New York State recently enacted legislation that has implications for Affiliate marketing. To review this new law in its entirety click here. Amazon.com and Overstock.com have both filed law suits to challenge the legality of this new tax law. Please read the examples below and our recommended additions to your program terms. We believe this is the best course of action for merchants to take while this new law plays out in the courts.

Here are what we believe to be the key components for review, and the scenario that will allow merchants to rebut any presumption that it is soliciting sales in New York State through resident representatives as defined in this tax document.

The following is a scenario from the TSB-M-08(3)S memorandum where a merchant would be presumed to owe state tax to the State of New York:

Example 2:
XYZ Company (XYZ) is an Internet-based retailer of sporting goods specializing in downhill skiing equipment. XYZ is located in Vermont, where it has its administrative offices and its warehouse, which holds its inventory for sale. XYZ makes sales of its merchandise throughout the United States and has customers in New York State. The merchandise sold by XYZ is delivered by the U.S. Postal Service or by common carrier.
As part of its marketing plan, XYZ has entered into agreements with several ski clubs located in New York State whereby the ski clubs will maintain links to XYZ’s retail Web site on the clubs’ own Web sites. XYZ will pay a commission to the ski clubs based on the sales that XYZ makes that originate from these links.
From March 1, 2007, to February 29, 2008 (i.e., the preceding four quarterly sales tax periods), XYZ has gross receipts from sales of its merchandise based on these agreements with the New York State ski clubs totaling $78,390. Based on the foregoing, XYZ is presumed to be making taxable sales in New York State by soliciting business in New York State through the use of independent contractors or other representatives and required to be registered as a sales tax vendor, collect New York State and local sales taxes, and file the required sales tax returns.

The following is the clause that would allow merchants to rebut any presumption that it owes New York State sales tax:

Presumption that solicitation takes place may be rebutted

A seller may rebut the presumption that it is soliciting sales in New York State through resident representatives. For purposes of administering the new presumption, the Tax Department will deem the presumption rebutted where the seller is able to establish that the only activity of its resident representatives in New York State on behalf of the seller is a link provided on the representatives’ Web sites to the seller’s Web site and none of the resident representatives engage in any solicitation activity in the state targeted at potential New York State customers on behalf of the seller.

Example 6:
This example also assumes the same facts as in Example 2 on page 3 of this memorandum. However, none of the ski clubs refer potential customers to XYZ through the use of flyers, newsletters, telephone calls or e-mails to club members or any other means of solicitation in the state targeted at potential New York State customers on behalf of XYZ. Therefore, XYZ may successfully rebut the presumption that it is making taxable sales in New York State through New York State resident representatives and XYZ is not required to register for sales tax purposes.

To prevent falling into the scenario of Example 2 we propose adding the following terms to your Merchant program terms:

“New York State Affiliates may not solicit New York State residents by using flyers, newsletters, telephone calls, e-mails, PPC ads, or any other type of Internet marketing techniques besides web site advertising links.”

Please contact us to have these terms added to your account. We would also recommend notifying all of your New York Affiliates of the terms changes so that they can bring their ad campaigns into compliance right away.

UPDATE (July 3, 2008): Note that New York State is now requiring an additional step. See Additional Information on How Sellers May Rebut the New Presumption Applicable to the Definition of Sales Tax Vendor as Described in TSB-M-08(3)S for more information. As per the above linked memo, once New York State releases the suggested compliance document we will add terms that require NY-based Affiliates submit that document annually for each of their merchants.

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