Other States May Copy New York's Amazon Tax Law

While the giant online shopping site fights the law, other states are pushing for online shopping sales tax revenue.

By Laura Kennedy, Researcher-Reporter, the Kiplinger letters

May 13, 2008

Several other states are taking notice of New York's new sales tax law. Dubbed the "Amazon" law, it requires Web retailers to collect state sales taxes even if they, like the online retailer, are based solely on the Internet with no physical presence in the state.

Seattle-based Amazon.com has filed a lawsuit, claiming the law is unconstitutional because it would hinder interstate commerce. Amazon isn’t saying whether it will also ask a judge to bar collection of the tax until its suit is heard. But with the law scheduled to take effect June 1, time to take that legal step is running out.

Legal arguments and strategies aside, collection and enforcement would be a logistical nightmare. The state sales tax in New York is 4%, but it's higher in New York City, for example, where the sales tax is 8.375% -- and there are 78 different tax jurisdictions in this state alone.

The law targets online retailers' relationships with affiliates, which are Web sites that earn commissions from vendors by linking consumers to retailers' sites. And if an online retailer's affiliate is based in New York, it counts as a physical presence in the state, requiring collection of the sales tax.

Other states are watching the New York situation closely. The state's large population accounts for a big chunk of Web shopping, which is forecasted to reach $200 billion this year.

California too is mulling legislation that would broaden online sales tax requirements. The aim there is to define the significant business connections a company must have within a state with its online customers before the state can legally collect sales tax: for example, brick-and-mortar stores and distribution centers in the state -- or relationships with affiliates and third-party vendors in the state that profit from the Internet transactions.

Taxing online sales will require retailers to install complex collection systems to monitor the more than 7,400 tax jurisdictions nationwide. Some vendors, such as J. Crew and Wal-Mart, that have brick-and-mortar locations in numerous states have already created systems and charge state sales tax based on a shopper's physical location at the time of purchase using zip codes and other identifying shipping information.

Some non-Web retailers applaud the New York for leveling the playing field between brick-and-mortar and online retailers. Booksellers, for instance, claim that Amazon has an unfair advantage because it doesn't charge sales tax, giving shoppers a discount of sorts for making their purchases online.

But retailers also say New York's new law will hinder a separate federal effort to untangle the web of state sales taxes. The Sales Tax Fairness and Simplification Act at the federal level would give states a blueprint to simplify sales and use-tax collection systems, making it easier to collect taxes from out-of-state retailers. The federal law would lighten the compliance burden for retailers and provide more revenue for states.

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