Overstock.com said on Friday it has filed a lawsuit challenging New York's new tax law that requires Internet retailers with affiliates residing in New York to collect New York sales tax. The state claims those affiliates count as a physical presence.

Overstock.com stated in a press release it is based only in Utah, has no operations in New York, and sells exclusively through the Internet. "The controversial new law attempts to redefine the relationship that internet retailers have with their New York-based advertising affiliates by requiring that when those affiliates solicit customers, the internet retailers collect and pay sales and use tax from all their New York customers."

Overstock.com said it filed the complaint in the New York Supreme Court and calls upon the court to issue an injunction and to declare the law unconstitutional. It names as defendants in the suit the New York State Department of Taxation and Finance, and Tax Commissioner Robert L Menga and Governor Paterson in their official capacities as state officers.

New York Tax Law § 1101(b)(8)(vi), enacted on April 9, 2008, requires affected businesses to register and start paying taxes by June 1st. State officials have projected the law would generate $50 million in the current fiscal year. The law affects companies that do more than $10,000 worth of business in the state.

Amazon.com sued the state in April (http://www.auctionbytes.com/cab/abn/y08/m05/i02/s01). But the two companies have taken different approaches to sales tax collection. Amazon.com is complying with the law by collecting sales tax from New York shoppers, while Overstock.com terminated its relationship with its New York-based affiliates so it would not have to collect the tax. On May 15, 2008, Overstock.com notified more than 3,400 New York-based affiliate advertisers that as of June 1, 2008, they could no longer provide advertising for Overstock.com owing to the application of the law.

A help page about sales tax on Amazon.com now includes the following paragraph:

"Effective June 1, 2008, Amazon.com LLC will begin collecting sales tax on items shipped to destinations within the State of New York as New York has enacted a new law requiring out-of-state sellers to collect and remit sales tax based on advertising. Amazon has filed a lawsuit challenging the constitutionality of this provision. However, as required by the law, we must still begin collecting New York sales tax beginning on that date. Please note that if you place an order prior to June 1, 2008, your Order Total may not include an estimate of New York sales taxes, but those taxes may still be charged if your order is readied for shipment on or after that date." (http://tinyurl.com/64bgyu)