NY Likely To Face Battle Over Collecting Sales Tax From E-Tailers

David PatersonIf New York goes through with its plan to make Amazon and other e-tailers collect sales tax from consumers, the state will almost certainly face a tough battle in court, legal experts say.

The bill, passed recently by the state and awaiting signature by Gov. David Paterson, would require Web retailers that use in-state affiliates to collect New York sales tax.

Amazon Director of Strategic Communications Craig Berman said the company was still reviewing the bill. "At this point, it would be premature for us to comment," he said.

The U.S. Supreme Court ruled 16 years ago that states cannot require out-of-state retailers like catalog companies to collect sales tax unless they have a brick-and-mortar store or other physical presence in those states. But New York says it should be able to force companies that use affiliates in the state to collect taxes.

That argument, however, isn't a sure winner. "It rubs against the grain of just about all of our legal process to make that leap," said lawyer Jerry Spiegel of Frankfurt Kurnit Klein & Selz. "I think it's a tough case."

Despite the potential legal problems, politicians throughout the country are searching for ways to capture the sales taxes that brick-and-mortar stores used to collect, but are now being lost to Web retailers.

"There are a lot of states that are losing revenues because they haven't been able to locate who's buying what where," said Catherine Fox-Simpson, a tax partner in retailer and consumer product group of practice at BDO Seidman.

Currently, New York requires online retailers with local storefronts to collect taxes online, which means that Barnes & Noble must collect taxes from New York residents, but Amazon.com doesn't have to.

New York also presently requires consumers to pay taxes on any online purchases or out-of-state purchases when they file their tax returns, but it's commonly believed that consumers overall pay less than they owe.

"States are not able to track all of the information," Fox-Simpson said. "It's hard to catch people."

The measure, expected to bring in an extra $50 million to New York this year, was first floated by former Gov. Eliot Spitzer last November.

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