New York’s new nexus-expanding affiliate marketing law has generated considerable confusion and anxiety in the direct marketing industry. The legislation was signed into law on April 15, and now the second shoe has dropped in the form of a technical services bulletin (TSB) issued by the New York Department of Taxation and Finance on May 8 — TSB-M-08(3)S. The TSB purports to explain the new law and resolve some of the uncertainties arising from its vague statutory language.
The good news is the TSB actually narrows the scope of the new law in certain important respects. It may provide comfort to catalog companies and Internet merchants that maintain relationships with New York affiliates, so long as the remote seller carefully restricts and monitors those relationships.
The New York legislation creates the “presumption” that a remote seller is obligated to collect New York sales/use taxes if it enters into agreements with New York residents for the referral of potential customers through Web site links. The TSB didn’t adopt the most expansive interpretation of this broad statutory language. Instead, it limits the application of the law and makes clear how an out-of-state retailer can rebut the “presumption” and thereby be relieved of use tax collection obligations. The department’s relatively modest approach to enforcement may be part of its effort to defend the constitutionality of this new statute in the face of court challenges filed by Amazon.com and Overstock.com.
Key TSB Provisions
1. Mere advertising on an affiliate’s Web site, including pay-per-click arrangements, won’t give rise to a presumption of tax collection obligations.
The TSB provides that, “A business is not considered a vendor ... merely because the business stores advertising on a server or other computer equipment located in New York State, or has advertising disseminated or displayed on the Internet.”
Affiliate marketing arrangements that don’t involve performance-based (i.e., sales commission) compensation won’t create a tax collection presumption. In that case, there’s no need to present information to rebut a presumption of tax collection responsibilities.
The TSB also specifically provides that this presumption doesn’t arise “where the consideration for placing the link on the Web site is based on the volume of completed sales generated by the link.” As an example, the bulletin refers to the situation where an Internet marketer pays “a set fee based only on the number of clicks on the link to [the Internet marketer’s] Web site, whether or not sales are made.”
2. Rebutting the presumption of a tax collection obligation.
The most significant provision in TSB-M-08(3)S is that a remote seller can rebut the presumption that a New York-based Web link gives rise to a tax collection obligation if the retailer can prove that there’s no additional solicitation activity.
So unless there’s some additional solicitation activity that occurs in New York by the site owner, the link alone won’t be sufficient to impose a tax-collection duty.
The TSB presents two examples with different outcomes showing this requirement. First, if the Web site owner distributes flyers in the state promoting the presence on its Web site of links to the out-of-state retailer, then the presumption can’t be rebutted and the out-of-state retailer must register for sales/use tax collection.
In the other example, however, where the link on the New York Web site isn’t promoted “through the use of flyers, newsletters, telephone calls or e-mails,” the presumption of “vendor” status created by the presence of a New York Web site link can be successfully rebutted and no registration or collection is required.
The relatively restrained position taken by the Department of Taxation and Finance is critical to direct marketers. It means, if retailers are vigilant about their affiliate relationships, then the mere maintenance of a link relationship shouldn’t require use tax collection. But if a more extensive relationship exists with an affiliate marketer, then use tax must be collected on all sales to New York consumers — not just those referred through the affiliate Web site.
Moreover, the burden of proof is on the retailer to overcome the tax presumption by presenting evidence of no added solicitation activity.
George S. Isaacson is a senior partner with Brann & Isaacson. He represents multichannel merchants on tax matters and is tax counsel to the DMA. Reach him at firstname.lastname@example.org.