Overstocked and Underpaid

Overstock.com, Inc. has filed a lawsuit in the New York Supreme Court  challenging the New York State tax law requiring Internet retailers to collect and pay sales tax on their in-state sales.  The Complaint states that Overstock is seeking a declaration that the New York law is unconstitutional.

For the most part, you need to have some sort of presence within a jurisdiction in order to be subject to tax, even if your presence is just soliciting business within a state that can be enough. The gist of the Complaint filed by Overstock is that Overstock sets up deals with affiliates throughout the country and the world, as do most website retailers, whereby Internet traffic is delivered to Overstock.com.  In exchange for the delivery of that traffic, a fee is paid. The delivered customer now makes a purchase. The delivered customer could be generated from anywhere, but it just so happens he is from New York.  The State of New York says Overstock.com needs to collect sales tax from that sale. Overstock says they did nothing to generate a sale from a New York customer. Specifically, “the statute imposes the burden on Overstock to collect and pay taxes even if the purchase by the New York customer is based on a referral to Overstock’s website that is indirect, or passes through various other websites with whom Overstock has no agreement or connection whatsoever.” Sounds pretty unconstitutional to me, but the problem for Overstock is that if they do not get the tax from Overstock, the ultimate seller, there is no chance whatsoever of ever collecting the tax. The problem for the State, however, is that they and other states continually draft legislation that, in an overbroad manner,  attempts to fix a problem that is not capable of being fixed and so, the legislation is invariably stricken.

We shall see, but the answer seems to be that you cannot rely on historic notions of  state taxation when dealing with Internet retailers.  The states need to get together, apply a blended rate of tax from the rates used in each state, apply the rate to all the Internet sales of a particular retailer, collect the tax and split it equally.

John M. Hanamirian