Back in February, I wrote a short piece on the subject of how was dealing with the State of New York’s efforts to force them to collect sales tax on products delivered to New York residents. It is, to be sure, one of the scariest prospects for small business I’ve ever seen.

Amazon’s response to New York’s overreaching taxation efforts was strong, and swift. They discontinued the accounts of all New York-based merchants. This effectively put a bunch of small businesses out of business, and while it doesn’t make me any more fond of Amazon’s business practices (see also this piece), it was the thing they needed to do under the circumstances.

Recently, a client asked me about his state government’s right to tax him if he did business with out-of-state entities. I put on my favorite “I’m not an attorney” hat, and then moved forward to say “they can’t”. But of course, that’s not a complete answer.

The highest taxing authority you answer to (your country) has the right to tax you any way it sees fit. If a lower authority taxes you in a way that conflicts with the higher taxing authority’s plans, it will generally not be successful . . . unless by “successful” you mean “they got your money before the laws caught up with them”. That’s what the State of New York and several others are doing now, and what Commission Junction is talking about here.

Let’s take this to its most ridiculous end. My client is in California, one of the states doing a grab. My company (a contractor to him, not an employee), is in Nevada, with ‘operating authority’ in New Jersey. Our phone number originates in New York. Under these circumstances, three other states could claim that my client is “in” their states and force him to collect sales tax on anything sold in there.

Even weirder: New York could try to force my company to collect sales tax on anything we sell to to NY residents simply because our phone number begins with 646—a “New York Area Code”. Oh, and by the way: that’s New York City, and they have their own tax, too!

Does your head hurt yet?

Especially in the current economic environment, I’m hoping that, or some other company with deep enough pockets to fight this fight, sues New York and the other states playing this game before business gets stifled. Outside of a US Supreme Court decision to the contrary—and one that I don’t expect to see—I believe they’ll win.

In the meantime, manage your change very carefully.

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