Wednesday, October 6, 2010

New York’s “Other Affiliate” Nexus Law

By now, many of our readers may be aware of the New York “Affiliate” Nexus law, which provides for a presumption of nexus under certain circumstances; i.e. where a remote seller uses a New York resident (an “affiliate”) to link to its website and pays commissions of more than $10,000 per year to such New York affiliate as a result of sales the affiliates facilitate. See N.Y. Tax Law § 1101(b)(8)(k); and v. New York State Department of Taxation and Finance, 23 Misc. 3d 418, 82 N.Y. S.2d 842 (2009) (on appeal to the New York Court of Appeals).

In 2009, the New York Assembly enacted another law to address a second kind of “affiliate.” This time, the definition of affiliate is based upon the more common usage of the term in which the affiliate is related to the out-of-state company by an ownership interest. The law is found in Tax Law §1101(b)(8)(i)(1). In particular, the statute, when enacted, provided two separate “conditions” or situations for establishing that a remote seller is deemed a vendor required to collect sales and use tax based upon the activities of the seller’s New York affiliate. In the first condition, the out-of-state seller is deemed a vendor required to collect sales and use tax if any person or entity owns, directly or indirectly, more than 5% of the retailer, and a New York sales tax vendor uses a trademark, service mark or trade name in New York that is the same as that used in New York by the remote seller. This condition is designed to address multi-channel vendors, and is similar to statutes adopted in other states.

In the second situation, the person or entity must own directly or indirectly at least 50% of the equity of the remote seller and a company with nexus in New York (the New York affiliate). If the New York affiliate engages in activity in New York that benefits the remote seller in its development or maintenance of a market for its goods or services in New York, to the extent that those activities are sufficient to satisfy the nexus requirement of the U.S. Constitution, then the out-of-state seller is deemed a vendor required to collect the New York sales tax. TSB-M-09(3)(s) outlines the kind of activities that relate to the development or maintenance of a market for the remote seller’s products, They include the affiliate: referring New York customers to the remote seller; accepting merchandise returns on behalf of the remote seller’s customers; distributing catalogs on behalf of the remote seller; and accepting orders on behalf of the out-of-state company.

Recently, the Assembly adopted a law, Chapter 57 of the Laws of 2010, that amended the 2009 law on affiliates, to narrow the definition of companies that are deemed sales tax vendors. Specifically, the 2010 statute provides that if the in-state New York affiliate only provides accounting or legal services or advice, or directs the activities of the remote seller insofar as making decisions about strategic planning, marketing, inventory, staffing, distribution or cash management, the remote seller will not be deemed a vendor required to collect sales and use tax. TSB-M-10(12)(S), issued on August 19, 2010, provides an informational statement about the Department of Taxation and Finance’s views on the 2010 law.

Under the 2010 clarification, therefore, if a New York-based holding company of a direct marketer with facilities located outside of New York were to provide traditional administrative and management services to the remote seller, the remote seller would not be deemed to have nexus under New York law. This, of course, is a significant, favorable clarification for New York-based enterprises that wish to own and control remote sellers located outside of New York without creating nexus in New York.

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