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Do Webmasters need to add lawyer and legal counsel to their job description?

Alan Norton presents the New York online sales tax law as an example of why it's becoming increasingly important for Webmasters to have more than just a cursory understanding of legal issues.

 

Webmaster, marketing director, author, artist, and designer are all roles that are familiar to Web site owners and operators. You can add lawyer to that list because basic legal knowledge is becoming more and more important for Webmasters.

In this article, I'll explain why you should be aware of the consequences of a tax bill that was signed into New York state law April 15, 2008 and became effective June 1, 2008. This information will be of primary interest to Webmasters whose corporate Web sites have advertising and banners.

Note: This article is also published as a TechRepublic download.

New York tax law fiasco

New York legislation Chapter 57 of the Laws of 2008 is a complex and vague set of tax rules that require vendors with a nexus relationship in New York to collect taxes on business done in the state of New York.

New York has effectively sidestepped the precedent set in the Supreme Court's 1992 decision Quill Corp. v. North Dakota, 504 U.S. 298, which states that a vendor has to have a physical presence in the state before they must collect sales tax for orders in that state. The New York legislation essentially ties all employees, salespersons, independent contractors, agents, or other representatives and affiliates to the vendor. The nexus of any of these entities in the state of New York forces the vendor to collect taxes on all transactions from New York residents even if that vendor has no direct physical presence there.

For online sellers and resellers, this poses a real problem because the law extends to affiliates -- and there are a lot of affiliates out there. Most affiliate programs have at least one affiliate in each U.S. state.

New York has released Technical Service Bulletins TSB-M-08(3)S and TSB-M-08(3.1)S to try to clarify the law. The Technical Service Bulletins also give an "out" to vendors. If vendors can prove that they and none of their associates and affiliates have a nexus in New York, they can avoid the collection of the tax.

Vendors who can avoid passing the sales tax on to their customers have a real price advantage over their competitors. An Overstock.com press release states that up to 8.75% sales tax must be added to New York orders under the new law. For large orders, this can be a large chunk of change and likely the deciding factor in which online store the customer chooses.

Fallout from the tax law

Amazon and Overstock.com have challenged the tax law in court. Amazon has agreed to collect the tax, while Overstock.com threw its approximately 3,400 New York affiliates overboard and dropped them from its affiliate program. This action by Overstock.com meets, in whole or in part, the "out" requirements of the New York tax law, and the clarifications presented in the Technical Service Bulletins. Overstock.com can, in theory, avoid the requirement to collect New York state sales tax on all New York state transactions. (I say in theory because a vendor that only drops its New York affiliates may not be addressing the requirement that non-New York affiliates have no New York nexus. I do not have information that Overstock.com is or is not addressing this issue -- I am raising it as a possible generic issue to all vendors.)

For me, the fallout occurred August 14, 2008 when Newegg, a company with which I'm affiliated, sent me an e-mail requiring me to approve a new Special Terms and Conditions (STAC) agreement. I declined the original version of the STAC, but I accepted a second version. (For more detailed information, you can read My Response to the Newegg Affiliate Program Changes.)

Newegg's response

Newegg delineates its affiliates into two groups: those with a New York nexus and those with no New York nexus.

Newegg allows its New York nexus affiliates to remain part of its affiliate program, but they must accept and comply with the STAC agreement. These terms state that they will not solicit New York residents, and they will remain in compliance with the new terms. Organizations are required to post a statement on their Web site notifying their members of the "prohibition of solicitation to New York residents" requirement. Also, under penalty of perjury, they must sign a "Certification" once a year that states that they did not solicit New York residents during the past year.

Per language in the New York tax law, Newegg requires its non-New York residing affiliates to declare that they have no New York nexus. They agree that they will not engage in any activity that will create a New York nexus. They must also sign a statement once a year that they remained in compliance during the past calendar year and do not have ties to any entity doing business in New York that would trigger a requirement to collect sales tax.

This action should meet the "out" clause of the New York Technical Service Bulletins allowing Newegg to avoid collecting sales tax for New York state transactions. In practice, this would create possible liability issues for an affiliate if they find themselves in violation of the STAC for whatever reason. And therein lies the problem of just how legal savvy Webmasters are who will be accepting the Newegg terms without legal advice.

For the New York nexus affiliates, acceptance and compliance with Newegg's STAC will be difficult if not impossible. It's mostly a mystery to me how Newegg's New York affiliates are supposed to avoid solicitation to New York residents. I say mostly because I can see a way to present a page for each new visitor to your Web site that asks, "Are you a resident of New York?" If done properly, any possible legal liabilities might be passed on to the Web site visitor.

Newegg says it is committed to working with all its affiliates, including its New York affiliates.

(Note: Newegg declined my offer to respond to this article.)

New York tax law's impact on Webmasters

Just how does the New York tax law change affect you as a domain owner and Web site operator? If you or your company are part of an affiliate program or are thinking about applying to be an affiliate, here is how the law may impact you:

  • Possible removal for New York nexus affiliates
  • Additional legal terms to review and accept or decline
  • Risk of additional liability
  • Possible attorney fees
  • Additional costs to become compliant and remain in compliance

Many companies make it mandatory to have any legally binding documents reviewed by its legal team. Your company should authorize you to enter into any legally binding contract on the company's behalf before you accept such an agreement.

If you don't have in-house legal counsel, you will have to decide if you want to pay for legal counsel or essentially become a part-time lawyer. The implications of such a decision can be important to the future of your Web site.

An expensive precedent

As of August 27, 2008, 60 companies have dropped their New York affiliates. Online vendors who haven't already done so will soon have to fully explore their options in regards to the New York tax law change.

If New York's legislation, Chapter 57 of the Laws of 2008, is not overturned, it will set a costly precedent for Webmasters, online vendors, and consumers. Webmasters will have to spend time reviewing any new laws and affiliate program's terms in order to comply with them. For example, if other U.S. states follow suit, will Newegg issue a STAC for each new state? Will affiliates continue to be thrown out of affiliate programs?

This precedent could also lead to even more onerous legislation that might attempt to regulate the Internet, state by state. It would be a nightmare for Webmasters since cyberspace knows no state or country boundaries, but that wouldn't stop some state legislators from trying.

Learning some basic legal knowledge

So Webmasters, just how good a lawyer are you? How good a lawyer do you want to be? Perhaps the better question is how good a lawyer do you need to be?

I am not a lawyer, and I don't want to be one. I am, however, finding more and more need to make decisions that require more than just a cursory understanding of the law.

How are you coping with the New York tax law change? Will you learn some basic legal skills or pay to have someone else advise you? If you have read this far, patient reader, and have a good understanding of the legal implications that the New York tax law has on your Web site and role as Webmaster, maybe you can add part-time lawyer to your job description.

Disclaimer: This article does not constitute legal advice. Please consult a qualified professional if you have a specific legal situation.

About

Alan Norton began using PCs in 1981, when they were called microcomputers. He has worked at companies like Hughes Aircraft and CSC, where he developed client/server-based applications. Alan is currently semi-retired and starting a new career as a wri...

15 comments
James Adib
James Adib

I think I spent a lot of time looking for a link to individual state laws--which isn't here. What a great idea--make the middle-aged people who've worked their whole life & saving for retirement--pay for parents. Then, when the middle-aged people are broke and need help, the next generation can be sued. Switzerland & other European countries have wonderful plan for their elderly and take care of them with no fuss. Guess that's too much to ask from this country's politicians. 

http://www.brennanbail.com

.Sherwood
.Sherwood

This is just another reason why the US tax system needs to be replaced with something far simpler. The FairTax would simplify all of this. Find out more at www.FairTax.org.

Alan Norton
Alan Norton

Here I am again discussing a topic that isn?t exactly what I would call fun. It is important though and I have enjoyed the challenge. As you can see, I do have something to say. Do your eyes gloss over when you try to read a legal document? Do you take the time to read and understand legal documents or do you glance through them? I would like to hear how you respond to legal documents like the Newegg STAC. I would like to ask that the discussion be focused on legal issues related to IT professionals and Webmasters in particular. If you want to complain about state taxes, regulations, or tech writers who pretend to be lawyers, feel free to 'rant on', but please title your posts as such. I want to avoid the issue of trying to interpret the New York tax law and TSBs altogether. My interpretation would be worth almost exactly zero. However, if you are a lawyer or have a legal background and want to share your thoughts and interpretations, please feel free to do so. I would like to share several important legal definitions as they relate specifically to the New York State tax law: Nexus is defined as meeting either of the two following conditions: (a) Having either an office or other physical presence in New York State (b) Activities in New York State by you, your employees or a person or business with which you have some sort of contractual or agency relationship, which are sufficient to require you to collect and remit New York State sales tax under New York State law Vendor is defined by the state of New York in Technical Service Bulletin TSB-M-08(3)S as ?persons who solicit business within the state through employees, independent contractors, agents or other representatives and, by reason thereof, make sales to persons within the state of tangible personal property or services that are subject to sales tax.? Penalty of Perjury ? A statement containing this phrase, when signed, holds you liable for the offense of perjury if a false statement or lie is made that is materially relevant or significant to the case. In a Sworn Declaration or Sworn Statement this phrase usually allows the document to hold the same weight as an Affidavit without the requirement for the document to be notarized or signed in front of an authorized agent. A humorous definition - for those who need a break from the legal jargon at http://www.funmeme.com/archive/2008/07/15/penalty-for-perjury.aspx. There are a few notes that I would like to add that couldn?t be included in the article: The specific part of the New York legislation affecting vendors and their affiliates is Chapter 57 of the Laws of 2008, New York Tax Law Section 1101(b)(8), Sales and Use Tax Regulations Section 526.10(a)(3) and Tax Law Section 1101(b)(8)(vi) I note in the article that New York nexus Webmasters might be able to pass the Newegg STAC liability on the their Website visitors. I don?t think this is a reasonable solution. I would not want to burden my visitors with the extra Web page and the extra legalese required. Remember that old saying about unpleasantries rolling downhill? The camel dung-ball rolls downhill - http://www.youtube.com/watch?v=M-IhbkiHWhI&NR=1. Feel free to join in the discussion. I will be popping in and out to participate. Alan Norton

Alan Norton
Alan Norton

No doubt the U.S. tax system is too complicated. We do have the answer to one question: If a tree falls in Brooklyn is it heard in California?

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Justin James
Justin James

... I think this is more proof that companies should not just jump on the Internet without researching it first. You wouldn't open a store without talking to a lawyer and making sure that you were meeting all of the applicable laws (sales tax, wokers compensation, disability taxes, insurance, handicap access, etc. etc. etc.). So why would someone assume that they can just do business on the Internet without doing due dilligence? It's just ignorance. The problem isn't the Webmaster's to deal with, it is the business' responsibility. J.Ja

Alan Norton
Alan Norton

Hi Justin. Thanks for reading the article and participating. I just listened to your interview last night - http://blogs.techrepublic.com.com/tr-out-loud/?p=162. Nice job. I want to make the distinction in the following discussion between vendors and affiliates. Online Vendors: I agree with you for the companies large enough to do their due diligence before doing business online. The majority of companies in the U.S. are small businesses, many with five employees or less. There are quite a few where the business owner is the Webmaster and due diligence and legal issues become their problem to deal with. And that can be a daunting task to say the least. Affiliates: Affiliates and online publishers typically do have to agree to affiliate program terms before they can participate in affiliate programs. But up to this point, there have not been a lot of state and federal laws that they have had to deal with. One of the unintended consequences of the New York State sales tax law is that Webmasters and affiliates are for the first time being affected by state tax laws and having to understand them.

Alan Norton
Alan Norton

J Ja, There are laws on the books that are being enforced on the Internet like child pornography, gambling, sales of restricted goods (drugs, weapons, counterfeit items, etc) and copyright infringement just to name a few. For example I remember the RIAA push to stop illegal downloads of music. You are right about COPA. COPA (Child Online Protection Act) is an Internet specific law passed in 1998. In addition there is the CIPA (Children's Internet Protection Act) which is a federal law enacted by Congress in December 2000. http://www.fcc.gov/cgb/consumerfacts/cipa.html And then there is the Children's Online Privacy Protection Act (not to be confused with COPA) enacted in 2000 that pertains to the online collection of personal information from individuals under the age of 13. http://en.wikipedia.org/wiki/Children%27s_Online_Privacy_Protection_Act One day WWW might stand for Wild Wild West instead of World Wide Web if the Internet becomes more regulated. There are, for instance, laws that could be enacted telling Webmasters what to include on their sites (Terms of Use, Privacy Policy, About Us, etc.). There is no end to laws that could be enacted regulating the Internet. The Internet is for the most part self-policed just like the Western states of the U.S. were in the days of the gold rush Note: To reply to this post you must reply to J Ja's post 'Unregulated Internet?'. Mary Weilage informed me that in order for pages to load properly, there is a limit to the depth of the posts (7 deep). I should have also thanked Mary Weilage earlier for her help in getting this article published. Let me make amends by doing so now. This article would never have been published without her interest and help. Thanks Mary!

Justin James
Justin James

It has always struck me that the Internet is so (relatively) unregulated compared to the actual world. Another thing that I find interesting, is that this state of relatively de-regulation is embraced by a vry large number of people, while at the same time, a great many other people are not terribly thrilled with it. For example, for every person who is delighted by the variety and ease of finding adult Web sites, there is someone else who wants that kind of material to be hidden away or hard to find. The government has been trying to regulate some aspects of this for some time, where it be the COPA law, "sting" operations for predators, the DCMA (I know that DCMA is not Internet-specific, of course), and so on. I think that it will be interesting to see which of these perspectives wins out, particularly as a younger generation of voters becomes more and more influential. J.Ja

Alan Norton
Alan Norton

Hey J Ja, I'm really happy with regulation of the Internet as it stands today. I've been using the Internet since September 1996 and I have seen a lot of changes, but for the most part state and federal authorities have kept their hands off. As for sales tax on items sold by online vendors, it is only a matter of time before that happens. It is just too large to be ignored. I'm surprised it hasn't happened already. New York's back door attempt to collect sales taxes is exactly the wrong way to go about it though. It adds more complexity and confusion.

Justin James
Justin James

Alan - I actually beleive that the Internet is *much* more regulated that people assume it is. For example, "property tax" applies to more than just houses (and in SC, boats and cars). It applies to any or most pieces of property. But just try to get someone to pay property tax on their expensive jewelry, for example... not going to happen, even though it is technically the law in many places. That's what the Internet is like. There are all sorts of slander and libel laws out there, and half the Internet is nothing but slander and libel. ;) And, of course, if it ever gets *too* tough to do business in the US, just get a server in Russia and now all laws are irrelevant. It really is a no-win situation. Laws often (not always) exist for a good reason, so uncomplied-with or unenforced laws can be a problem. The Internet will either end up heavily regulated/taxed (with some sort of magic enforcement method), or the non-Internet parts of our lives will become much more regulated/taxed to compensate for the lossage as more and more of life moves online. J.Ja

Alan Norton
Alan Norton

Justin, Funny that you should mention the multiple New York State tax rates. I ran across an article mentioning 60+ different tax rates in who knows how many cities, municipalities and counties while doing my research. That is why I had to mention in the article that the New York State sales tax is 'an up to 8.75%' tax rate. You are exactly right about the complexity of city, state and federal regulations being barriers to entry. There is one saving grace to the New York tax law - vendors with sales below $10,000 to New York residents during the past four quarters do not have to "obtain a Certificate of Authority for New York State sales tax purposes" or have to collect the tax. The quoted text is from the New York State TSB-M-08(3)S Technical Service Bulletin. Only the smallest of online vendors would meet this requirement. I don't think that most Internet users understand the importance of the New York tax law. Most people have never even heard about it. I hadn't until it impacted me. This is no shot across the bow, this is the first salvo in an attempt to regulate the Internet. The New York legislators who voted for this tax law change were mostly clueless as to its full impact. They expected to receive 47 million dollars from the new sales tax the first fiscal year. New York was looking at a projected 4.4 billion dollar shortfall they were trying to remedy. No doubt they expected a lawsuit or two and they might even have expected some outcry from New York residents. But I seriously doubt that they expected a Webmaster in Arizona and Webmasters in the other 49 states to have to spend a couple of hours of their precious time because of it. We are living in the golden age of the Internet though most don't realize it. Whether we are spoiled or ignorant, we take the mostly unregulated Internet for granted. One day I can expect Webmasters to sit around a cyberspace table and reminisce about the good old days of the Internet.

Justin James
Justin James

Alan - Glad you liked the podcast! I think that the complexity of the law is the major stumbling block here. A few years ago I was involved with an eCommerce project for a New York company. Even though they only needed to deal with taxes in New York State, hundreds of municipalities and counties choose to implement their own sales taxes. There are literally hundreds of different sales tax rates in New York State alone. I cannot imagine being a small business owner who seriously wants to comply with the law under these circumstances. In this case, there are companies that will provide a ZIP code to sales tax table, but they cost hundreds of dollars per state, a significant expense. J.Ja

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