a state-by-state basis in the US? It's an absurd notion relative to the nature of the web, but entirely possible in hard economic terms.

This will be an interesting one to watch. Bottom line, New York's decision to disincentivize ecommerce could not possibly have come at a worse time.

Rebecca Lieb

Published 14 January, 2009 by Rebecca Lieb

Rebecca Lieb oversees Econsultancy's North American operations.

Follow me on Twitter, or connect with me on Facebook.

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Comments (2)


Tax Preparation

such a nice information about income tax so i read and understand about tax preparation.

over 7 years ago


Chuck Hamrick

There are 5 additional states working to place laws on the books to use affiliates as a nexus to claim the collection of sales taxes. The loser is the state as this caused Overstock to close their program to New York affiliates. Some relocated the rest lost income which means they paid less New York income tax. The net result, New York lost millions of tax dollars with no increase in sales tax. Stupid use of tax law as it takes a federal court to enforce interstate tax collection. 

over 7 years ago

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