Taxable Talk

Governor Eliot Spitzer (D-NY) is leading the way. But it’s a taxing way. The New York Department of Taxation and Finance says that any company that has an affiliate program that has any affiliates in New York must charge sales tax on sales shipped to New York.

Currently, companies must charge sales tax when a business has a “nexus” in the state. That’s usually caused by having a physical presence (an office) or employees in that state. Amazon.com doesn’t have an office or employees in New York. Thus, they haven’t charged New Yorkers sales tax.

However, New York now says that having an affiliate in the state is enough to give a company a nexus in New York. This is an interesting theory, but it could run into difficulties. Glenn Reynolds, the Instanpundit, thinks it wouldn’t stand up in court.

In any case, Governor Spitzer is looking at a $4 billion deficit for next year and has pledged not to increase taxes. The Department of Taxation and Finance calls this a policy clarification. I hope they have a big budget for legal fees as that’s likely where this is headed.

Suppose you work as a telecommuter in one state, but your corporate headquarters is in another state. To which state must you pay state income taxes? The obvious answer is the state you live in. Of course, if you visit your corporate headquarters, you will owe state taxes to that state based on the number of days you are at the corporate headquarters.

However, in a case decided earlier this year, the New York Court of Appeals (the highest state court in New York) ruled that a telecommuter who works outside of New York State but works for a New York based company must pay New York state income taxes. The 4-3 decision in Huckaby v. New York State Division of Tax Appeals may have aided New York’s coffers, but it certainly made New York less attractive to corporations that encourage telecommuting. New York has a rule that allows the state to tax out-of-state employees if they work out of state “for the convenience of the employer.” Luckily, California doesn’t have that rule—yet.

The Supreme Court yesterday refused to review the case. This means that if you work for a New York based employer but telecommute, you owe New York state income tax.