Did you hear?…New York sales tax law causing other states to consider taxing Internet sales

New York’s governor, David Paterson, recently signed legislation that requires out-of-state Internet retailers that have online affiliates in the state of New York to collect sales tax on all New York sales. This law, which is being challenged in court on constitutional grounds, goes into effect on June 1, 2008.

This latest move underscores the desire, especially in a challenged economy, for states to collect sales tax from out-of-state sales. It also demonstrates the level to which states might go to prove a business has a physical presence in a state — the only way a business can currently, under a 1992 U.S. Supreme Court ruling, collect sales tax from another customer in another state. The logic being argued by New York legislators is that affiliate stores represent a physical presence, and, subsequently, New York hopes to pad its coffers with an additional $50 million in revenue.

As a result of the New York legislation, other states are beginning to seriously scrutinize options around collecting out-of-state sales taxes, including, most recently, Texas — which apparently just realized that Amazon.com has been operating a distribution center in Irvine since 2006. Using the physical presence philosophy means sales taxes are due in the minds of the Texas comptroller’s office.

The National Retail Federation (NRF) realized that if each state starts to go its own way, chaos could ensue. In an attempt to avoid that, NRF is endorsing a plan called the Streamlined Sales and Use Tax Agreement (SST) — click here to read — that it says is a response to the realization that taxation of Internet sales is inevitable. SST establishes guidelines of taxable items, facilitates collection of sales taxes across state lines, and provides retailers with software and databases to help determine how much to charge on each particular sale.

Currently, NRF is supporting federal legislation (click here to review) that would make collection of sales taxes mandatory regardless of a physical presence in a state. NRF contends that by establishing the federal law using SST guidelines, any sales tax collection will be conducted in a much more uniform, simplified and manageable manner.