Overstock Sues to Overturn Overreaching New York Sales Tax Law

by on June 5, 2008 · 15 comments

E-commerce advertising, meet sales tax. Sales tax, meet e-commerce advertising. And they are talking amongst themselves–in a New York court.

Last week Overstock.com filed a lawsuit against New York to overturn the state’s recently implemented sales tax law. Overstock’s suit is in addition to a lawsuit filed by Amazon.com, with both companies saying that New York’s law is unconstitutional and should be overturned.

Overstock’s complaint highlights the disconnect that regulators have with how technology creates new ways to drive business and enhance revenues. Overstock has affiliates, which are websites that contain a link to Overstock.com in exchange for the possibility of earning a commission from purchases made by those visitors who access the Overstock website form the affiliate’s website. New York says these websites, if in New York, are soliciting business sufficient to create a legal nexus for sales tax purposes. Overstock says it’s just advertising.

Here’s where technology makes it interesting. Overstock says:

  • It can’t determine whether affiliates are actual legal residents of NY
  • It doesn’t control the affiliate websites, and can’t determine whether a specific ad is a direct or indirect solicitation for business.
  • Websites aren’t location specific. Are New York websites even soliciting New York consumers?

A technical bulletin issued by the New York Department of Taxation attempts to provide guidance on the new presumption to the definition of sales tax vendor. The bulletin makes a distinction between a “commission” on sales and a “set fee” on clicks.

An agreement to compensate a NY website for a click thru plus completed sale falls under the presumption:

Placing an advertisement does not include the placement of a link on a Web site that, directly or indirectly, links to the Web site of a seller, where the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link.

This presumption can be rebutted, but only if online companies like Amazon and Overstock can prove that each of its affiliates do not refer potential customers to retailers through such offline activities as “the use of flyers, newsletters, telephone calls” and also through e-mails.

In contrast, a click thru only (where set fee payment occurs regardless of subsequent purchase) is akin to advertising and is not required to collect sales taxes:

In exchange for placing G’s advertisements on its Web site, G will pay the organizations a set fee based only on the number of clicks on the link to G’s Web site, whether or not sales are made. G’s agreement with the organizations is merely to place advertising on the organizations’ Web sites. Therefore, G is not presumed to be a vendor making taxable sales in New York State by soliciting business in New York State through the use of independent contractors or other representatives.

What it comes down to is that Overstock still has to prove a negative to rebut the presumption that it’s not soliciting business in New York. And the decentralized Internet that we all know and love makes this practically impossible, and thus a burden on interstate commerce.

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