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New York's expansive new online sales-tax requirements are drawing mixed responses from major e-tailers that haven't previously collected such fees in the Empire State.

Despite a pending lawsuit challenging the law's constitutionality, Amazon.com has said on its Web site that it still plans to abide by the law and add sales tax to orders shipped to New York when the mandate kicks in June 1.

But online outlet store Overstock.com wants nothing to do with collecting the new tax, according to reports at the Affiliate Tip blog and The New York Times.

A few weeks ago, New York's governor signed a new law that requires any company that pays New York-based entities for "directly or indirectly referring customers" to its retail business to collect sales taxes from New York-based customers. It's an attempt to get around a 1992 U.S. Supreme Court decision in the Quill v. North Dakota case that says retailers aren't required to collect sales taxes from customers who live in states where the businesses don't have a physical presence.

New York's new law directly implicate Amazon, Overstock, and other companies that operate "affiliate" programs, which, in the e-tailers' cases, means they offer commissions to external Web site owners who link to their products and prompt sales. Amazon has hundreds of thousands of such affiliates, although in its court complaint against New York state, the company said it wasn't sure exactly how many were truly located in New York.

Overstock, for its part, is opting to cut off its 3,400 affiliates in New York, telling the Times that it couldn't afford to deal with collecting sales taxes in the state, although it, like Amazon, believes the new policy is unconstitutional. An e-mail from Overstock's affiliate program manager republished by the blog Affiliate Tip characterized the situation as "temporary."

Reportedly inspired by an ongoing legal skirmish in New York, tax officials in Texas are investigating whether Amazon.com should be collecting sales taxes from the Lone Star State's residents.

According to recent reports in the Dallas Morning News, the Texas Comptroller's office is currently looking into whether the Seattle-based e-tailer can be held responsible for paying as many as four years' worth--potentially millions of dollars--of back taxes. Some Texas officials said they weren't aware that Amazon had been operating a distribution center in Irving, Texas, since 2006, until receiving a call from a Morning News reporter last week.

Amazon, for its part, told the newspaper that the state is "fully aware" of its Texas operations and that the company is already in compliance with the state's tax laws. Amazon said state law doesn't require it to collect taxes on its Texas facility, which is operated by a subsidiary called Amazon.com.kydc, the Morning News reported.

But a spokesman for the Texas Comptroller's Office said it was nevertheless continuing a "thorough" investigation of the matter and wasn't sure how long it would take to complete.

It's just the latest chapter in the broader debate over sales taxes on Internet-based purchases. In 1992, the U.S. Supreme Court ruled in its landmark Quill v. North Dakota case that retailers aren't required to collect sales taxes from customers who live in states where the businesses don't have a physical presence, or "nexus."

So far, nothing has happened to change that decision, though Congress has considered taking steps in that direction, and some states are banding together in a strictly voluntary effort known as the Streamlined Sales Tax Project, which is designed to make tax collection easier for retailers.

Technically, Americans residing in states with sales taxes--Texas included--are already supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15 through a concept known as a "use tax."

State officials, however, argue that most Americans don't actually do so, potentially depriving them of millions of dollars in revenue, particularly as e-commerce sales continue to grow. The Dallas Morning News article said Texas officials estimated losing $541 million in uncollected sales taxes in 2006 to online commerce.

Earlier this month, Amazon sued New York state over a new law requiring sales tax collection by companies that pay New York-based entities for "directly or indirectly referring customers" to their businesses. That provision directly implicates Amazon "affiliates" through its "Associates Program," to whom it pays a commission for linking to products for sale on its Web site, and the Internet merchant argued that the law is "invalid, illegal, and unconstitutional."

According to its Web site, Amazon currently collects sales tax on items sold and shipped to the states of Kansas, Kentucky, North Dakota, and Washington. Some of its merchants, such as Target, collect taxes in other states as well.

As expected, Amazon.com is hitting back at New York over a new law requiring online retailers to collect sales taxes from customers residing in that state.

In a complaint filed on April 25, Amazon asked the New York State Supreme Court to declare the recently passed law "invalid, illegal, and unconstitutional." (Wired.com, which reported the lawsuit earlier this week, has posted a PDF of the document.)

New York has long required vendors to collect taxes from customers in its state if they "solicit business" there, according to Amazon's complaint. But a few weeks ago, the state passed a new law, as part of its state budget, that expanded the meaning of "solicit" to include any company that pays New York-based entities for "directly or indirectly referring customers" to its retail business, or risk "hefty civil and criminal penalties," Amazon wrote in its complaint.

That expanded definition clearly implicates Amazon, which says it has hundreds of thousands of independent Web site "affiliates" through its "Associates Program" to whom it pays a commission for linking to products for sale on its Web site.

Amazon in its complaint contended that the statute violates the equal protection clause of the U.S. and New York constitutions because it "intentionally targets" the company, noting that some state officials have even described the new policy as the "Amazon tax."

The Seattle-based e-tailer also argues that the statute is unconstitutional because it imposes tax-collection obligations on an out-of-state retailer without a "substantial" physical presence in New York. Amazon, for its part, said it "does not own, lease or otherwise occupy any physical property in the state, and none of its employees works or resides in the state."

A 1992 U.S. Supreme Court decision in the Quill v. North Dakota case currently limits states' ability to collect sales taxes from out-of-state retailers. It says retailers aren't required to collect sales taxes from customers who live in states where the businesses don't have a physical presence, or "nexus." New York's new statute represents one attempt at getting around those limitations.

Technically, of course, Americans in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15--a concept known as a "use tax." But state officials argue most Americans don't actually do so, potentially depriving them of millions of dollars in revenue, particularly as e-commerce sales continue to grow.

Amazon also argues that the new statue is "overly broad and vague." The company said it has "no way of knowing" whether affiliates who provide New York addresses are actually legal residents of New York--or whether their particular advertisements "qualif(y) as a direct or indirect solicitation on behalf of Amazon."

The litigation is hardly unexpected. Even Neal Osten, federal affairs counsel for the National Conference of State Legislatures, told CNET News.com recently that his lobby group for state politicians would actually discourage the somewhat unique approach taken by New York because it is "probably going to be litigated and will therefore cause delay" in collecting taxes. Other states are seeking to at least some recover sales taxes potentially lost to Internet purchases by signing up for an as-yet voluntary program known as the streamlined sales tax project.

Amazon's complaint instructs the New York State Department of Taxation to file its response with the court within the next few weeks. A department representative told The New York Times on Thursday that the state won't publicly comment on the lawsuit until that document is filed.

Americans gather at the base of the Capitol building in Washington, D.C., to protest the income tax and federal government overreaching. Rep. Ron Paul spoke at the rally earlier in the day.

(Credit: Declan McCullagh/News.com)

If tax-hungry politicians get their way, the days of ordering items over the Internet and not paying sales tax may become just a fond memory.

Right now, if a California resident orders something from Seattle-based Amazon.com, for instance, he or she won't be charged sales tax at the time of purchase. That's because Amazon doesn't have offices in the state of California.

Pro-tax politicians want to change this by allowing California to force Amazon to collect and submit sales taxes--and they may have found an ally in a U.S. Congress that's controlled by Democrats. (Note: See our related story on new taxes on digital downloads.)

Two bills are pending in Congress that would allow tax collectors to target out-of-state Internet and mail-order retailers, and their supporters are optimistic about their political prospects.

"I certainly would love to see a floor vote," said Neal Osten, federal affairs counsel for the National Conference of State Legislatures (NCSL), a lobby group for state politicians. "We've heard encouraging words from the Democratic leadership in the House."

Meanwhile, pro-tax states are trying their own ways to circumvent a long-standing rule saying a retailer must have physical presence before it can be forced to collect taxes. One effort came from New York state, where legislators recently approved a measure requiring Amazon and other online retailers (that lack a physical presence in the state) to collect sales tax on New Yorkers' purchases.

That amounts to a declaration of war against Amazon, and a legal battle now seems all but inevitable.

This is not exactly a new debate. For years, politicians in state legislatures and the U.S. Congress have been arguing that the rise of e-commerce is causing them to miss out on potentially millions of taxpayer dollars. But now, with a Democratic Congress and a potentially Democratic administration next year, the arguments may gain more political traction.

Technically, of course, Americans in states with sales taxes are supposed to keep track of out-of-state purchases and cough up the necessary sales tax on April 15--the concept is known as a "use tax". But state tax collectors have long complained that in practice, that just doesn't happen, and that money has been unfairly left in taxpayers' pocketbooks.

Verenda Smith, government affairs associate for the Federation of Tax Administrators, framed the decision as a moral one of sorts: "Do you want to be a good American, or do you want to be an American who wants to cheat your government deliberately? It's a harsh way to look at it, but it's true."

Smith said she's also concerned that there's not a level playing field, which is potentially giving online retailers an advantage over their brick-and-mortar counterparts.

It's not exactly clear how much money states are losing to uncollected use taxes. Some politicians have thrown around claims in the past that state and local governments will have lost nearly half a trillion dollars in uncollected sales taxes by 2011.

More generally, total e-commerce sales were estimated at $136.4 billion in 2007, up about 19 percent from the year before, according to the latest U.S. Census statistics. That figure still accounted for only about 3.4 percent of total 2007 retail sales in the United States, however, as opposed to about 2.9 percent in 2006.

'Tyranny Response Team' clothing was popular among rally attendees. Speakers at the rally challenged the U.S. government to show them what section of federal law requires regular Americans to pay income taxes. Here's what the IRS has to say.

(Credit: Declan McCullagh/News.com)

The legal limits of sales-tax collection
States are currently limited in their sales tax collection authority because of a 1992 U.S. Supreme Court decision in the Quill v. North Dakota case. It says retailers aren't required to collect sales taxes from customers who live in states where they don't have a physical presence, or "nexus." The justices did, however, make it clear that Congress could step in and change the rules.

The ruling came out the way it did in part because tax codes tend to be quite complex and vary among states and localities, with bewilderingly different tax rates associated with the same kind of product. In response, some states have tried to smooth out their differences.

Over the past five years, 22 states have signed on, either wholly or partially, to a plan known as the Streamlined Sales Tax and Use Agreement, in which they agree to simplify their tax codes and make them uniform. About 20 more states are still considering whether to participate.

Steve Del Bianco, executive director of the NetChoice Coalition, whose members include eBay and Yahoo, said he doesn't think the plan has really simplified matters for retailers, nor has it produced the effects states were seeking.

"Fiscally strapped states thought that (the streamlined sales tax project) would bring a flood of new tax revenue, but they're seeing just a trickle, and that's coming from sellers who should have already been collecting under the old tax laws," he said.

That may be in part because adopting the streamlined sales tax system is voluntary to begin with. Participating states don't have the authority to require any retailers to collect those taxes from their residents, although if companies sign up to collect sales taxes under the regime, they must agree to do so in all participating states. (Some 1,000 companies have signed up so far, resulting in at least $150 million in newly collected taxes since the venture began, said NCSL's Osten.)

The push in Congress
Two bills introduced last spring in Congress, however, would change that. The Senate version is sponsored by Republican Michael Enzi of Wyoming and Democrat Daniel Inouye of Hawaii, and the House of Representatives version was introduced by Democrat Bill Delahunt of Massachusetts and is co-sponsored by Rep. John Conyers, chairman of the influential House Judiciary Committee.

In the past, similar proposals have stalled in part because of a disagreement over a section that attempts to exempt "small businesses" from the new tax-collection burden. Both pending bills stipulate that sellers who bring in less than $5 million in taxable sales per year don't have to collect taxes from their customers. eBay, for one, has argued that exemption is too high and could cause new administrative headaches for even small-time sellers.

The relevant congressional committees have already held hearings on the issue, with the latest one occurring last December in a House Judiciary subcommittee. The NCSL's Osten said he feels good about how that hearing went.

Elly Pickett, an Enzi spokeswoman, said the Wyoming Republican "continues work to secure additional co-sponsors and is hopeful it will be considered this year."

Aides to the committees controlling the bills' movement were less forthcoming about what happens next. An aide to Sen. Max Baucus, the Democratic chairman of the Senate Finance Committee, said the committee was aware of Enzi's bill but hasn't scheduled debate on it yet. House Judiciary Committee aides did not respond to requests for comment.

As for New York's recent move, it aims to circumvent the tax-collection restrictions that differ from the more common streamlined sales tax project. Instead, the state determined that any online retailer with "affiliates" located in its state would be required to collect sales taxes from purchases by New York-based customers.

Amazon, for example, has thousands of "affiliates" to whom it pays a commission for linking to products for sale on its Web site. Presumably some of them are located in New York, which would mean, under the state's interpretation, that it would have to collect sales tax from its residents. (Amazon.com did not respond to News.com's requests for comment on the New York law but has previously said it's still reviewing the language.)

Other states, including California, have considered such steps, but Osten said his group would actually discourage that method if they're really interested in increasing their tax revenues. "I think this option is one that is probably gong to be litigated and will therefore cause delay," he said.

News.com's Declan McCullagh contributed to this report.

A Massachusetts Democrat said Tuesday that he plans to revive an earlier effort to force broader sales tax collection by Internet retailers.

At a hearing focused on what to do about a soon-to-expire ban on Internet access taxes, Rep. Bill Delahunt (D-Mass.) said he remains concerned that states are being deprived of billions of dollars in would-be sales tax revenue because of the massive growth of e-commerce over the years.

"I will be filing legislation come July that hopefully will deal with the issue," he said.

At the moment, if you order something from a company that's located entirely out of state, you're typically not charged sales tax, although technically, most states require you to pay up in the form of a "use tax."

But in recent years, there has been a push by some members of Congress to change that.

An aide wasn't immediately able to provide details on what shape Delahunt's legislation will take. He was among the sponsors of a 2003 proposal designed to get more companies to collect sales taxes from customers in states where they don't have a physical presence.