A New York state law enacted last spring[FOOTNOTE 1] was on the minds of many Internet retailers this holiday season. The law imposes obligations on certain online out-of-state (and bricks-and-mortar) companies to collect state and local sales taxes for sales made through New York-based affiliates.

Although New York law has long required consumers to pay sales or use taxes when purchasing goods from out-of-state sellers, the new law switches the onus to remit taxes to the state from the individual purchaser to the out-of-state retailer, who now must register as a New York “vendor” when certain criteria are met. The obvious goal of the switch was to enable New York to capture some of the tax revenue that was otherwise not paid by online consumer purchasers who live in New York.

The law is being challenged in court, however, and, now that the holiday rush has passed, the focus can turn not just to whether the law is legally enforceable, but also to whether it properly balances the interests of increased tax revenue with the needs for a robust retail presence in New York.

The new law amends the state tax law to create a presumption that certain sellers of taxable tangible personal property or services are sales tax vendors who are required to register for sales tax purposes and collect state and local sales taxes. As defined in the statute, a seller is presumed to be a “vendor” if the seller enters into agreements with New York residents, whether as employees, independent contractors, agents or other representatives, to refer customers to the seller, which result in sales of tangible personal property or services to New Yorkers that are subject to sales tax. If an out-of-state business solicits sales of taxable tangible personal property or services through such New York-based parties, the out-of-state business must register as a vendor and obtain a Certificate of Authority for state sales tax purposes.[FOOTNOTE 2]

E-businesses that use “affiliate programs” are particularly likely to fall within the ambit of the statute and therefore be required to register as a vendor for state and local sales tax purposes.[FOOTNOTE 3]

The new law provides that a seller that makes taxable sales of tangible personal property or services in New York state is presumed to be a vendor required to be registered for sales tax purposes and required to collect sales tax on all of its taxable sales in New York if it meets the following conditions:

• The seller enters into an agreement or agreements with a New York state resident or residents[FOOTNOTE 4] under which, for a commission or other consideration, the resident representative directly or indirectly refers potential customers to the seller, whether by link on a Web site or otherwise. A resident representative would be indirectly referring potential customers to the seller where, for example, the resident representative refers potential customers to its own site, or to another party’s site which then directs the potential customer to the seller’s site; and

• The cumulative gross receipts from sales by the seller to customers in New York as a result of referrals to the seller by all of the seller’s resident representatives under the type of contract or agreement described above total more than $10,000 during the preceding four quarterly sales tax periods.[FOOTNOTE 5]

For purposes of this presumption, a seller is considered to have met the condition of having an agreement with a New York resident where the seller enters into an agreement with a third party under which the third party, in turn, enters into an agreement with the New York resident to act as the seller’s representative. However, an agreement to place an advertisement does not give rise to the presumption described above.

In other words, a Web ad placed on a New York server that contains a link to the online retailer’s site does not support a presumption that the retailer is a New York vendor for tax purposes if it results in only “click through” revenue (i.e., payment for each time a link is clinked on) for the New York resident. Conversely, the presumption will apply when a Web ad containing a link to the e-retailer’s site results in a commission or fee being paid to the New York resident based on the actual sales achieved as a result of the link.

The Office of Tax Policy Analysis of the New York State Department of Taxation and Finance issued guidance recently that contains a number of examples that help to illustrate the impact of the new law.[FOOTNOTE 6]

The XYZ Company, an Internet-based retailer of sporting goods specializing in downhill skiing equipment, was one example. The guidance assumed that XYZ was located in Vermont, where it had its administrative offices and its warehouse, which held its inventory for sale. XYZ made sales of its merchandise throughout the United States and had customers in New York; merchandise sold by XYZ was delivered by the U.S. Postal Service or by common carrier.

The guidance continued that, as part of its marketing plan, XYZ entered into agreements with several ski clubs located in New York whereby the clubs maintained links to XYZ’s retail Web site on the clubs’ own sites. XYZ paid a commission to the ski clubs based on the sales that XYZ made that originated from these links. The guidance further assumed that from March 1, 2007, to Feb. 29, 2008, (i.e., the preceding four quarterly sales tax periods), XYZ had gross receipts from sales of its merchandise based on these agreements with the New York ski clubs totaling $78,390.

Based on the foregoing, the guidance concluded that XYZ was presumed to be making taxable sales in New York by soliciting business in New York through the use of independent contractors or other representatives and thus it was required to be registered as a sales tax vendor, collect New York state and local sales taxes, and file the required sales tax returns.

Similarly, “T” sold a variety of small tools over the Internet. T’s home office was in Arkansas, where its warehouse and administrative offices were located. T entered into a contract with S, a service provider. Under the contract, S entered into agreements with New York residents on behalf of T, whereby the New York residents agreed to refer potential customers to T’s Web site to purchase T’s products by placing T’s product links on their sites.

Under the contract, S tracked sales of T’s products as a result of the referrals from the New York residents’ Web sites. S distributed commissions to the New York resident representatives based on these sales from an account maintained by S on behalf of T for this purpose. Other than making sales of its products in this manner, which products were delivered to its customers in New York by common carrier, T had no other connection with New York.

From March 1, 2007, to Feb. 29, 2008, T’s gross receipts from sales made under its agreements with S and the New York residents as described totaled $68,000. Accordingly, the guidance concluded that T was presumed to be soliciting sales in New York through the use of independent contractors or other representatives and it was required to be registered as a sales tax vendor, collect New York state and local sales taxes, and file the required sales tax returns.

The new law provides that a seller may rebut the presumption that it is soliciting sales in New York through resident representatives. For purposes of administering the presumption, the Tax Department has indicated that it would deem the presumption rebutted where the seller was able to establish that the only activity of its resident representatives in New York on behalf of the seller was a link provided on the representatives’ sites to the seller’s site and none of the resident representatives engaged in any solicitation activity in the state targeted at potential New York customers on behalf of the seller.


The law has been challenged in court. A lawsuit filed by Amazon.com in Supreme Court, New York County,[FOOTNOTE 7] contends that the statute is unconstitutional because it requires out-of-state online retailers with no substantial nexus with New York to collect New York sales and use taxes.

The complaint bases its argument on two decisions by the U.S. Supreme Court. In one, Quill Corp. v. North Dakota,[FOOTNOTE 8] the Court decided that the U.S. Constitution’s Commerce Clause forbids a state from requiring an out-of-state retailer to collect sales taxes unless the retailer has a “substantial nexus” with the state. In the other, Tyler Pipe Industries Inc. v. Washington State Department of Revenue,[FOOTNOTE 9] the Court ruled that a “substantial nexus” requires a “physical presence” in the state that is “significantly associated with the taxpayer’s ability to establish and maintain a market in the state.”

According to the complaint, Amazon.com has no physical presence in New York, does not own, lease or occupy physical property in New York, and has no employees who work or reside in New York. The complaint also asserted that Amazon.com has no representatives in New York who solicit sales on its behalf.

The gist of its concerns, however, stemmed from its “Associates Program,” a marketing model pioneered by Amazon and presently used in some form by most e-retailers. Under the program, third parties advertise Amazon.com on their own Web sites, and those ads generally have links enabling visitors to “click through” to Amazon.com.

Amazon.com compensates such advertisers for purchases made by the visitors they refer to Amazon.com. As one of the innovators and largest users of this type of program, Amazon.com contended that the new tax law was targeted to impose tax-collection obligations on Amazon.com with respect to the Associates Program. Motion practice has ensued and a decision from the court as to pending motion practice is due shortly.

Whether Amazon.com will prevail remains to be seen. However, one impact of the new law has already been felt, as numerous e-retailers have discontinued their associates programs in their entirety, made them available only to non-New York residents or required the associates to certify to them that they are not New York residents to continue their affiliations.[FOOTNOTE 10] Moreover, because of the nature of the Internet, it is likely that e-retailers have been able to discontinue their New York affiliations without significant loss of New York Web sales.

Other retailers — and other states — are paying close attention to the statute and the pending litigation. The potential gain of sales tax revenue may be offset by the loss of income and employment within New York that results from the e-retailers discontinuing their affiliations with New York residents.

After a holiday season that saw retail purchases hit rock bottom, massive layoffs and record number of bankruptcy filings by retailers, the law and its potentially chilling effect on online retailers’ New York affiliates may make the court somewhat more sympathetic to Amazon’s position.

Shari Claire Lewis a partner at Rivkin Radler, specializes in litigation in the areas of Internet, domain name and computer law.


FN1 Chapter 57 of the Laws of 2008.

FN2 See Tax Law Section 1101(b)(8) and Sales and Use Tax Regulations Section 526.10(a)(3).

FN3 It should be noted that a business is not considered a vendor merely because the business stores advertising on a server or other computer equipment located in New York state, or has advertising disseminated or displayed on the Internet. See Tax Law Section 12.

FN4 For sales tax purposes, a New York resident includes, but is not limited to, any individual who maintains a permanent place of abode in New York and any corporation incorporated under the laws of New York, and any corporation, association, partnership or other entity doing business or maintaining a place of business, or operating a hotel, place of amusement or social or athletic club in New York. See Sales and Use Tax Regulations Section 526.15.

FN5 Sales tax quarterly periods end on the last day of February, May, August and November.

FN6 See http://www.tax.state.ny.us/pdf/m emos/sales/m08_3s.pdf.

FN7 See Amazon.com, LLC v. New York State Department of Taxation and Finance, No. 08601247 (filed April 25, 2008).

FN8 504 U.S. 298 (1992).

FN9 483 U.S. 232 (1987).

FN10 See, e.g., “Overstock.com Dumps NY Affiliates to Avoid the ‘Amazon Tax,’” available at http://technologyexpert.blogspot.com/2008/05/overstockcom-dumps-ny-affiliates-to.html; see also, http://www.marketingpilgrim.com/2008/05/merchants-ban-affiliates-based-on-new-york-tax.html; see also, http://forum.abestweb.com/showthread .php?t=105869.