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. 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 was the first state to enact an Amazon law.
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, physical presence means having:
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. However, New York has special rules that apply to certain larger Internet sellers (see New York's Amazon law).
In 2008, the New York legislature amended the definition of vendor in its sales tax statute. The change had the effect of requiring certain larger Internet retailers with no physical presence in the state to collect and pay New York's sales tax. More specifically, an out-of-state retailer must collect sales tax from New York customers if that retailer:
Similar laws have been enacted in other states; they are commonly referred to 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 where it sells merchandise. Under the default physical presence rule, this type of seller would not have to collect sales tax from customers in states where it has no physical presence. Since most customers don’t pay the corresponding use tax, online sales by large online retailers like Amazon and Overstock.com constitute a significant lost tax revenue for many states. Amazon laws have been enacted to try to reduce this loss. In response to New York passing the 2008 law, Amazon.com filed a lawsuit against the state. However the statute was upheld by the New York courts in 2013.
To further complicate the issue of physical presence, many states, including New York, have used the term nexus rather than physical presence in their sales tax laws, regulations, or other official documents. In the process, they have sometimes defined nexus in ways that could go beyond physical presence as defined above.
For guidance on how physical presence, or nexus, is understood 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:
Affilliated Persons. In this context, the word 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:
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.
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 an online guide to exempt items which covers most exemptions and includes a useful chart with links 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.)
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 as a use tax. The DOTF publishes guides to New York’s use tax for individuals and for businesses. The guides focus on the purchaser’s obligations and provide useful examples. Keeping in mind the physical-presence rule, the guides indicate that a common situation where use tax is required is a purchase “made over the Internet, from catalogs, or by phone from businesses that are located outside of New York State.”
For additional information, check the use tax statute, N.Y Tax 1110 , and the related administrative regulations in 20 NYCRR Part 531.
At the federal level, Congress has repeatedly considered legislation that would affect large Internet retailers and how online sales taxes are collected in all states. The most recent form of a proposed federal law is the Marketplace Fairness Act of 2015. As in previous versions, the 2015 Act 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.
Generally speaking, the physical presence rule will apply for most Internet retailers who sell to customers in New York. Larger online retailers and those with possible in-state affiliated status will need to check the rules more carefully. Also, 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.
Updated: April 14, 2016