New York's state legislature passed a budget earlier this month that includes a provision requiring online retailers to collect all applicable taxes at the behest of the state. Individuals shopping online had previously been able to dodge paying local taxes since online retailers were not responsible for their collection. Instead, New York as well as most other states require individuals to voluntarily declare items bought from out of state retailers, in their annual income tax filings.

The 'Use Tax' puts the onus on the individual to pay their owing taxes on items purchased.  In reality, however, most people fail to do so, and are often even unaware of their legal obligation. Local retailers as well as independent bookshop owners had lobbied strongly for this legislation, which they claim fixes a longstanding bias that prevented them from competing with online retailers. (Source: realtechnews.com)

President CEO of the Retail Council New York, James Sherin reacted to the passing of the bill by stating "This is a first step -- but a critical one -- in our ongoing battle to level the sales tax playing field between New York retailers and the out-of-state Internet giants that have, for years, capitalized on an unfair and unintended competitive advantage driven solely by tax policy." (Source: Internetnews.com)

Legal experts believe that online retailers will challenge this legislation as it seemingly contradicts a 1992 ruling by the U.S. Supreme Court. In Quill v. North Dakota, the court declared that out of state retailers were not responsible for the collection of taxes as it represented an excessive burden on companies to comply with 7,500 local taxing jurisdictions. (Source: newrules.org)

However, this ruling took place during the era of mail in catalogues, and online retailers will have to demonstrate to the courts that they are unable to administer the collection of local taxes from their customers. If the legislation is signed by New York's David Paterson, it will represent as much as an extra 8 percent charge, which is expected to net the state $47 million in tax revenues. (Source: newrules.org)