May 30, 2008, 12:00 AM

Amazon, Overstock act against New York law on sales tax

In the long-simmering battle between states and Internet merchants over the collection of sales tax, New York upped the ante in April when it amended its sales tax law to cover sales by out-of-state online retailers who get customers through New York-based affiliate sites. But Amazon and Overstock say they won’t let the state cut into their profit margins without a fight.

Amazon.com Inc. and Overstock.com Inc. each gave a strong message last month to New York State: You may need more tax revenue, but we won’t let you cut into our profit margins without a fight.

In the long-simmering battle between states and Internet merchants over the collection of sales tax, New York upped the ante in April when it amended its sales tax law to cover sales by out-of-state online retailers who get customers through New York-based affiliate web sites. The law targets retailers like Amazon and Overstock, which, because they maintain no physical presence in the state, have been exempt until now from sales tax responsibilities.

But Amazon, charging New York’s new tax law is “invalid, illegal, and unconstitutional,” filed a lawsuit against New York in early May seeking to have the law thrown out. Overstock followed by telling its more than 3,400 New York-based affiliates that, as of the law’s June 1 effective date, Overstock would no longer place ads on their sites for customer leads unless New York changes the law or the courts declare it unenforceable.

The state’s amended law, designed to recoup about $70 million a year in uncollected tax revenue, requires Amazon, Overstock and possibly other e-retailers who sell $10,000 or more a year through affiliates to collect sales tax of up to about 9% from state residents and remit it to New York. “We love New York,” says Overstock chairman and CEO Patrick Byrne. “But New York’s new tax law required us to choose between New York customers and New York ad businesses. In the end, we chose our customers.”

Shawn Collins, an affiliate consultant who founded the Affiliate Summit annual conference, says retailers should consider the potential long-term loss of business before severing affiliate ties.

“A lot of affiliates were bothered by the sudden decision of Overstock, and some may be less inclined to go back to it if the New York sales tax law is changed,” he says. Collins adds that many affiliates who built special sections of their sites to present products from Overstock will have to disconnect them or insert different content to prevent shoppers from clicking on dead links.

For many retailers, 98% of their affiliate business is from 2% of affiliates, and they should check how many of that 2% are in New York before abandoning the state, Collins says.

Amazon contends in its legal complaint, filed in the New York State Supreme Court against Gov. David Paterson, tax commissioner Robert Megna and the state’s Department of Taxation, that web sites participating in its Associates Program place on their sites advertising links to Amazon.com after submitting an application on Amazon.com, and that the process does not require Amazon to have a physical presence in New York. “Amazon’s only contact with New York residents is by mail, wire, or common carrier,” Amazon says in the complaint. “Nor does Amazon have any representatives in New York soliciting sales on its behalf.”

Overstock agrees that the law is unfair and unconstitutional. “We think the New York law makes no sense at all,” says David Chidester, Overstock.com’s senior vice president of finance. “We have no taxable connection to New York that is recognizable under constitutional principles laid down by U.S. Supreme Court decisions.”

paul@verticalwebmedia.com

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