Are There Any Limits to What State Government Can Tax?

Saul Hansell of the New York Times reports on a challenge to the state of New York’s attempt to extend its tax reach that is likely to have a big impact on the future of the Internet…

Before the ink on the bill has even dried, Amazon.com has filed a suit challenging New York State’s new law that forces online retailers to collect sales taxes on shipments to state residents.
On Friday, Amazon filed a complaint in New York Supreme Court in New York City, objecting to the law. The provision is meant to contribute about $50 million to the $122 billion budget that was passed by the state legislature April 9 and signed by Gov. David A. Paterson last week.
The issue isn’t whether people should pay taxes when they buy goods from out-of state sellers like Amazon, which is based in Seattle. For decades, New York and other states have required their residents to pay use tax — equivalent to sales tax — on out-of-state purchases for which sales tax wasn’t collected.
The question is whether the vendors must collect those taxes on behalf of the state. Generally, only those companies that have a physical presence, such as an office or store, in the state of the purchase are required to collect the taxes.
The new law is based on a novel definition of what constitutes a presence in the state: It includes any Web site based in the state that earns a referral fee for sending customers to an online retailer. Amazon has hundreds of thousands of affiliates—from big publishers to tiny blogs—that feature links to its products. It says thousands of those have given an address in New York State, although it does not verify the addresses.

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chuckR
chuckR
13 years ago

This has ‘interesting’ ramifications in meatspace as well. Say you’re a software vendor and you have distributors, but only have offices in one state. What are your tax collection obligations to the other 49 states?
And are the web site referrers actually selling anything? Whats the sales tax on a book endorsement? How does it differ from the NYT Review of Books? Will NYS look to collect from Amazon for books purchased by anyone with a Sunday Times subscription? I hope NYS fails miserably.
OT, but remember Dennis Koslowski, the TYCO tycoon? NYS and NYC came after him for sales tax on a tens of millions $ painting acquired from a NYC gallery. It was shipped to his out of state home but then showed up at his NYC apartment. I’m sure it was an egregious dodge. Question – how long would that painting – or any other personal property – have to stay elsewhere before it would not be subject to sales tax if it were retrieved?

Mario
Mario
13 years ago

“Question – how long would that painting – or any other personal property – have to stay elsewhere before it would not be subject to sales tax if it were retrieved?”
I don’t know how the law works in every state (and I’m not about to check), but to my knowledge there is no time limit for Rhode Island. The state can simply assume that the goods are subject to the tax and it is up the the consumer to prove otherwise. When it comes to something like a painting, ‘consumption’ becomes a very broad term (particularly since it would never be fully consumed), but there is no tax liability beyond the normal tax rate applicable here. In other words, if you paid sales tax in another state, you are only liable for the shortfall, if any, between the amount paid and the amount due in RI (7%, typically).
The Use Tax is only owed by residents of RI, so anything bought while a resident of another state is exempt. In the particular case you described, assuming the person was a resident at the time of purchase, I can see no reason why the state would be unable to claim taxes due on any object brought into the state no matter how long it was owned. Presumably, however, the owner would only owe, at most, the amount in tax that RI assessed at the time of purchase.

chuckR
chuckR
13 years ago

Mario
I don’t know if Koslowski was a legal resident of NYS/NYC. For the sales tax dollars involved in his case, an NYC gallery could open or acquire satellite galleries in favorable tax states and initially stash the art there. I guess this is what keeps accountants and tax attys gainfully employed.
When the legislature does its worst for the next year’s taxes, we’ll see if their actions democratize the residency strategies used by high earners and wealthy people. It ain’t hard to live/work outside a state this size.

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