NY Court Rules Amazon Must Collect Sales Tax

Amazon's long battle with the state of New York drew to a conclusion this week. The NY State Court of Appeals has issued a ruling, and it is one that will hit Amazon and their customers in the pocketbook. Reuters reported yesterday:

Amazon.com Inc and other out-of-state online retailers must collect state tax on New York state customers, the state's highest court ruled on Thursday, a decision at odds with other courts that could set the stage for a showdown in the U.S. Supreme Court.

The case, combining two brought by Amazon and Overstock.com Inc, was decided by the New York State Court of Appeals by a vote of 4-1.

This particular court case has been going on since 2008, when Amazon filed suit to block a new sales tax law that had been passed as part of the NY state budget. That law required Amazon and other online retailers to collect sales and use taxes on any orders shipped to customers in the state of NY.

It's important to note here that Amazon's customers in NY have always been required to pay the taxes, but until that law passed Amazon had no legal requirement to collect the taxes because Amazon did not have a physical presence in the state.

That changed in NY in 2008 when the state decided that Amazon's NY-based marketing affiliates, some of whom were independent websites like myself, counted as a physical presence in the state of NY (or nexus, to use the proper legal term as defined by the USSC). It is that new definition that was upheld today by the NY State Court of Appeals.

New York was the first state to come up with a new reason for online retailers to collect sales and use taxes, and when they tried this trick in 2008 their actions verged on the ridiculous and were based on a questionable definition of nexus.

But now it is 5 years later and that is no longer the case. Eight states have passed similar laws, and more are considering doing so.  There is strength in numbers, so the legal concept of affiliate partners meeting the definition of a nexus in the state isn't as ridiculous as it was 5 years ago. As much as Amazon and other retailers may not like it, they can't duck the collection of sales tax any more.

That's going to be a shame for online retailers; not collecting sales and use tax gave them a 5% to 15% price advantage over brick-and-mortar competition. I would be loath to give that up.

But perhaps it is time they did.

It was never anyone's intention that the taxes shouldn't be paid. Online retailers were avoiding collecting sales tax because of a loophole said they didn't have to collect - even though the taxes still had to be paid. All that the NY law and the laws in the other states did was to close the loophole.

There is a good chance that Amazon may appeal this case to the US Supreme Court, and I have no guesses on whether the Court will hear the case. But if the USSC doesn't hear the case then this law will stand as legal and constitutional, paving the way for other states to pass similar laws.

On a related note, there's a law before Congress that would settle the matter by requiring online retailers to collect sales taxes for all US states and territories.  It is expected to be voted on this year and possibly signed into law.

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About Nate Hoffelder (11389 Articles)
Nate Hoffelder is the founder and editor of The Digital Reader: "I've been into reading ebooks since forever, but I only got my first ereader in July 2007. Everything quickly spiraled out of control from there. Before I started this blog in January 2010 I covered ebooks, ebook readers, and digital publishing for about 2 years as a part of MobileRead Forums. It's a great community, and being a member is a joy. But I thought I could make something out of how I covered the news for MobileRead, so I started this blog."

7 Comments on NY Court Rules Amazon Must Collect Sales Tax

  1. So would they have to collect the state of NY’s 4% rate or also the county & municipality percentages as well?

    Probably not a big deal for big guys like Amazon, but for small businesses this could be a nightmare (especially if it goes nation wide where we’re talking thousands of different rates that need to be collected, paid and reported).

  2. This is bad for everyone. It’s a battle between large online retailers are large brick-and-mortar chains. The little guy gets crushed in either case and the states just want their grubby little hands on the money. I live in Maryland with a 6% sales tax, right next to Delaware’s zero sales tax. Here, its plainly obvious that the sales tax is far more economically destructive than any positives that may come about. The number of retail businesses and opportunities explode as soon as you cross the state line. The best way to make this situation fair and improve economic prosperity is to do away with state sales taxes, not twist the law to force retailers who don’t even use the state infrastructure as brick and mortar businesses do to pay it. Besides, the Walmarts of the world almost always get long-term tax free deals to open by various municipalities. How is that fair to online retailers? As usual, govt gets theirs, big companies get theirs and consumers get screwed.

  3. There are thousands of different sales tax collecting entities in the US. Just the cost of compliance will drive many small businesses out of business.

    Government entities have no business compelling private business to be their unpaid tax collectors. Government entities don’t have a revenue problem, they have a spending problem. Limit government to the essentials and free the market to boost the economy.

    This will be just another nail in the free market

    • Interesting how BN has been able to collect sales tax for their website affiliates correctly for years but somehow it’s impossible for Amazon (a company with oodles more cash) to do so.

      I smell some bullshit.

  4. There’s one more level of appeal if Amazon wants to keep the fight going.

  5. Also, Amazon has been FOR a national -standardized- law all along (which confuses some who feel they are just anti-tax) .

    If interested in an explanation or the thinking, plus a good article on all this by The Tax Foundation, see my blog entry at j.mp/amzntaxes

    The plan with the NY case was originally (affiliates in that state kept) to get this eventually (back to) to the Supreme Court.

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