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NY online retail tax approved

Late last week, New York legislators approved a bill that will require out-of-state online retailers to begin collecting sales taxes on purchases shipped to New York addresses, meaning that companies such as Amazon, which has no employees or operations in New York, will be required to collect state taxes because several of its affiliates live in the state. This will effectively end tax-free online shopping in New York.

While the New York Governor’s office was not available for comment, published reports have noted that Governor David Paterson is expected to sign the measure.

At this point, the key question is not whether other states will attempt to copy New York’s aptly dubbed Amazon Tax, since it’s really too early to tell, but more so, if the measure will avoid a legal challenge.

Even now, both the Direct Marketing Association and the National Retail Federation are trying to determine the constitutionality of the bill, with DMA VP of government affairs Mark Micali noted, “We think it goes against the spirit of the 1992 Quill vs. North Dakota decision,” which effectively determined that out-of-state retailers cannot be required to collect sales tax on purchases sent to states where they did not have a physical presence.

The term “physical presence” is really at the heart of the debate, with New York now asserting that online retailers such as Amazon hold a physical presence in the state because they derive sales through its affiliates who live there. Micali, who expressed strong opposition when the bill was first proposed in mid-February by Eliot Spitzer, called the law “an unabashed attempt by New York State government to expand the reach of its tax system across state borders to businesses which have no physical presence in the state.”

The NRF, for its part, has been working on a multi-state project to streamline retail regulations, and according to National Retail Federation VP Maureen Riehl, the measure by New York does not represent a move toward these goals. “While New York has historically pushed the envelope in the tax arena in terms of extending its reach beyond state borders, not just in the retail sector, we’re scratching our head about this,” she said, adding that the NRF’s e-tail community “has been pretty worked up about the bill, and I suspect we’ll see some court action shortly.”

Ultimately, the adoption of this legislation is tantamount to New York “hanging out the ‘unwelcome’ sign to electronic commerce,” said Micali, who noted that the DMA will support any legal action taken against the bill.

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