Spitzer's Christmas Tax Surprise

New Yorkers going Christmas shopping online at Amazon.com will find an 8.375% surprise at the virtual cash register, courtesy of Governor Spitzer, who is moving aggressively to collect Internet sales taxes that have gone widely unenforced.

Under a new policy, major electronic retailers, such as Amazon.com, will be required to collect sales tax on all purchases from New York. The policy, based on a novel legal theory, could hasten the end of the Internet's era as a duty-free marketplace if other states follow New York's lead. With the policy, New York immediately took the lead among states that are seeking to tax online commerce.

"I'd say this puts us at the front," one state tax official, who requested anonymity, told The New York Sun.

Having pledged not to raise taxes, Mr. Spitzer is increasingly scrounging for ways to close a projected $4.3 billion deficit next year. State officials estimate that this latest initiative, which goes into effect in December, will bring in about $100 million more each year, split between state and local government tax revenue. Statewide, the sales tax averages about 8%, although in New York City it is 8.375%.

During this year's budget debate, Senate Republicans and business groups labeled many of Mr. Spitzer's revenue-raisers as tax hikes, while Mr. Spitzer insisted he was simply closing loopholes. They are likely to pounce on this effort as well.

The policy would shift the burden of reporting taxes from the purchaser to the online vendor. New Yorkers currently pencil in about $45 million a year in sales and use taxes owed from out-of-state or online purchases. But much more likely goes unreported.

When it comes to charging sales tax, e-retailers have been held to the same old standard that the U.S. Supreme Court set for mail-order vendors: The seller only needs to collect the tax on purchases in states where the vendor has a physical presence, such as a storefront or salesman. New York is saying that it has found a way around that obstacle to tax collection. Many e-retailers may have unwittingly lost their exemption because of the way they direct traffic to their Web sites, according to a tax memo recently released by the state's tax department.

At issue is the "affiliate program" used by many e-retailers. Web site operators can provide a link to an e-retailer in return for a commission on any sale resulting from customers using the link. While the affiliate program may consist of little more than a non-descript advertisement on the computer screen, the tax consequences may be huge: New York state says it is the equivalent of having an instate salesperson.

"It's just treating the affiliate the same way we would treat any other type of sales representative," Mr. Spitzer's budget director, Paul Francis, said in an interview.

Under this novel theory, any e-retailer who pays a New York-based Web site operator a commission would be required to start collecting sales taxes on any purchase from New York, regardless of whether it originated from an "affiliate."

"It's a clever move," a professor of Internet governance at Oxford University, Jonathan Zittrain, wrote by e-mail yesterday.

It wouldn't take much more than a fringe novelist from Brooklyn plugging his latest book on his Web site— and providing a link to Amazon.com in exchange for a commission of the sales— to force the online bookseller to collect a sales tax from every New Yorker who makes a purchase.

What is especially interesting, Mr. Zittrain wrote, is that the taxes doesn't just apply on sales made through affiliates, but on all sales "so long as they have an affiliate program at all."

A spokeswoman from Amazon.com, which boasts some 900,000 "affiliates" across the globe, did not return a call for comment.

But some e-retailers would likely respond by simply dropping their "affiliate" programs. Or they may end up challenging the policy in court, where some lawyers think New York's position may not hold up.

Of the affiliates, one tax lawyer, Scott Brandman said, "I don't see them as real agents of the company in the traditional sense.

"Many of these people have 200 such arrangements with companies," Mr. Brandman, of the New York office of Baker & McKenzie LLP, said. "They get a one percent commission on the click through and it may be nothing more than a box on the Web site."

The memorandum outlining the state's position says that it "is intended to clarify current policy and does not reflect any change."

The policy initiative doesn't affect vendors such as the bookseller Borders or clothier L.L. Bean which sells to New Yorkersboth through the Internet and stores. Such companies are already required to collect and remit taxes from online sales. That was established by a landmark case brought by the state of California against Borders' online operation.