Debate Begins Over Net Taxes

The passage last week by New York State of the Internet Sales Tax provision, which will require out-of-state online retailers to collect sales tax from New York residents, is the first step in what is likely to be a long process to establish other, similar taxes in other states. Although it has not yet commented on the New York law, Amazon has made it no secret that it will likely challenge the legality of the New York provision. Even Oren Teicher, COO of the American Booksellers Association, which strongly supported the Net tax provision, expects a legal battle. “This will be in court,” Teicher said, noting that case law about the ability of states to force out-of-state companies to collect sales tax predates the Internet.

Teicher noted that what is critical in New York is that, for the first time, a state has gone on record making it clear that an affiliate program constitutes nexus. Amazon has argued that it is only required to collect taxes in states where it has a physical presence and should not be required to collect sales tax where its presence is limited to individuals using Amazon as a sales tool. The New York statute considers Amazon affiliates to be sales agents, thus establishing a nexus in the state.

Several other states have been watching events in New York and may now move ahead with their own sales tax collection plans. The NCIBA has already been dealing with various aspects of the online tax question. The California Board of Equalization previously ruled that Barnes&Noble.com owed $700,000 in back taxes for the November 15,1999, through January 31, 2001, period. B&N successfully appealed that decision, and the BOE's appeal of that ruling is still pending. Late last year B&N.com filed a complaint in the U.S. District Court for the Eastern District of California seeking to overturn a second BOE ruling that B&N.com owes taxes, interest and penalties of about $17 million in connection with its failure to collect sales tax from May 1, 2000, through March 31, 2004.

B&N.com began collecting online sales tax shortly after B&N took over complete ownership of B&N.com. In fact, B&N lent its support in New York to have the Internet Sales Tax provision implemented. In a statement it submitted to the New York Assembly, B&N said it “now operates at a severe competitive disadvantage to numerous out-of-state book dealers who are not required to collect sales tax from New York residents. Failure to even the playing field will result in a continued and significant competitive advantage to out-of-state e-tailers.”