Let the Tax Collection Begin

If you live or work in New York State, look closely when buying online.

Last Sunday, many but not all online retailers started to collect sales tax on goods shipped into New York. Most significantly, Amazon.com, the largest online store, was one of them.

In April, as part of its 2008-2009 budget, the state legislature passed what is being called the “Amazon Tax.” What’s new isn’t actually a change in the law—New York residents always owed tax on their purchases—it is an expansion of the law that is meant to force online retailers to collect the tax and send it to New York. Any company with physical operations in the state—such a store or office—already collects tax for the state.

Indeed, the state calculates that of the nation’s top 20 online retailers, 18 had already been collecting tax because they, like Dell and Staples, had operations in the state. The remaining two—Amazon and Newegg.com—have now registered to collect taxes.

The state now says tax must be collected by any online store that gets customers referred to them by Web sites based in the state. In late April, Amazon filed suit challenging the state law. And on Friday, Overstock.com filed a related suit. Overstock, has stopped doing business with its affiliates in New York and so it will not collect sales tax for now.

Overstock’s suit, filed in New York Supreme Court, differs from that filed by Amazon because it is asking for an immediate injunction to suspend the law, said Jonathan E. Johnson III, Overstock’s senior vice president for legal matters. He added that since Overstock cut off its affiliates, the facts of the case are slightly different. It is possible that the state might move to combine the suits, he said. Tom Bergin, a spokesman for the New York State Department of Taxation, declined to comment on the suit.

Why didn’t Amazon also simply cut off its state affiliates until the courts sort this all out? One reason is that the law is written to give companies a strong incentive to participate. If they register and start collecting taxes by June 1, they will be forgiven any liability for collecting taxes on sales before that, Mr. Bergin said. But for companies that don’t register—as Overstock did not—the state could press its interpretation of the law retroactively and sue for taxes that were not collected on sales in any year that they had affiliates in New York.

Depending on what the courts determine, Overstock may get a big tax bill. For now, most online shoppers in New York will be paying sales tax. At least they won’t have to pay for gas to drive to the mall