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More states are joining New York in efforts to tax web sales by affiliates. Hawaii has joined California, Connecticut, Minnesota and Tennessee in introducing state legislation that, like a New York state law enacted last year, requires Amazon.com Inc. and other online retailers to process sales tax on orders received through many affiliate websites.

For the most part, the new state bills follow the wording of New York's precedent setting law, which requires Amazon and other online retailers without a physical presence in New York state to collect and remit sales tax on orders received through affiliate websites based in the state, said Daniel Schibley, a tax analyst at CCH Inc., a unit of Wolters Kluwer that publishes tax and legal information. The New York law exempts online retailers doing less than $10,000 a year through New York based affiliate websites. Affiliate websites host links to online merchants' websites and receive commissions on purchases stemming from consumers clicking on those links. For example, a New York based ski club might host a link to the ski selection on Amazon.com, and collect a small fee from each purchase.

Amazon and Overstock.com Inc. each contested New York's law in court, contending that their connections with thousands of New York based affiliate websites don't tie them to any in-state physical facilities. But the New York State Supreme Court dismissed their arguments in January. Amazon and Overstock have each said they will appeal the court's decision. Hawaii and Massachusetts have also introduced legislation that would require all online and catalog retailers to collect sales tax on internet orders received from their state residents, regardless of whether the retailers maintain a physical presence in those states, Schibley noted.

The U.S. Supreme Court has ruled that Internet and catalog retailers are required to collect and remit sales tax only if they maintain a physical presence in a customer's state. If Hawaii and Massachusetts enact their legislation, they would join 19 other states that have become members of the Streamlined Sales Tax Project (SSTP), through which participating states work to simplify their tax laws, in an effort to make it easier for Internet and catalog retailers to process sales tax. State lawmakers in Texas have also been considering similar legislation, Schibley said.

The ultimate goal of the states participating in the SSTP is to win support in the U.S. Congress for a new federal law that would require all internet and catalog merchants to collect sales tax on all orders, regardless of whether they have a physical presence in a customer's state.

Although efforts to introduce and pass such a federal sales tax law have failed several times in the past, new federal legislation is becoming more likely with the current Democratic Congress and pressure on the federal government to help financially struggling states, Schibley said. "I'm sure new legislation will be introduced this year, and chances of it passing have improved," he said. "This is a way for the federal government to help states with new revenue, without having to give them any federal money."

Article ID: 1038