If you are selling goods or products online to customers located in New York, you should be aware of New York’s Internet sales tax rules. In comparison to some other states, New York’s rules are relatively complicated. Moreover, in 2008, New York passed special legislation, sometimes known as an “Amazon Law,” that targets larger online retailers.
The federal government is currently considering legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The proposed federal law, called the Marketplace Fairness Act of 2013, would allow states to require sellers not physically located in their state to collect taxes on online and catalog sales made to people in their state. Sellers that make $1 million or less in annual sales and have no physical presence in the state would be exempt from this requirement. States would have to meet certain criteria to simplify their sales tax laws and make sales tax collection easier before they could require sellers to collect the tax.
Below is an article on the current rules on Internet sales tax in New York. The new federal law scheduled to be voted on in May 2013 would affect all state Internet sales tax laws so be sure to check for updates in this area. (We will continue to keep you updated as well.)
The General Rule: Physical Presence in the State
The current default rule throughout the United States is that you must collect sales tax on Internet sales to customers in those states where your business has a “physical presence.” The physical-presence rule is based on a 1992 United States Supreme Court decision, Quill Corp. v. North Dakota, that addressed the obligations of mail-order businesses to collect sales tax on out-of-state sales; the decision has been extended to include online retailers. Generally speaking, a physical presence means such things as
- having a warehouse in the state
- having a store in the state
- having an office in the state, or
- having a sales representative in the state.
While the physical-presence rule may seem clear, in the case of New York, as well as a fair number of other states, that is not necessarily the case. In Quill, the Supreme Court discusses not only physical presence, but also several types of potential “nexus” (connection) between a business and a state. The type of “nexus” the Supreme Court ultimately found relevant for mail-order businesses was under the Commerce Clause of the Constitution, which—as described by the Supreme Court—means physical presence. However, many states, including New York, have used the term “nexus” rather than “physical presence” in their sales tax laws, regulations, or other official documents, and, in the process, have sometimes defined nexus in ways that some people may think goes beyond physical presence.
For guidance on how physical presence, or nexus, is understood specifically under New York law, consult Section 1101(b)(8) of New York’s tax laws (N.Y. Tax Law). The section provides a relatively lengthy set of statements defining “vendor,” which is a person or other entity required to collect and pay sales tax. Several definitions of “vendor” now involve “affiliated persons.” In addition, New York’s definition of “vendor” includes:
- a person who solicits business by distributing catalogs or advertising, “if such person has some additional connection with the state which satisfies the nexus requirement of the United States constitution,” and the person makes sales of taxable items within New York
- a person who makes sales of taxable items and “regularly or systematically” makes deliveries of those items into New York other than by common carrier (i.e., not using U.S. Mail, UPS, Fedex, etc.)
“Affilliated Persons.” In this context, “person” can include a variety of business entities as well as individual people. In simplified terms, “affiliated persons” are primarily defined as persons who have some degree of ownership interest in one or more other affiliated persons. New York sales tax law distinguishes situations where (a) more than 5% ownership interest is relevant, (b) more than 50% ownership interest is relevant, and (c) ownership interest that exceeds 5% but is less than or equal to 50% is relevant. The ownership interest can be direct or indirect.
Here are two examples of how affiliated persons can create sales tax obligations for an (ostensibly) out-of-state business:
- The out-of-state business and an in-state business are “affiliated persons,” with one business having more than a 5% interest in the other business, and the in-state business uses, in New York, the same trademarks, trade names, or service marks as the out-of-state business
- The out-of-state business and an in-state business are “affiliated persons,” with one business having more than a 50% interest in the other business, and the in-state business engages in activities in New York that “benefit” the out-of-state business and otherwise “satisfy the nexus requirement of the United States constitution.”
For further guidance, including illustrative examples, consult the short, plain-English bulletin on the expanded definition of “vendor” published by the New York State Department of Taxation and Finance (DOTF).
It should be clear even from this brief summary that New York law in this area is relatively complicated. You should strongly consider reviewing both the DOTF guide and the statute itself. If you still have questions, consider consulting a tax professional.
One final point on physical presence: as you might expect, the corollary to the physical-presence rule is that, if you do not have a physical presence in the state, you generally are not required to collect sales tax for an Internet-based sale to someone in that state.
Some items sold via the Internet to New York customers may be exempt from sales tax under New York law. For example, United States flags and New York State flags are exempt from sales tax. The DOTF publishes a useful guide to exempt items which covers most exemptions and includes a useful chart with references to relevant statutes and forms. For more formal guidance, consult N.Y. Tax Laws 1115 through 1123 and Part 528 of Title 20 of the New York Codes, Rules & Regulations (NYCRR). (The codes, rules, and regulations are available online through a web portal maintained by Thomson West.)
The Customer’s Responsibility
In cases where the online retailer does not have to collect sales tax, it is the customer’s responsibility to pay the tax—in which case it is known not as a sales tax but, rather, a “use tax.” The DOTF publishes a readable guide to New York’s use tax that focuses on the purchaser’s obligations and provides useful examples. Keeping in mind the physical-presence rule, the guide states, “Certain businesses that are located outside of New York State are not required to collect New York State and local tax.” One of the guide’s examples of where use tax would be due from the customer is ordering an item over the Internet from a vendor located in another state, and having the item delivered to New York via U.S. Mail.
For additional information, you can check the use tax statute, N.Y Tax 1110 , and the related administrative regulations in 20 NYCRR Part 531.
New York’s “Amazon Law”
In 2008, the New York legislature amended the definition of “vendor” which resulted in larger Internet retailers with no direct physical presence in New York to have to collect and pay New York’s sales tax. In subsequent years, similar laws have at least been considered, and sometimes enacted, in other states around the country; they are commonly known as “Amazon laws.” (As you might guess, the name refers to Amazon.com, which is a large, Internet-based retailer that does not have a physical presence in many states, and therefore, under the default sales tax rule, need not collect sales tax from customers in those states. As customers in those states often do not pay the corresponding use tax, Amazon’s sales, and those of other large online retailers, such as Overstock.com, are frequently understood to constitute significant lost tax revenue for those states.)
Under New York’s 2008 law, if an out-of-state Internet retailer has what is commonly known as a “click-through” arrangement with one or more New York residents, and meets a few other conditions, the retailer must collect sales tax. More specifically, the law creates a presumption that an out-of-state seller needs to collect sales tax from New York customers if that retailer:
- has an agreement with one or more New York residents to refer potential customers to the seller via a website link or otherwise
- compensates the New York resident or residents for directing potential buyers to the seller, and
- the seller’s “cumulative gross receipts” from such directed sales to New York customers exceeds $10,000 during the preceding 12 months.
The issue of whether to require online retailers to collect sales tax in states where they have no physical presence has been a matter of significant debate in New York, in many other states, and at the federal level. This is particularly clear in New York, which became the first state to enact an Amazon law.
Generally speaking, and putting aside the Amazon law, which applies to larger businesses, the physical-presence rule applies for Internet retailers who sell to customers in New York. However, because the issue is a subject of ongoing debate, you should check in periodically with the New York Department of Taxation and Finance to see if the rules have changed. For more general information on taxes on Internet sales, see Nolo's article Sales Tax on the Internet. And, for information on the rules about collecting sales tax for Internet sales in any other state, see Nolo’s article, 50-State Guide to Internet Sales Tax Laws.