Amazon Challenges NY Online Sales Tax

The battle over Web retailers' obligation to collect sales taxes heats up.

In a widely anticipated move, Amazon is suing New York, challenging the state's new online sales tax.

According to the law passed earlier this year, online retailers must collect New York sales tax on purchases shipped to state residents, even if the retailer maintains no physical presence in the state.

../images/stories/videobug4.gifClick Here to Watch the Latest eWEEK Newsbreak Video.

Amazon claims the law is unconstitutional based on a 1992 Supreme Court ruling that claims states can't require out-of-state retailers to collect sales taxes unless the company has a physical presences-or nexus-in that state.

New York, though, contends Amazon's unaffiliated program-sites that maintain ad links to Amazon-constitutes a presence in the state since customers link on through to Amazon's main site. The law requires any retailer generating at least $10,000 in revenue from New York affiliates to collect New York sales tax.

The lawsuit also claims the law unfairly singles out Amazon, the world's largest online retailer. "It [the law] was carefully crafted to increase state tax revenues by forcing Amazon to collect sales and use taxes," the May 2 complaint states, adding, "State officials have described the statute as the 'Amazon Tax.'"

In addition, the Amazon lawsuit maintains independent advertisers that carry links to the company's site are not authorized to act as Amazon agents. Amazon also points out that sites carrying Amazon ad links are compensated.

Amazon maintains that simply because "some independently operated, New York-based Web sites post advertisements with links to Amazon and are compensated for these advertisements," the new law requires Amazon to "collect New York sales and use taxes on all of its sales to New Yorkers or face hefty civil and criminal penalties."

In approving the new law promoted by former Gov. Eliot Spitzer and signed by current Gov. David Patterson, New York hopes to generate up to $50 million a year in online sales taxes.

Although the 1992 Supreme Court decision seemingly decided the issue of nexus and sales tax, the court also found that online buyers do owe sales taxes. However, the court ruled, the current patchwork of more than 7,500 nationwide taxing authorities makes it too difficult, confusing and complex for retailers to collect the tax. States, the court urged, need to simplify the process.

In 2000, a number of states organized the SSTP (Streamlined Sales Tax Project) with a goal of drafting laws that would allow states to collect sales taxes on online and catalogue sales. Since then, 15 states have joined the SSTP, but four of the largest states-California, Texas, Florida and New York-have declined to participate.

Congressional approval of the SSTP will ultimately be required for a nationwide collection system for online sales taxes. While bills have been introduced in Congress to accomplish that, lawmakers have not moved on the issue.