Venable’s John F. Cooney on vs. New York State Department of Taxation and Finance

For the past three years, and the state of New York have been sparring over whether marketing affiliates based in New York constitute nexus for the online retailer, thus requiring the collection, tracking and reporting of sales and usage tax for affiliate-driven online purchases.

New York enacted the statute in 2008, upon which filed suit. In January 2009, New York’s trial court found in favor of the state, moving the case to the appellate level; the Appellate Court has been reviewing the case since September 2009.

With the likelihood of a decision coming back from New York’s Appellate Court in the near future, Target Marketing talked to John F. Cooney, a partner in the Washington, D.C., office of law firm Venable LLC. Cooney wrote an amicus brief on behalf of the Performance Marketing Alliance, supporting the trade group’s assertion that the New York law is unconstitutional. Here, he explains the legislation’s impact on the practice of affiliate marketing, the larger movement in the states to enact similar laws and the anticipated path this battle will take.

Target Marketing: What are the main ramifications of the New York statute on marketers that use affiliates for advertising?
John Cooney: The New York statute would require entities that are using affiliates to collect New York state use tax for every sale they generate that is generated through a New York website, which would basically be defined as a website operated by a company that is organized under New York law or an entity that happens to have its website physically located in New York.

For the largest enterprises, such as, there may be tens of thousands or even in excess of a 100,000 people who are affiliates who operate websites that bear banner advertisements or clickthrough advertisements [for their products and services]. … So it’s an obligation to collect information about what may be a large number of entities and then determine how many sales were made through them and then set aside the money for the use tax and send it in to the state.

TM: And what are the ramifications for the affiliates?
JC: For the affiliates, they should be keeping information about sales they generate, collecting sales tax information for the people with whom they deal. So there will be implications both from sort of a sales tax collection and payment side and also on the corporate tax side, because they’ll be required to report their revenues to the state.

TM: How many other states have passed similar laws?
JC: The first one was the New York state tax statute. Then Rhode Island was second … it passed that end of June, very early July of 2009. In that situation, because Rhode Island was a small state, Overstock and Amazon simply cut off all their affiliates in Rhode Island. It’s a small state, so there probably were only several hundred, but probably less than a thousand people that were adversely affected.

Since then, I think North Carolina has passed a similar statute, and there are [bills] that are being considered at various levels of the states’ legislative processes this year. I think Connecticut is probably the state that’s closest to adopting a new one. But these bills have been considered by various committees in the state legislatures, typically as part of the budget process. And the budget is one of the last things to be resolved before the legislature adjourns. So there are a lot under consideration, and if new ones are going to pass, they’ll probably pass at the end of June, as most state legislatures tend to go out of session [then].