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Overstock.com has filed a lawsuit challenging New York's new tax law that requires online retailers with affiliates in New York to collect New York sales tax. The state maintains those affiliates count as a physical presence.

Overstock is based only in Utah and 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," the company said in a statement.

The company 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, 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 collecting taxes by June 1st. The state estimates the law would generate $50 million in the current fiscal year. The law applies to companies that do more than $10,000 worth of business in the state.

Overstock ended its relationship with its New York - based affiliates so it would not have to collect the tax. On May 15, 2008, Overstock.com said it had 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 this law.

"We love New York," said Patrick Byrne, Overstock.com chairman and chief executive officer. "But, we had to choose our New York customers over the New York tax collector armed with an unconstitutional statute."

Overstock is the second major online retailer to challenge the law. Amazon.com filed suit previously, alleging similar claims.