March 26, 2010

John Cooney discusses implications of pending sales tax case in Friday Report

2 min

Venable partner John Cooney recently discussed the implications for the online retailing industry of a case pending in New York that tests the legality of a law mandating the collection of state sales and usage tax for online purchases. The story appeared in the March 19 edition of Friday Report, a newsletter for the direct marketing industry.

The case, v. New York State Department of Taxation and Finance, stems from a New York law requiring online retailers to collect sales tax if they have marketing affiliates in the state. The definition of “affiliates” includes third party web sites that run ads directing users to another e-commerce site, such as Amazon.

Cooney told Friday Report that the affiliate advertising model at the heart of the Amazon lawsuit has solved one of advertising’s oldest dilemmas – knowing which advertising leads to sales and which is wasted - because affiliates are only compensated for advertisements that generate a sale. Regardless of the utility of this model, New York State claims that affiliates operate like sales agents, allowing the state to claim that Amazon and other sites have a geographic nexus in the state.

Meanwhile, Amazon and other retailers maintain that affiliates are more akin to television or print advertising and do not constitute a physical presence that would compel them to pay New York sales tax.

“The electronic advertisements displayed on third-party web sites inform the web user of the name and in some instances the contact information of the advertiser that is offering a product," Cooney wrote in a brief authored for the Performance Marketing Association, an industry group for affiliate marketers. "This is no different from the contact information that a reader receives from a magazine advertisement and does not give the electronic advertiser a greater 'physical presence' in the state than a traditional hard-copy advertiser.”

In the piece, Cooney noted that the New York case will likely influence several states’ tax policy in regard to affiliate marketers. Rhode Island and North Carolina have adopted similar affiliate taxes, and at least six states - including California, Illinois, Connecticut and Virginia - are considering their own versions of a tax on online sales.

Click here to read the Friday Report story.