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E-commerce Vendors may be Required to Collect Taxes under NY Tax Law

By Martha L. Arias

In the United States, e-commerce vendors have been exempted from collection of taxes by the Internet moratorium act.  Yet, some states are already reaching out to these vendors as source of fiscal revenue.  The state of New York, one of the most important e-commerce players, recently modified its tax code and expanded the definition of the word "vendor;" this new definition seems to embrace those selling goods and services over the Internet.  The issue is still debatable and a close analysis is further required for those offering online products and services in NY.

Article 28 of the NY CLS § 1101, "Sale and Compensating Use Taxes," defines terms related to the imposition of state use taxes.  On April 2008, the NY legislature expressly modified the definition of "vendor" and the new rule went into effect on June 1, 2008.  Indeed, the new law said "this act shall take effect immediately and shall apply to sales made, uses occurring, and services rendered on or after the date this act shall have become a law in accordance with applicable transition provisions in sections 1106 and 1217 of the tax law and without regard as to the date the seller and the resident entered into the agreement described in section one of this act."  

Under the updated NY CLS § 1101, vendors must collect taxes from purchasers; vendors will be liable for those taxes, and penalties and interests if they fail to do so.  "Vendor" includes (1) a person selling goods or services, the receipt from which are taxes; (2) a person maintaining a place of business in NY and selling goods or services from such business or elsewhere to persons within the state of NY, the use of which is taxed; (3) a person who solicits business through an employee, independent contractor, agents or other representatives.  This also includes those who distribute through catalogs   or "other advertising matter, without regard to whether such distribution is the result of regular or systematic solicitation, if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution;" (4) a person who sells goods or services and who "regularly or systematically delivers such property or services in this state by means other than the United States mail or common carrier."  This specific provision seems to apply to those delivering electronic services; (5) a person who "regularly" and "systematically" solicits business in NY, regardless where its distribution center is located.  Solicitation may be in the form of flyers, catalogs, letters, or by any other method of business solicitation.  These are some of the e-commerce relevant definitions of vendor.  § 1101 includes some additional scenarios that may not be applicable to e-commerce vendors. 

As observed from the above definition of vendor, e-commerce players providing goods or services to persons in NY or those soliciting business in that state may be now required to collect sale and use taxes.  When a nexus analysis is required, Constitutional standard will apply - Quill Corp. v. North Dakota, 504 U.S. 298 (1992). In Quill, the US Supreme Court held that a state can impose sale and use taxes only when the taxpayer has physical presence in the state.  Additionally, NY state standards for the imposition of use taxes play an important role in the interpretation of the new "vendor" term.  In the Matter of Orvis, Orvis Co. v. Tax Appeals Tribunal, 86 N.Y.2d 165 (1995) the Court of Appeals for the State of NY held that imposition of sale and use taxes requires "substantial nexus" with the state under the Commerce Clause of the U.S. Constitution.  These two legal precedents binding on the state of NY may not be in accord with the new fiscal interpretation of vendor as applied to online sellers.  Nevertheless, litigation has ensued and it is still premature to determine the effect on e-commerce transactions in NY.  Two major e-retailers have filed lawsuits against the state of NY and its tax department; they are Amazon.com and Overstock Inc.  Both companies allege that the new tax provisions violate the Commerce Clause of the US Constitution.  The outcome of these two NY cases will definitely set a precedent for the state taxation of e-commerce.   

Full post as published by IBLS Internet Law Blog on December 08, 2008 (boomark / email).