Internet Sales Tax Fairness — Click-Through Nexus — New York

In 2008, New York enacted a measure that requires many large online retailers to begin collecting sales taxes on purchases shipped to the state, even if they have no operations or employees there.

The measure states that any online retailer that generates more than $10,000 in sales via in-state sales affiliates must collect New York sales tax. Many online retailers, including and, have sales affiliates nationwide that link to the retailer’s web site and are paid commission on any sales generated from their referrals. New York’s measure clarifies state tax law to say that sales affiliates based in the state are representatives of the online retailer. This means that the retailer has nexus (i.e., a physical presence) in the state and is required to collect state sales taxes.

In all, more than 30 companies are covered by New York’s provision.  According to the New York State Department of Taxation and Finance, in the first six months since the provision became law, the state has recouped $46 million.  Officials expect to recoup $68 million in FY 2009-2010.

Several other states have now adopted legislation modeled on New York’s.

Update: On March 28, 2013, New York state’s highest court upheld the state’s internet sales tax fairness law. The case was brought by and, which argued that the law violates the commerce and due process clauses of the U.S. Constitution.

In its ruling, the New York Court of Appeals said that the law does not unfairly burden interstate commerce.  The court concluded that “active, in-state solicitation [by a paid in-state sales affiliate] that produces a significant amount of revenue qualifies” as sufficient physical presence to give the state authority to require sales tax collection.  The court noted, “It also merits notice that vendors are not required to pay these taxes out-of-pocket. Rather, they are collecting taxes that are unquestionably due [from the consumer].”

The court also noted: “The world has changed dramatically in the last two decades, and it may be that the physical presence test is outdated.  An entity may now have a profound impact upon a foreign jurisdiction solely through its virtual projection via the Internet.  That question, however, would be for the United States Supreme Court to consider.”


Part X- Establish an evidentiary presumption that certain sellers using New York residents to solicit sales in the State are “vendors” required to collect sales and use tax.


Thisbill would create an evidentiary presumption that certain sellers are”vendors” pursuant to Tax Law Articles 28 and 29, if the sellers enter into agreements with New York residents under which the residents are compensated for referring customers to the sellers and the gross receipts from such sales are more than $10,000.

Summary of Provisions, Existing Law, Prior Legislative History, and Statement in Support:

Sellersare increasingly utilizing marketing programs that depend on the efforts of New York residents to make sales in New York. Sellers often enter into agreements with residents under which the residents are compensated for the number of successful referrals of customers they make to sellers. For example, many internet retailers enter into agreements with organizations under which the organization receives a commission if it includes a link on its website that connects users to the internet retailer’s website. If the customer makes a purchase, the organization receives a commission from the retailer. When the resident engages in solicitation activities in the State, such as distributing advertising fliers or newsletters in order to refer potential customers to the seller and maximize his or her commission income, the resident is acting as a “representative” and the seller is acting as a “vendor.” See Tax Law § 1101(b)(8)(i)(C)(I)).

The extent of these local solicitation activities is easier to ascertain for the sellers than it is for the Department of Taxation and Finance(“Department”). Thus, to facilitate the administration of the sales tax and establish a clearer standard for sellers, section 1 of the bill amends the definition of “vendor” in Tax Law § 1101(b)(8) to include a presumption that sellers that use New York residents to solicit sales are “vendors” for purposes of collecting New York sales and use tax, if their aggregate gross receipts during the preceding four quarterly periods from sales attributable to customers referred by the New York residents are in excess of $10,000.

Section 1 of the bill further provides that the presumption would be satisfied even if the resident indirectly refers potential customers to the seller. This language in the bill would allow the presumption to be satisfied if, for example, a resident organization encouraged others, such as its members, to refer potential customers to the seller, thereby earning the resident organization a commission, provided that the $10,000 sales threshold is reached. The presumption can be rebutted by proof that the residents did not engage in any solicitation activities in the State on behalf of the seller that would satisfy the constitutional nexus requirement. The term “resident” is defined in the Department’s regulations and it includes, for example, corporations organized under the laws of this State, persons carrying on business in the State and persons with a permanent place of abode in the State. See 20 NYCRR §526.15. This bill is not meant to change the burden of proof in cases where the presumption in Section 1 of the bill does not apply.

Section2 of the bill provides a limited amnesty for specified businesses covered by this bill that come forward and register by June 1, 2008. Specifically, this section precludes the Commissioner of Taxation and Finance from assessing tax, penalties, and interest against businesses for failure to collect sales tax from their customers for periods before June 1, 2008 if the businesses are covered by the presumption described in Section 1 of the bill and meet certain other conditions, including that they register as sales tax vendors by June 1, 2008.

Section3 of the bill provides that the bill takes effect immediately and applies to sales made and uses occurring on or after the date the act becomes a law in accordance with the transitional provisions in Tax Law §§ 1106 and 1217, without regard to the date of the agreement between the vendor and the resident. Furthermore, sales tax quarterly periods commencing before the effective date of this bill are relevant to determining whether the seller has achieved the threshold level of gross receipts described in section 1 of the bill.

Budget Implications:

Enactmentof this bill is necessary to implement the 2008-2009 Executive Budget because it would increase revenues by $43 million in 2008-09 and $73 million in 2009-10.

Effective Date:

Thisbill takes effect immediately and applies to sales made and uses occurring on or after the date the bill becomes a law in accordance with the applicable transition provisions in Tax Law §§ 1106 and 1217.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.