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New York Nexus: For Out-of-State Sellers, No News is Good News

author photo of Tom Mazurek

State legislatures across the country have been busy this year introducing new legislation intended to force out-of-state sellers to collect sales tax on remote sales made to residents of their states. According to Multistate Associates, “lawmakers in 31 states have introduced 80 sales and use tax compliance bills this year, and in the executive branch, five states have proposed five regulations” (click here for their full article). States are desperate to stop losing out on sales tax revenue from remote sales and have offered up numerous proposals to overcome the physical presence requirements set forth in Quill, as Congress fails to act and the Supreme Court seemingly waits for the right case to wind its way through the judicial system.

New York is no exception when it comes to identifying new ways to expand nexus and compel out-of-state sellers to collect their sales tax. In fact, the Empire State has typically been at the forefront of finding new avenues to take a bigger bite of the proverbial apple. In 2008, New York was the first state to enact what came to known as click-through nexus legislation, specifically targeting internet retailers. The so-called “Amazon tax” required internet retailers like Amazon and Overstock, who had no physical presence in New York, to register and collect sales tax when they entered into agreements with New York residents, who in exchange for a commission or other consideration, directly or indirectly referred customers to their prospective websites [TSB-M-08(3)S]. This legislation faced a number of state court challenges, but in the end was upheld, and became the blueprint for many other states to follow.

In 2009, New York returned with more new legislation, again aiming to expand the definition of a sales tax vendor. This time the State targeted out-of-state sellers who are “affiliates” of businesses in New York. The businesses are affiliated if one owns, directly or indirectly, more than five percent (5%) of the other or if more than 5% of each business is owned, directly or indirectly, by the same business or by an affiliated group of businesses. This affiliate nexus legislation also broadly expanded the types of activities other than solicitation that could require an out-of-state seller to register and collect sales tax if an in-state affiliate conducts these activities on their behalf [TSB-M-09(3)S]. Many other states have subsequently passed similar legislation related to in/out-of-state affiliates.

Just two years ago, New York became the first state to target marketplace providers, introducing new legislation in 2015, as part of their budget process. A “marketplace provider” is a business such as Amazon or eBay who facilitates a sale for a marketplace seller by collecting the purchase price from the customer and providing the physical or virtual forum where the transaction takes place or arranging for the exchange of information or messages between the customer and seller. This legislation simplifies the tax collection process and minimizes the number of sellers who need to register, by shifting the tax collection responsibility from the out-of-state marketplace seller (who is likely not registered to collect sales tax in New York) to the marketplace providers. Only marketplace providers with sufficient physical presence in New York would be required to collect tax and provide documentation to sellers indicating that they are collecting tax on their behalf. While this legislation was not enacted in 2015, New York introduced the concept to other states. Governor Cuomo took another run at marketplace providers in this year’s budget, however the legislation failed to be enacted again. Marketplace Provider legislation has been enacted in three other states in 2017 – Minnesota, Rhode Island and Washington – so I would plan to see New York revisit this type of nexus-expanding legislation again in the future, especially if additional states enact similar proposals.

As New York continues to aggressively pursue out-of-state sellers through legislative measures, there is always the possibility the Department of Taxation and Finance may issue new or revised regulations that again broaden the definition of a “sales tax vendor” or expand nexus beyond physical presence. This has been accomplished in other states with some success. New York has not pursued controversial economic nexus measures like Alabama or South Dakota nor has the State attempted to introduce notice and reporting requirements like those recently implemented in Colorado after their long legal battle with the Direct Marketing Association. This does not mean that New York may not turn to these measures in the future, especially if federal legislation regarding remote sales continues to flounder in Congress or the State feels it cannot continue to lose sales tax revenue due to untaxed sales.

Questions or Comments?

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Other recent “New York (NY)” posts by Tom Mazurek, CPA:

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Comments

4 Responses to New York Nexus: For Out-of-State Sellers, No News is Good News

  • Posted by Doug on December 8, 2017 1:31pm:

    Is a Canadian distributor of a product that uses a Buffalo warehouse to ship it's product within the USA for its US customers, subject to a nexus relationship when their inventory is stored and shipped from a New York warehouse ?

    • Posted by Author photo of Tom MazurekTom Mazurek on December 11, 2017 8:26pm:

      Thanks for your question Doug. it’s a question we get pretty often, given our proximity to the border.

      Tax Bulletin ST-190 addresses the issue of out-of-state sellers using unaffiliated fulfillment services providers located in the State to provide fulfillment services.

      A seller who is not otherwise required to register in NY may purchase fulfillment services from a NY fulfillment services provider who is not an affiliated person without being required to register in NY.

      A NY fulfillment services provider may provide one or more of the following services for a seller that is not an affiliated person and that is not otherwise required to be registered without causing that seller to have to register for NY sales tax purposes:

      • store the seller’s inventory on its premises;
      • accept orders electronically or by mail, telephone, fax, or Internet;
      • respond to consumer correspondence and inquiries electronically or by mail, telephone, fax, or Internet;
      • perform billing or collection activities; and
      • ship orders from an inventory of products offered for sale by the seller.

      In other words, the answer to your question is NO, you will not create nexus for sales tax purposes with NY if your only connection with the State is purchasing the above fulfillment services (including storage of inventory) from a third-party fulfillment center or warehouse. However, you should evaluate your connections with NY to determine if other business activities may require you to register in NY.

      For income/franchise tax purposes, the fulfillment services provider exemption was repealed as part of legislation passed in the 2014-15 budget, that establishes economic nexus for all companies with more than $1 million in sales, regardless of whether or not the company has physical presence in the State.

      Hope this answers your question, please contact me if you need additional assistance.

  • Posted by Author photo of Tom Mazurektommazurek on October 10, 2017 9:21am:

    You raise a good question Bob – how are states going to identify and administer sales tax compliance for all these out-of-state businesses they think should be filing in their states, when they have reduced headcount and are providing their tax authorities with less resources?

    I think in a lot of cases, you can argue that technology is the reason states are losing sales tax revenue, as a business can setup shop just about anywhere these days and be able to sell products and services across the country and even the world with minimal outlay. The internet has created this global market and sellers can use online marketplaces such as Amazon or eBay to sell their wares just about anywhere. Since a business still needs to have physical presence in a state before they are required to register and collect sales tax, millions of dollars of tax revenue are being lost every day to internet sales.

    I think technology can be also the answer for a lot of these states to identify businesses who are underreporting or not collecting/remitting sales tax. For example, every sales tax return filed in New York State is reviewed by their Case Identification and Selection System (CISS). The system can identify anomalies in filings based on industry and compare sales reported by businesses on their returns to information collected by banks and credit card companies to identify underreporting. This allows the NYSDTF to target businesses for audits more effectively, while allowing their auditors to work more efficiently since CISS has already identified there is a problem. In many instances these audits are desk audits being performed by auditors in Albany as opposed to field agents. The desk auditors can also take on a heavier case load since these audits are more targeted and conducted by correspondence not fieldwork. Utilizing technology will allow states to do more with less auditors, especially when their targets are remote sellers.

    As I discuss in my post, states like New York have been targeting remote sellers for years. You can argue that the states using click through nexus or affiliate nexus are stretching physical presence. However, if the remote seller uses Fulfillment by Amazon (FBA) and has their inventory in one of Amazon's warehouses in a state, I think you have a much more difficult argument about physical presence. I can see states auditing Amazon (especially now that they collect tax everywhere) and requesting the names/addresses/federal identification numbers of all the businesses who have inventory stored in their warehouses. Just last week, a Massachusetts judge ordered Amazon to provide this information to the MA DOR. Where does that leave Amazon - provide the information or challenge the court order? If this works in Massachusetts, I can see other states following suit, and it will not take too much work for these states to generate notices or send nexus questionnaires to the thousands of businesses they now know have inventory stored in their state. Just last month, I had clients email me letters they received from California, indicating that the CDTFA has information that their businesses use FBA, and they are required to register and collect sales tax if they have inventory in fulfillment warehouses in California. Plus, the technology Amazon employs to track sales and inventory for FBA sellers is very accurate and it is relatively easy to access and create detailed reports about where sales were shipped to, what warehouse the product shipped from and where your inventory is stored.

    I also agree with you Bob, that the states recognize that adding all these businesses to the tax rolls can be both a blessing and a curse in some ways. They can now collect all this purported additional sales tax revenue they have been telling us they are missing out on, but they will also have a significant increase in the number of taxpayers they have to administer. Most of these taxpayers will be small businesses who may not be collecting a whole lot of sales tax in their state, depending on the population. I don’t think these states will turn to third-party auditors, but will try to shift the compliance burden from the seller to the marketplace provider who is facilitating the sale in their state. Instead of dealing with thousands of these small remote sellers, the state collects their tax dollars from just Amazon or another one of these large marketplace providers who is likely already collecting tax in their state. We have seen Minnesota, Washington and Rhode Island enact this type of legislation in 2017 and I expect we will see more states enact similar legislation in the coming years, until this issue is resolved by the Supreme Court or Congress.

    Bottom line, if the tax dollars are out there, the states will find a way to collect them. It may take some time, some technology and enacting some new laws, but they will find a way…

    Thank you for your comments!
    Tom

  • Posted by Bob on October 9, 2017 1:56pm:

    Tom,
    I know that approx. 6-7 years ago, NY Dept of Tax had a MASSIVE reduction to audit/audit mgmt staff. Within the past 3-4 years OH closed their East Coast office & said "Bye Bye" to their staff @ that site. These are just 2 examples & there are more. So with the reduction to State audit staffs exactly HOW do these "aggressive" states plan on auditing/enforcing these laws that attempt to add ever more out-of-state vendors to these states tax roles?

    I do not believe that 3rd party audits are the option here as I recall seeing more than a few negative opinions given on accounting firms becoming involved with such audits.

    There is a saying about not wishing too hard for what you want because you just might end up getting states? AND THEN WHAT?

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