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New York, New Nexus, More Affiliate Taxes

Get ready for phase two. New York is proposing to revise their definition of vendor. This proposal may impact some merchants. The plan is to crack down on the brick and mortar stores that form a separate entity to handle internet sales. The State wants to crack down on the companies that are using loopholes to avoid a nexus. Under this new plan, a company having a parent or affiliate store with brick and mortar stores will also have nexus. This new information is all part of the 2009-2010 budget.  If these provisions are kept, it will take effect June 2009.

What does this mean? It means that the stores that form separate companies for online sales and do not collect sales tax online will have to do so if the proposed change takes effect. Good news for some NY Affiliates who were terminated from some programs that fell under this definition; they may be allowed back in programs as the nexus already exists.

The redefining of vendor to include affiliate nexus is contained in Section FF- Modernize definition of “vendor” to include an affiliate nexus provision.  Here is a quote:

In particular, under the Due Process Clause and the Commerce Clause of the United States Constitution, sales tax nexus depends on a seller’s physical presence in the State. While the remote sales affiliates are not themselves physically present in the State, they often receive services from affiliates that are present in the State. For example, the remote sales affiliates frequently use the same trademarks or even the same trade name as the retailer’s brick and mortar stores. This saves the remote sales affiliates the trouble and expense of developing and maintaining the value of their own trademarks. By avoiding any physical presence in the State, the remote affiliates are able to avoid any sales tax collection responsibility, thereby reaping a significant advantage over retailers that make sales only through brick and mortar stores in the State.

Section 1 of this bill combats this practice of manipulating the corporate form to avoid sales tax collection responsibilities by adding a new sub-paragraph (I) to the definition of “vendor” in Tax Law §1101(b)(8). Under the new sub-paragraph, the presence of an affiliate in the State makes the remote affiliate a vendor in either of two circumstances: (1) where the in-State affiliate uses in the State a trademark, service mark, or trade name the same as or similar to that of the remote affiliate; or (2) where the in-State affiliate engages in activities that help the remote affiliate develop or maintain a market for its goods or services, to the extent that those activities are sufficient to give the State nexus over the remote affiliate under the nexus requirement of the United States Constitution. This latter provision would apply, for example, where a retailer puts its distribution arm into a separate subsidiary that is present in New York and uses that affiliate to distribute into the State the products sold by the retailer’s remote sales affiliates

Here’s the link to the lengthy full text on budget and definition of vendor to include affiliate provision.

The anticipated revenues – $9 MILLION in 2009-2010 and $12 MILLION the next year, hard for a cash strapped state to say no to this.

The NY State Revenue Report also has information on sales tax, Internet sales tax and the Streamlined Sales Tax Project. The discussion of the SSTP is interesting because it discusses some of the complexity, especially in terms of current laws. It would be a major undertaking for NY but the benefits will be examined. NY State Revenue Report See report starting at report pages 61 and 91.

What struck me is the mention that the NY State Memorandum indicated several other states have already passed “affiliate nexus” including Alabama, Kansas and Minnesota. From the memo-

While the United States Supreme Court has yet to address the circumstances under which the activities of an affiliate may be attributed to a company not otherwise present in the State, the nexus provisions of this bill are a necessary corollary to the physical presence requirement imposed by the Court’s Dormant Commerce Clause rulings in the sales tax area. Several other states have passed similar affiliate nexus legislation, including Alabama, Kansas, and Minnesota.

 Just to clarify, this is not a law that defines affiliate marketers as a nexus or as a vendor; it closes the loophole that is costing States millions of dollars of revenue.

While it is hard to utter the words “I like this tax”, I do like this tax.

{ 2 comments… add one }

  • Rhea March 5, 2009, 10:37 am

    This tax makes sense. Closing a loophole that permitted merchants with a physical presence in New York to avoid charging and remitting State sales tax is prudent. (And prudent isn’t a word I use too often regarding the NY State legislature.)

    I hope this legislation results in the readmission of NY affiliates into merchant programs that had previously excluded them to avoid creating a NY nexus.

  • Melanie March 6, 2009, 1:46 pm

    Thanks Rhea, I hope this goes into effect. It is a huge loophole, lots of much needed money for States.
    Even better if it opens up some programs for affiliates.

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