Grabbing Remote Vendors

A recent law change in New York highlights the challenges of operating our sales tax system in today’s e-commerce business model.

July 31, 2008
by Annette Nellen, CPA/Esq.

As far back as 1872, when Montgomery Ward issued its first mail-order catalog, vendors have sold to customers without being physically present in the customer’s state. Although sales taxes have existed since the 1920s, we have no effective system for collecting sales-and-use tax on sales by remote sellers.

Today we’ll look closer at the history of the remote sales tax issue, clarify New York’s law change and note possible solutions.

Interstate Sales Tax History

As a 1965 congressional report noted: “The present system of State taxation as it affects interstate commerce works badly for both businesses and the States.” (State Taxation of Interstate Commerce Report No. 952, 9/2/65, Vol. 4, (the “Willis Commission” report))

While the 1965 congressional report made recommendations for administering state sales tax for interstate commerce, no action was taken. Litigation eventually led to our current sales tax nexus standard set by the U.S. Supreme Court in 1992 in Quill, 504 US 298. The Court ruled that physical presence was necessary for substantial nexus that would allow a state to impose sales tax collection obligations upon a vendor. A continuing issue is the amount and degree of physical presence needed. Many states provide some guidance on this question.

The Court also noted that per the Commerce Clause, Congress has the authority to “decide whether, when and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes.”

E-Commerce Challenges

The e-commerce model makes it easy for a vendor to operate in one state and have customers in many other states. This increases the number of transactions in which states must look to their resident consumers to self-assess their use tax because remote sellers have no collection obligation.

Certainly, it is easier for states to have thousands of vendors collect and remit sales tax than to get millions of individuals to remit use tax. Auditing vendors is also more efficient than auditing individual buyers.

However, for a state to collect sales tax from a remote vendor, it must either convince the vendor to do so voluntarily or find a way for the vendor to have a physical presence in that state.

New York’s 2008 Legislative Change

Chapter 57 (April 08) broadens the definition of “vendor” at NY Tax Law §1101(b)(8). Under the new provision, sellers are presumed to be soliciting business and thus required to collect tax if, per an agreement, they compensate New York residents for directly or indirectly referring potential customers. Referrals may be made through a Web site or other means. The presumption only applies to sellers with over $10,000 of sales to New York customers made via the referrals in the prior four quarters. Sellers may rebut the presumption by showing that the residents did not solicit sales in New York for them (Bill Summary (PDF)).

The Governor’s budget estimated that this change would generate $47 million in 2008/2009 and $73 million in 2009/2010 — an indication that use tax compliance by New Yorkers is a problem. The New York State Department of Taxation and Finance has issued guidance on the vendor presumption (TSB-M-08(3)S (PDF)) and how to rebut it (TSB-M-08(3.1)S (PDF)). FAQs interpreting the new law also exist.

Vendor Reaction

In April 2008, Amazon filed a complaint challenging the constitutionality of the new provision. Amazon argues it has no physical presence in New York as required for sales tax collection. Per Amazon, the independent third-parties in its “Associates Program” perform advertising rather than solicit sales. Per Tyler Pipe, 483 US 232 (1987), such activity is not sufficient to find nexus. Amazon states that the associates are not its agents. Also, because membership in the program does not depend on residence, Amazon does not know which associates are legal residents of New York.

Amazon started collecting sales tax from its New York customers. As noted in its complaint, the new presumption “is effectively irrebuttable, even though it is not true.”

In contrast, Overstock.com, which also filed suit, terminated its relationships with its approximately 3,400 New York affiliate advertisers. (press releases of May 30, 2008 and May 15, 2008)


A private ruling in Missouri issued in April 2008, found that a remote seller had no nexus in the state because goods were shipped by mail. The ruling also notes that under Missouri law, “advertising in the state through media” is not enough to establish nexus (LR 4702).

In a California Board of Equalization memo (PDF) (June 2008) on the New York law change, staff conclude that a link on an affiliate’s Web site does not by itself make the affiliate an authorized salesperson for the remote vendor.

Other Approaches

Arkansas (PDF), Minnesota (PDF), Idaho, and a few other states modified their sales tax laws to provide that a related party can create substantial nexus. For example, under Idaho’s rule (HB 320, Chapter 49), if a vendor and in-state business are related and use an identical or substantially similar name, trademark or goodwill to “develop, promote or maintain sales, or the in-state business provides services to, or that inure to the benefit of, the out-of-state business related to developing, promoting or maintaining the in-state market,” the vendor has substantial nexus.

These approaches also face constitutional challenges. Similar names or advertising alone is unlikely to meet the Quill nexus standard as it does not make the in-state entity an agent of the remote vendor and therefore does not create a physical presence for the seller. Several cases failed to find nexus in similar circumstances (for example, SFA Folio Collections, Inc., 585 A.2d 666 (Conn. 1991)).

In 2003, South Dakota enacted a rule prohibiting public corporations from doing business with vendors that do not collect sales and use tax (HB 1261, Chapter 34).


As suggested in the 1960s, uniform rules would help both vendors and states. However, uniformity is difficult to achieve in the real world.

The closest recent attempt at uniformity is the Streamlined Sales and Use Tax Agreement (SSUTA) that at least 20 states have enacted. The SSUTA, offers simplification through uniform definitions, paperwork and registration. Adopting states must also offer amnesty to sellers who register to collect. It is unlikely that all states will adopt the SSUTA unless Congress provides an incentive or mandate. The SSUTA does not include rate simplification because local jurisdictions may set their own rates.

S. 34 and H.R. 3396 (110th Congress) propose that to the extent the SSUTA meets specified simplification standards, adopting states may collect sales tax from remote sellers. There is an exemption for small sellers with less than $5 million of remote taxable sales in the prior year.

The small seller exemption challenges the touted simplification. Also, unless states exempt purchases from small businesses from use tax, buyers still need to self-assess use tax.

Another solution to explore is better use of technology, such as at the time of sale having the buyer’s credit card charged sales tax by the state tax agency. This approach results in no filing obligations for vendors or buyers.

Looking Forward

The realities of e-commerce will continue to challenge states’ use tax collection efforts. Also, many buyers remain unaware of their use tax obligations. States will need to do more to improve their use tax self-assessment and must work together to convince Congress that sales tax can be collected from sellers without impeding interstate commerce. That’s more easily said than done.

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Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University and an Irvine Fellow at the New America Foundation. Nellen is an active member of the tax sections of the ABA and AICPA. She has several reports on federal and state tax reform and a blog.