Back in July, I wrote Amazon/Overstock Gamble May Pay Off where I described how the two ersthwile competitors were teaming up to fight a new New York law which effectively required the internet giants to collect New York Sales tax.  As I mentioned in the article, New Yorkers have always been required to pay sales tax on their online purchases but few if any did. In a similar vein, people are supposed to pay income tax on the profits they make from selling their old junk at garage sales or on eBay. But again, few do.

What I failed to mention however, is that one has to keep in mind why brick and mortar stores charge sales tax. The money is used for services that benefit these stores such as maintaining roads, repairing electricity, trash collection, etc. Amazon, Overstock and other sites based outside of NY receive no such benefits. NY's "Amazon Tax" may be closing a loophole in the law or even leveling the playing field as some suggest, but I'm not convinced Amazon should be subsidizing the government services that Barnes & Noble receive in NY. And is it really leveling the field? There are advantages and disadvantages to buying an item online besides sales tax. A customer may save on the sales tax but at the same time, they may have to pay much more for shipping and/or endure lengthy ship times. And in the spirit of true competition, Barnes & Noble should not petition that Amazon be forced to charge sales tax as well (brick and mortar companies have been lobbying for this law for years) but rather should be forced to find creative ways at competing with Amazon on their own core strengths (price is one of Amazon's core strengths not theirs). For instance, one way Barnes and Noble successfully accomplished this has been by offering Manhattan customers same day delivery, something Amazon's business model could never offer.

Perhaps a solution would be to charge sales tax to all customers with the tax revenues going to the website's home state. For instance, Overstock is based in Utah, so it might make more sense for them to charge Utah sales tax on all sales which could be used to subsidize services within their own state, not New York. But of course that would involve a huge overhaul of our current tax laws and would do little to wet  New York State's appetite which estimates it could earn an additional $50 million in annual tax revenue from its new law.

Am I against a sales tax as some readers have asked? As a consumer, I of course prefer paying lower prices for items but as a U.S. citizen I appreciate the value that paying taxes offers to society. But those who posted the question are missing the point. The question isn't whether Amazon should be charging tax to New Yorkers, the question is whether New York's new law is technically illegal? And regardless, is it bad for New York? While I am no law expert, I think it is a stretch to claim affiliates qualify as a legal presence. And yes, I do think it can hurt NY businesses. First of all, if NY succeeds in keeping this tax on the books, other states are virtually guaranteed to pass similar laws of their own. Which means people may shun NY based internet companies, for those based in states that haven't passed such a law. Additionally, larger internet stores will likely follow Overstock's lead and shun them as well. Overstock may have been trying to send a message to Albany that the law will hurt NY businesses, but it was also a simple mathematical equation. As explained in their most recent earnings call transcript, they calculated that they would lose more business by charging sales tax to New Yorkers than they would by abandoning their NY affiliates. If NY actually fights the lawsuits and wins, I think we will be seeing Amazon employ the same math and if their calculation brings the same result, Amazon’s affiliates will be out the door as well.

Why haven't they done this yet? Amazon is very focused on customer service and my hunch has been that they believe NY will either back down or lose the lawsuit. If that happens, there will be no need to kick out their NY affiliates and will have generated tremendous goodwill by not having done so. Especially in light of Overstock's abandonment of theirs. Plus many of Overstock's 3,400 NY affiliates will likely join Amazon now that Overstock has closed its doors to them. When this all blows over, many of them will probably choose not to rejoin Overstock. So as much as I hate paying more at Amazon, I believe this was a wise strategic move for the company.

Many have requested an update. While a bill to repeal the law has passed the Senate by a wide margin (voting 6-24-08), it wasn't passed until the last day of New York's Session. The bill still needs to be approved by the Assembly to become law and that can't happen before the next Session which will not be until January, 2009.

Meanwhile, I’m afraid my article may have been overly optimistic. Even if the bill to repeal the tax passes the Assembly, according to Saul Hansell at the NY Times (bits.blogs.nytimes.com.../), it seems that Governor Paterson will likely veto it. So at the end of the day, those that want to see the Amazon tax repealed may have their hopes hinge on the outcome of Amazon and Overstock's lawsuits. And that could take a long time to resolve. It will also cost NY taxpayers a lot of money in lawyer's fees. Unfortunately, New York is very creative at finding ways to charge sales tax and if they lose the lawsuits, they'll likely find some other way to increase tax revenues. Anyone else remember when New York State sent agents to stake out New Jersey malls in 1992 to record NY license plate numbers? They were trying to crackdown on New Yorkers crossing the border to save on the lower taxes. It makes me wonder if New York would be more effective in increasing tax revenues by being competitive - for example and actually lowering the NY tax rate. Then maybe our neighboring states would be flocking to NY stores instead of the other way around.

I've also been informed by legal expertts, that regardless of what value Amazon and Overstock's legal teams believe the lawsuits have, they may be dismissed due to there being lilttle to no actual legal basis for the action.  Should Governor Paterson veto the bill and the Amazon/Overstock lawsuits fail, it is unclear how the companies will react.  Amazon has proved highly effective at adapting to changing needs and will likely be better at turning this ruling to their advantage.  For instance, as long as they need to charge sales tax, they could turn NY state into a distribution hub offering next day or even the very same day delivery service I recommended to Barnes & Noble.  This would fit in nicely to Amazon's comepttive edge in warehouse and shipping logistics.  If any company can weather this storm, it is Amazon.  I have less faith in Overstock and even Barnes & Noble in turning this possible outcome to its' advantage.

As for New Yorkers who have opposed this law... your only recourse may be to move to New Jersey.