Those famous lyrics from “New York, New York” just might have to be changed, at least for online retailers.
“Start spreading the news
I'm leaving today
I [don’t] want to be a part of it, New York, New York
These vagabond shoes
Are longing to stray
And make a brand new start of it
[anywhere but] New York, New York”
A new law from the state of New York thumbs its nose at the Supreme Court’s Quill decision, which held that for a state to require sales tax collections from a retailer that retailer must have some physical connection with the state.
In a frenzy to tax anything that could fill a hole caused by overspending, New York overrode the Supreme Court’s legal standard with an act of legislative imagination: Its new online sales tax law is widely interpreted to mean that having an advertising or marketing presence in New York is enough to trigger tax collection. To impose mandatory sales tax collection requirements on vendors for Internet purchases is not only bad for business and the state’s economy, but also flies in the face of Supreme Court standards.
In “New York: Double Dealing on Retail Taxes,” IPI senior fellow George Pieler says the law to collect out-of-state sales tax from online merchants selling goods to New York-based consumers is a “simple Ponzi scheme being played on taxpayers,” and the Internet should not be used as a new way to force the collection of sales taxes.
Furthermore, the Empire State risks driving away more businesses, both large and small, which fear getting caught in the tax squeeze. If forced to become out-of-state tax collectors, small start-up businesses—“the very genius of Internet commerce”—could be chased out of the state. But the damage goes even beyond the small operations.
New York has already seen large companies ceasing to do business within the state, such as in the case of Overstock.com terminating its affiliations with any New York-based companies. As a result, New York companies have lost valuable business, and the state has lost valuable revenues.
Chasing after every last dollar of theoretically collectible tax always costs more revenue than it gains. If this kind of tax-raising competition gains steam, there won’t be any extra tax dollars—just less economic growth, and then even less tax collected.
Is 2008 really the year to pursue that particular policy line?