Reversal of Fortune: Spitzer Backtracks on Enforcing Existing Sales Tax Laws

Posted Thursday, Nov 15, 2007

Today, ABA CEO Avin Mark Domnitz sent a letter to New York State Governor Eliot Spitzer on behalf of New York-based independent booksellers that decries the governor's decision to drop a plan to enforce existing sales tax laws.

In what was a stunning reversal, Governor Spitzer did an about-face on his previous decision to enforce existing state laws requiring out-of-state online retailers with nexus in the state to collect sales tax. With Internet shopping expected to grow by 18.5 percent, according to research firm eMarketer, the turnaround is sure to prompt many New York shoppers, enticed by tax-free shopping, to ship their shopping dollars out-of-state for the holidays -- at the expense of New York-based retailers.

In his letter to Governor Spitzer, Domnitz stressed: "We were surprised and disappointed to read of your recent decision to abandon plans to equitably enforce existing tax laws by requiring out-of-state retailers with nexus in the state to collect sales tax. We believe you had it right the first time: The November 9 memorandum from the New York State Department of Taxation and Finance made clear that online retailers with affiliates in New York are required to collect and submit sales tax. This is clearly existing state law -- not a new tax of any kind -- and we urge you to rethink your position and enforce the law."

Earlier in the week, the New York State Department of Taxation and Finance issued a memorandum stating that, under a clarification of existing tax policy, online retailers that have any affiliates in New York State would be required to collect sales tax on all items sold to consumers in New York. As such, retailers such as Amazon.com would have been required to register and begin collecting sales tax as of December 7, 2007, to avoid being assessed any prior sales tax due, civil or criminal penalties, or interest for failure to collect and submit any prior sales tax due. NYS Department of Taxation and Finance spokesman Tom Bergin said the clarification could have resulted in a windfall of about $100 million in previously uncollected sales tax revenue.

On Wednesday, November 14, just days after the Department of Taxation and Finance memorandum was issued, the New York Sun issued a scathing editorial bashing the move and the Direct Marketing Association also came out against the move.

The same day, Paul Francis, the state budget director, issued a statement that said: "Governor Spitzer believes that now is not the right time to be increasing sales taxes on New Yorkers. He has directed the Department of Tax and Finance to pull back its interpretation that would require some Internet retailers that do not collect sales tax to do so."

In his letter, Domnitz urged Governor Spitzer to rethink his decision -- again. He pointed out that, "When large out-of-state online retailers like Amazon.com -- that clearly have nexus in the state through their many New York-based affiliations -- skirt tax laws, New York-based businesses will lose sales as shoppers inevitably take advantage of tax-free shopping. In the end, New York's citizens are also losers, as potential tax revenue from both sources is uncollected -- monies that fund such essential services as schools and first responders." --David Grogan

Governor Eliot Spitzer
Office of the Governor
State Capitol
Albany, NY12224

Dear Governor Spitzer:

We were surprised and disappointed to read of your recent decision to abandon plans to equitably enforce existing tax laws by requiring out-of-state retailers with nexus in the state to collect sales tax. We believe you had it right the first time: The November 9 memorandum from the New York State Department of Taxation and Finance made clear that online retailers with affiliates in New York are required to collect and submit sales tax. This is clearly existing state law -- not a new tax of any kind -- and we urge you to rethink your position and enforce the law.

We are writing on behalf of the many booksellers in your state who are faced with an egregiously unfair business loophole -- one that continues to penalize New York State's independent businesses' e-commerce initiatives. ABA has long been concerned about many states' uneven enforcement of sales tax collection.

Locally owned independent businesses are the backbone of New York's economy. Every analysis points to the fact that locally owned businesses -- particularly retailers -- have far greater economic impact on their community; contribute more to local charities; and are largely responsible for our villages, towns, and cities retaining their unique characteristics. To undercut them by selectively deciding what laws to enforce and which laws to ignore is simply outrageous.

Importantly, we are in no way discussing any new "Internet taxes." We are simply urging you to untie the hands of your state taxing authorities and to allow them to enforce the tax laws already in place. Online retailers that have an indisputable presence in your state -- whether it's through a sales rep, a bricks-and-mortar store, or an affiliate relationship -- are no different than any other business within New York.

In contrast to the challenges that bricks-and-mortar retailers are grappling with this holiday season (including escalating gas prices and a weakening economy), a report recently predicted that online holiday sales will increase by some 18.5 percent this season for online retailers. In the report, Jeffrey Grau, a senior analyst for eMarketer, an online market research company, noted that this is "far superior to the low single-digit growth rate forecast for the overall retail industry this holiday season."

In such a retail climate, when such large out-of-state online retailers as Amazon.com -- that clearly have nexus in the state through their many New York-based affiliations -- skirt tax laws, New York-based businesses will lose sales as shoppers inevitably take advantage of tax-free shopping. In the end, New York's citizens are also losers, as potential tax revenue from both sources is uncollected -- monies that fund such essential services as schools and first responders.

Over the past few years, the problem has only grown worse, as more e-commerce companies that fail to collect sales tax compete unfairly, driving more consumers online because of an unfair playing field. The independent booksellers in New York are not asking for special treatment. However, they are looking for their state government to enforce the laws uniformly and fairly.

After this year's holiday season, we would welcome an opportunity to meet with you to discuss this situation in greater detail.

Thank you for your consideration.

Sincerely,

Avin Mark Domnitz
Chief Executive Officer
American Booksellers Association
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