New York State Supreme Court Rules on Internet Gambling; Decision Could Impact Internet Taxation Debate

NEW YORK, Sept. 21 -- In a case that could have wide ranging effect of the electronic commerce industry, New York State Supreme Court Justice Charles Edward Ramos has ruled that a foreign-based Internet casino web site is subject to New York State gambling laws. The ruling was announced on July 26, 1999.

Citing the New York State Constitution -- which bans casino gambling – as the basis for the Attorney General's authority to enjoin Internet gambling in New York, Judge Ramos ruled that World Interactive Gaming Corporation's website created a "virtual casino within the user's computer terminal" in New York State, and thus was subject to all state laws. "The act of entering the bet and transmitting the information from New York via the Internet is adequate to constitute gambling activity within New York State," said Ramos in his 20-page decision.

"This decision has the potential to dramatically impact the taxation of e-commerce by states," said Nilesh Shah, (National Partner in Charge, E.Com Tax Practice) of KPMG. "In essence, the court held that the State of New York has jurisdiction in this matter because it deemed the virtual casino to reside within the user's computer terminal, and thus within the state itself. The same logic could be extended to the taxation of Internet commerce – that e-sellers reside in the states where users purchase their goods -- and thus would make out-of-state sellers subject to state tax laws. This could send chills up the spine of e-sellers. It will be interesting to see how this ruling plays out over the next couple of months in various states. You also have several foreign governments looking at this ruling who could think of applying the logic in international e-commerce situations as well."

Don Griswold, National Partner in Charge, KPMG's State and Local Tax Technical Services, said, "The ITFA Advisory Commission is likely to consider the New York case as it evaluates alternative standards for determining nexus -- a state's jurisdiction to impose tax. Over the next nine months, the commission will have the opportunity to hear experts on both sides of this issue debate the merits, and the final commission report will probably carry a good deal of weight in deciding this critical matter. If its analysis were applied to the field of state taxation, this case's dramatic expansion of traditional jurisdictional concepts would have a decisive impact on the future of e-commerce taxation. It is too early, however, to anticipate whether the Commission members intend to move so aggressively."