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 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.