Amazon Tells NY Tax Man to Take a Hike has filed suit against the state of New York claiming the state’s Internet Sales Tax Collection law requiring online companies to pay state sales tax is unconstitutional and violates a 1992 Supreme Court finding.

Amazon filed its suit on April 25, claiming that the newly enacted state law effectively makes any Web site operator posting a link to subject to New York tax laws. The lawsuit, first reported by Wired magazine, claims the legislation violates the U.S. Commerce clause in the U.S. Constitution, as well as due process and equal protection clauses in both the U.S. and New York Constitutions.

“Because some independently operating, New York-based Web sites post advertisements with links to Amazon and are compensated for these advertisements, Amazon is now presumed to have engaged in ‘solicitation’ under this Statute and thus must collect New York sales and use taxes on all of its sales to New Yorkers or face hefty civil and criminal penalties,” the company says in the complaint.

New York’s Stance

In January, former New York governor Elliot Spitzer pushed through a proposal that would require online retailers to collect state and local taxes on any purchases made through online companies that had a presence — any presence — in the state. The Retail Council of New York applauded the decision at the time.

“New York must stop sanctioning sales tax avoidance practices and stop giving unfair pricing advantages to out-of-state retailers at the direct expense of the storefront taxpaying merchants who are the backbone of our Main Street economies across this state,” said council CEO James R. Sherin.

Spitzer stepped down earlier this year, but current governor David Patterson followed up on the proposal in April by adding to the state budget a line item consisting of US$26.5 million in expected revenues that would be collected from online retailers.

Issue History

E-commerce has largely been given a pass when it comes to local and state taxes, thanks in part to a 1992 Supreme Court decision that found mail-order companies were exempt from paying state and local taxes in places where they didn’t have a substantial brick-and-mortar presence.

As e-commerce came to the Web, Congress gave online retailers an exemption from paying sales tax while businesses and states worked out an efficient way to track — and charge — customers.

In 2000, the Streamline Sales Tax Governing Board formed to modernize the ways states tracked their sales tax rates, giving online companies the opportunity to set up technologies that could enable them to more easily charge customers appropriate taxes. As of today, 43 states and the District of Columbia have participated in the project, and some states — such as New York — say it’s time for online companies to begin paying back into the system.

The Fallout

Ultimately, the battle between Amazon and New York is more about convenience than it is about collecting taxes, said Don DePalma, author of Business Without Borders and chief research officer at Common Sense Advisory, a Boston-based globalization firm.

The technology and reporting capabilities are almost ready to be deployed, quickly and easily. However, such laws would require every company — even small mom-and-pop shops — to add another layer of reporting to their stores. There are a few software companies already developing databases that can easily track sale taxes by ZIP codes, though, and states have been modernizing the way they report their sales tax percentages since 2000.

“For any of the shopping cart sites, it isn’t terribly difficult for them to compute the taxes based on the address [an order] is going to,” DePalma told the E-Commerce Times. “This is a technology that anyone could add without a tremendous amount of work on their part.”

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