Gov. Andrew Cuomo wants to change the way sales tax is collected over internet transactions, and this may be the year that he can finally get it done.
In his executive budget for fiscal year 2020, Cuomo included a proposal to eliminate the internet tax advantage – a loophole that exempts internet third-party marketplace providers like Amazon from collecting and remitting New York sales tax on some transactions conducted over their sites.
This isn’t the first time a Cuomo budget has included a “marketplace provider tax” – sometimes referred to as an internet sales tax – but in past years the measure has failed to overcome resistance from both the internet industry and Republicans in the state Legislature. But new circumstances – including a Democratic-controlled state Legislature and a recent U.S. Supreme Court ruling on internet sales tax – could add momentum to the move to establish a new framework for internet sales tax collection in New York. Here’s how it would work.
What is a marketplace provider tax?
A marketplace provider tax, as proposed in Cuomo’s budget, would require third-party retail sites – like Amazon, eBay and Etsy – to collect and remit sales taxes when a buyer in New York purchases something from a retailer on their site. The measure would make marketplace providers collect New York state sales tax at its normal rate of 4 percent plus local sales tax, which varies based on location – such as 4.5 percent for New York City, or 4 percent for some upstate counties.
In his budget, Cuomo refers to the growing competition that brick-and-mortar businesses face from online retailers – which, in many cases, are not simply online stores but third-party platforms like Amazon that facilitate transactions between buyers and sellers. The marketplace provider tax targets sales on those platforms that aren’t already subject to New York sales tax collection.
Doesn’t New York already collect sales tax on internet transactions?
Any online retailer that has a physical presence or “nexus” in New York – brick-and-mortar property or in-state employees, usually – is already required to collect and remit New York state and local sales taxes. In 2008, New York set a precedent in passing what is referred to as the “Amazon law,” which amends the state’s tax code to expand the definition of “nexus” to include independent in-state websites, or affiliates, used by out-of-state retailers to promote sales. These affiliates work with out-of-state retailers to place links to the out-of-state website on their own website to then receive a commission when a buyer follows their link and makes a purchase with the out-of-state retailer.
Last June, however, a U.S. Supreme Court ruling took internet sales taxes even further. In South Dakota v. Wayfair, the Supreme Court determined that states may collect taxes on internet sales even when the purchases are made from out-of-state retailers. New York issued a notice last month that the state tax laws would now reflect the new standard set by the Supreme Court ruling. Now, businesses are responsible for collecting and remitting sales taxes for online transactions even if they don’t have an in-state presence – but only if the business has made more than $300,000 in sales of tangible personal property and 100 sales of tangible personal property delivered in the state in the past four sales tax quarters. In other words, a fledgling mom-and-pop retail website that makes only $50,000 a year in sales in New York wouldn’t be required to collect sales tax on its transactions.
How would revenue from the marketplace provider tax be used?
In his budget proposal, Cuomo says eliminating the internet tax advantage – and establishing this new framework to collect from marketplace providers – would result in an additional $390 million annually for local governments.
In his 30-day budget amendments released last week, however, the governor proposed that revenue from internet sales taxes be used for a more specific purpose. When Cuomo first released his executive budget in January, it included cuts to Aid and Incentives for Municipalities funding to towns and villages totaling roughly $59 million. But after facing backlash from towns and villages who rely on state AIM funding, Cuomo proposed using revenue from internet sales tax collection to make up for those cuts. The amendments also propose moving up the start date for collecting new taxes from Sept. 1 to June 1.
Who is against the marketplace provider tax?
In past years, tax-averse Republicans in the state Legislature have stopped any movement on marketplace provider taxes included in the governor’s budget. And though Republicans no longer have control of the state Senate – and therefore lack the power to really block the proposal – they still maintain their opposition to tax increases in general. Senate Republicans have asked that the governor restore AIM funding, but forcing New Yorkers to pay sales tax on more internet transactions is not how they think it should be done, Senate GOP spokesman Scott Reif said.
Republicans in the Legislature aren’t the only ones who oppose using internet sales tax revenue to make up for AIM cuts, however. When the governor announced this new plan in his 30-day amendments, various local Republican officials – along with the New York Conference of Mayors and Municipal Officials, or NYCOM, and the New York Association of Towns – criticized the solution as just creating another tax burden for New Yorkers.
“While we appreciate the fact that the Governor has acknowledged that the elimination of AIM funding would have serious implications for the State's villages and towns, his ‘restoration’ of this $59 million is in reality a robbing of one property taxpayer to pay another,” the letter from NYCOM read. “Rather than playing this shell game, New York State should be fulfilling its obligation to increase its investment in municipal aid and the property tax relief it will generate. Imposing a new mandate on counties to make up for the state's cut to villages and towns will only further harm New York’s already overburdened taxpayers.”
And then there are the internet companies who will carry the burden of ensuring taxes are properly collected. When a marketplace provider tax was proposed in 2017, companies including eBay launched an opposition campaign asking its New York customers to protest the measure.
This time around, some opposition from the industry remains. “Governor Cuomo’s internet tax proposal shows that he misunderstands who will pay his new tax – any taxes collected by Internet businesses will come from the pockets of New Yorkers who already bear the highest tax burden in the nation,” Steve DelBianco, president of NetChoice, an eCommerce trade association, said in an email.
Who is in favor of it?
With the recent Supreme Court ruling, some connected to tech industry interests have acknowledged that a marketplace provider tax is likely to be coming down the pike and have refocused their efforts on shaping the legislation to minimize the cost on internet companies. “After the Supreme Court ruling over the summer, there were fewer questions around the constitutionality of this,” said Zachary Hecht, policy director at the tech network Tech:NYC. “It seemed a bit more inevitable than in previous years when the tax was wholesale opposed by groups like Tech:NYC.”
Hecht wants to see more protections for marketplace providers to ensure that they don’t solely bear the burden of collection and remittance. What the current proposal is also missing, he says, is a protection against class-action suits against providers if they have over-collected. Still, he sees the marketplace provider tax as likely to pass, not only because of the Supreme Court ruling, but because of the Democratic-controlled state Legislature.
Democratic officials, including Nassau County Executive Laura Curran and Suffolk County Executive Steve Bellone, backed Cuomo’s proposal last year. Representatives from the Senate Democrats did not respond to requests for comment.
Is it likely to pass this year?
Given the host of other legislation passed by a Legislature no longer hampered by two-party rule, the outlook for advancing the marketplace provider tax is certainly better this year than it has been in the past.
But what might be just as influential is the Supreme Court ruling last June. More than a dozen states now have some version of a marketplace provider tax, several of them enacted since the Supreme Court ruling. “It created more constitutional grounds for the marketplace provider tax,” Hecht said. “Basically, we think that it's an inevitability, so to speak, because of the Supreme Court decision.”
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