Internet sales tax fight heats up

Amazon.com fired the latest volley in the war against states (in this case, New York) who want to collect sales taxes for purchases made over the Internet and shipped across state lines. This week it's suing New York over a new law that says it and other e-tailers have to collect state sales taxes for sales made to NY residents, even though Amazon.com is based in Washington. New NY Governor David Paterson signed the rule into law last week.

Such a fight has been bubbling up for years. Last November, New York's then-Governor Eliot Spitzer first floated a plan to collect sales taxes on web-based purchases, but he quickly pulled the proposal. And technically speaking, many states (at least 20 of them, including New York) already require citizens to declare out of state purchases on their annual tax returns and voluntarily pay taxes on them. The problem is that no one does, so New York's new rule would put the onus on the merchant to collect the tax instead and send it on over to New York.

But that's against the law, says Amazon. 1992's ruling in Quill v. North Dakota held that one state can't impose collection requirements on an out-of-state corporation unless it has a substantial physical presence in that state. That's been the law of the land ever since, and why you'll find some web purchases taxed and some not. New York's argument here is bizarre, saying that thousands of Amazon affiliates (people who sell stuff through Amazon's third-party services or get commissions on sales there) are located in New York, and thus that amounts to a physical presence there. Oh, and NY wants all sales in the state taxed, not just those affiliate sales.

The fight is going to be a bitter one. Amazon is worried that it will lose New York customers if they have to pay tax, and the state is anxious to get its hands on what would raise about $50 million a year for no extra effort. Amazon.com says the law is specifically and prejudicially focused against the company, saying that New York even refers to the new rule as the "Amazon tax."

Whoever wins, there will be major repercussions, as there are dozens of other states lined up behind New York, all eager to get a piece of that sales tax action, too. Stay tuned for more news as this winds its way through the courts.