The New York State Tax Nexus imposed for Online Merchants will cost web merchants sales due to higher costs passed to the consumer. eCommerce merchants already know buyers jump out of their carts at an alarming rate when they see shipping charges. The NY state online tax nexus may spur even more cart abandonment.

This must is Elliot Spitzer’s swan song. After making life difficult for many an online entrepreneur, his original out-of-state merchant’s tax law, which originally in November of 2007 was defeated, was passed in the NY state legislature this spring.

The law attempts to break new ground in challenging the Internet’s “grand experiment” that has enjoyed exclusion from taxation since eCommerce was coined in 1992 by the U.S. Supreme Court in Quill Corp. v. North Dakota. The federal exclusion from collecting sales tax is now being challenged.

The Internet was seen as a growth area for the US and Congress saw fit to pass exclusions for eCommerce to spur growth. It was also as a result of not having the technology at the time to properly collect and distribute sales tax collected online. There are more than 6,000 separate sales and local tax jurisdictions in the United States.

But now the time has come to pay the piper. New York is only the first in a long line of states that want to build their coffers from sales taxes imposed on any merchant that does business online. Cataloger’s have long dealt with nexus because their physical location of warehousing and corporate offices forces them to collect sales tax from customers who live in those states.

The NY law goes further to challenge what physical presence means in order to get circumvent the Federal exemption and collect the tax. This includes online affiliates. Notably, Amazon is challenging the law.

The NY State Online Sales Tax law is borderline unconstitutional and definitely murky enough to choke a catfish. Poorly worded as it is, and overstepping on federal legislators attempts to spur economic growth from online commerce, it is a wake up call to all advertisers. Like Europe’s VAT, which varies by country of origin of the buyer, states will eventually get their way.

The technology exists today to collect and distribute tax revenue from online sales. Recently the IRS put online merchant transaction processors such as Paypal and others on notice that they will be requesting their records to assess taxes on anyone, business or individual who made a transaction over the Internet.

As a consultant to many online merchants I advise that they get closer with their transaction processors to start collecting sales tax voluntarily. Why? Won’t it cost them sales? Yes. Will consumers look for competitors that do not collect sales tax? Yes they will. But there are a few steps that merchants can do to keep customers from bailing.

Merchants who collect sales tax voluntarily need to:

- Explain clearly WHY they are collecting the tax.

- Offer to reduce shipping costs on their first sale.

- Offer a coupon for their next purchase in the amount of the sales tax.

- Realize that a first sale is a gateway to a lifetime of sales from this customer.

Bottom line, it is a risk issue. If, like the NY Sales Tax Law wants, merchants could be held liable for ALL purchases made anytime, that includes PAST sales. Scoffing at this could cost a business all their marbles, since a state sales tax of 5% charged against all online sales could be more than most merchants could attempt to pay. Those who voluntarily adopt will most likely be treated with more leniency if this becomes reality.

The Streamlined Sales Tax is gaining strength, and most likely will provide a ready solution to the state sales tax. This organization is dedicated to providing a reasonable response that can be implemented easily by merchants both online and off. This organization advocates amnesty for merchants by the states that have adopted their agenda. “The amnesty is for uncollected or unpaid sales or use taxes for a seller who registers to pay or collect and remit applicable sales or use taxes on sales made to purchasers in the state.”

Online merchants will all eventually have to collect sales tax, just as European merchants have to collect VAT. Those who resist longest will have the most to lose, but each merchant will need to assess the risk associated with their decision. Lose a few customers now or lose a lot of revenue later to the IRS. The best merchants on and offline know that long term success comes through cultivating a lifetime of sales with your customers. After all, when you collect sales tax from a customer, it ultimately flows back into their state.