New York State Internet Nexus Tax: A New Understanding
Based on a tip from a dear friend, I revisited this memo from the New York State Department of Taxation and Finance.
In re-reading this, I think some important distinctions need to be made. The memo linked to above provides 2 very specific examples of what it means by affiliate, and 99% of the affiliates I know fall into what I would consider the “tax free” group.
Here’ an example, from the document, of an affiliate that would qualify as a nexus:
XYZ Company (XYZ) is an Internet-based retailer of sporting goods specializing in
downhill skiing equipment. XYZ is located in Vermont, where it has its administrative offices
and its warehouse, which holds its inventory for sale. XYZ makes sales of its merchandise
throughout the United States and has customers in New York State. The merchandise sold byXYZ is delivered by the U.S. Postal Service or by common carrier.
As part of its marketing plan, XYZ has entered into agreements with several ski clubs
located in New York State whereby the ski clubs will maintain links to XYZ’s retail Web site on
the clubs’ own Web sites. XYZ will pay a commission to the ski clubs based on the sales that
XYZ makes that originate from these links.From March 1, 2007, to February 29, 2008 (i.e., the preceding four quarterly sales tax
periods), XYZ has gross receipts from sales of its merchandise based on these agreements with
the New York State ski clubs totaling $78,390.Based on the foregoing, XYZ is presumed to be making taxable sales in New York State
by soliciting business in New York State through the use of independent contractors or other
representatives and required to be registered as a sales tax vendor, collect New York State and
local sales taxes, and file the required sales tax returns.
The important thing to note here is the PHYSICAL PRESENCE of a ski club in New York. This affiliate is not entirely a “virtual affiliate”, such as most of us are. By having a physical location here, it’s presumed that these ski clubs are in fact specifically targeting New Yorker’s with their advertising efforts, based on an organizational sphere of influence.
Further, the memo appears to touch on “virtual affiliates”:
Example 6:
This example also assumes the same facts as in Example 2 on page 3 of this
memorandum. However, none of the ski clubs refer potential customers to XYZ through the use
of flyers, newsletters, telephone calls or e-mails to club members or any other means of
solicitation in the state targeted at potential New York State customers on behalf of XYZ.Therefore, XYZ may successfully rebut the presumption that it is making taxable sales in New
York State through New York State resident representatives and XYZ is not required to register
for sales tax purposes.
In this case, since only a website is used to promote the traffic, the ski club does NOT fall under the definition of Nexus. The interesting question is the use of the term e-mail, but I’m presuming that to mean essentially e-mails specifically, and not incidentally, sent to New Yorker’s.
So what is the deepest underlying factor in determining which affiliates fall into my first example or my second example? It would seem to be this:
An affiliate deemed to have a specific sphere of influence within New York, based on marketing tactics or physical location, that intentionally, not incidentally, provides a referral service based in large part on that sphere of influence.
Does that make things crystal clear? Of course not. At the same time, I think it shows that Overstock may have jumped the gun in removing New York based web affiliates. However, per the above, I think they were dead on in breaking their partnership with the Entertainment book.
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