New York State of Mind

During a Direct Marketing Association seminar last week, marketers alike tried to wrap their arms around just what New York state’s new Internet tax law means for their businesses. Jerry Cerasale, the seminar’s host and senior vice president of government affairs for the DMA, and the organization’s tax counsel, George Isaacson, provided the 85 members in attendance with answers on what this development means for their industry. Here’s a sampling of some of the tips, thoughts and observations gleaned from the event:

* “This is very aggressive, nexus-expanding legislation,” Isaacson said, referring to the law which requires out-of-state online retailers to collect sales (or use) tax from New York residents, and which he believes was passed in large measure to “grab the attention of direct marketers.” Cerasale warned that the reach of this bill may soon “extend far beyond the state of New York.” That’s why it’s so important for direct marketers to get involved now, he said.

* The biggest concern for direct marketers is their relationships with affiliate marketing programs located within New York. Under the new law, these agreements are deemed as in-state, commissioned sales representatives, thus creating nexus and making the out-of-state merchant liable to collect sales tax on all purchases as a result of these affiliate programs. This includes links to New York-based Web sites, which the state views as an electronic form of a sales representative, Isaacson said.

* So what steps should merchants take to protect themselves from future tax assessments? Isaacson provided three possible options.

1. Terminate all affiliate marketing relationships with New York companies. This will obviously be easier for some than others, he noted, depending on the number of relationships you currently have established or the amount of business you receive from New York.

2. Assume the risk of an assessment. This is sort of the wait-and-see approach. With the constitutionality of this new law still very much up for debate, per the Supreme Court’s ruling in the Quill v. North Dakota case, which states that it’s unconstitutional for states to require out-of-state merchants with no physical presence in such states to collect sales taxes on remotely placed purchases, Isaacson believes direct marketers have a solid argument to rebut the presence of nexus in the state. But he also warns the burden is on the direct marketer to prove that the presumption of nexus doesn’t meet the standards of the U.S. Constitution.