Monday, April 14, 2014

Danger on the Horizon: Gift Card Companies and Unclaimed Property Laws

There are approximately twenty states that require issuers and holders of gift cards to pay to their state treasury the balances of any unredeemed gift cards, which is otherwise known as “breakage.” (For purposes of this article, I refer to gift cards in the broad sense, including gift certificates, gift cards, and stored value cards). The larger states—New York, New Jersey, Massachusetts, and Delaware—provide, however, for the escheat of gift cards. (Technically the required payment of unredeemed gift card balances is based on unclaimed property or abandoned property laws rather than escheat, but the underlying principles of the state taking funds on behalf of its citizens are the same). A majority of state unclaimed property laws do not escheat unredeemed gift card balances.

For legitimate business reasons with the result of reducing payment of breakage, many retailers with gift card programs have entered into agreements with third parties such as Card Compliant in which the third party forms a special purpose gift card entity to issue the gift cards. Other retailers, without use of a third party, have set up their own gift card subsidiaries to issue their gift cards. The gift card companies are formed in states such as Ohio or Florida, which do not require the payment of breakage to the states. Under the priority rules established by a line of U.S. Supreme Court decisions and embodied in the various state unclaimed property statutes, if the records of the holder (i.e. issuer) of the gift card do not identify the last known address of the owner of the gift card, then the state for payment of the unredeemed gift card balances is the state of incorporation of the holder. Thus, since the gift card company is incorporated in a state with favorable laws regarding gift cards, and because the gift card companies do not maintain the addresses of the owners of the gift cards, the gift card company (and the retailer, which is not the holder) are not liable for payment of breakage. In other words, the theory is that the states with laws that require the escheat of gift cards—even if it is the state of incorporation of the retailer— cannot enforce its laws to require payment of the breakage against either the retailer or the gift card company.

The theory has now run up against the reality of a qui tam suit brought by a noted plaintiff’s securities fraud law firm on behalf of the State of Delaware and a relator (the individual who sues on behalf of the state in a qui tam suit) against Card Compliant, its special purpose gift card entities, and various retailers that caused their gift cards to be issued by these Card Compliant entities.

Tuesday, April 8, 2014

Did Wyoming Just Become an Internet Affiliate Nexus State?

We have written often about state Internet “click through” nexus laws, including the New York affiliate nexus statute unsuccessfully challenged by and, and the Illinois Internet affiliate nexus law stuck down by the Illinois Supreme Court in response to a suit brought by the Performance Marketing Association (for which Brann & Isaacson served as counsel). In most states, meaningful risk of Internet affiliate nexus for an out-of-state seller arises only after the legislature adopts a statute that, like New York’s law, creates a rebuttable presumption of “click through” nexus. In our view, even such a rebuttable presumption suffers from serious constitutional failings. Thus, an even more aggressive position, such as asserting that an Internet affiliate relationship, by itself, can create nexus for an out-of-state vendor without providing any opportunity to rebut the presumption, is plainly at odds with the Constitution.

On April 3, 2014, the Wyoming Supreme Court waded into the “click through” nexus arena and raised the possibility that, under Wyoming case law, the mere existence of an Internet affiliate relationship with an in-state website may be deemed sufficient to create nexus for an out-of-state retailer. See et al. v. Wyoming Department of Revenue, 2014 WY 43 (Apr. 3, 2014). The case is one in an extensive series of cases around the country involving challenges to state tax assessments brought by online travel companies. At issue typically in these cases is the question of whether online travel companies (“OTCs”) are subject to a state sales/use tax collection obligation on the portion of their charge to consumers that is not paid to the hotel that provides the room (as to which tax is often collected by the OTC, paid to the hotel, and remitted remitted to the state). The OTCs have argued that the portion of the charge not paid to the hotel is a service fee collected by the OTCs, not a part of the charge to the consumer for the room.

The OTC cases raise numerous issues under both state sales and use tax law and federal constitutional principles, including substantial nexus. Since nexus requires a sufficient connection between the state and both the seller and the activity/transaction being taxed, see Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977), the OTCs have argued that nexus is lacking with regard to the transaction in question, since their sales occur on servers located outside the state in which the room is provided. In other words, the OTCs assert that the state lacks nexus with the activity being taxed, regardless of whether there is sufficient nexus with the OTCs themselves as sellers.

Thursday, February 20, 2014

State Court Suspends Colorado Notice and Reporting Law

On Tuesday, February 18, 2014, Judge Morris Hoffman of the Colorado District Court for the City and County of Denver granted the motion for a preliminary injunction filed by the Direct Marketing Association (“DMA”) in its suit challenging the 2010 Colorado statute that imposes onerous notice and reporting obligations upon out-of-state retailers that do not collect Colorado sales tax. The Court suspended, effective immediately, all of the Colorado law’s requirements (referred to in the ligation as the “Transactional Notice,” the “Annual Purchase Summary,” and the “Customer Information Report”). Judge Hoffman explained that “Plaintiff has proved to my satisfaction at this stage that each of the Act’s three notification and reporting requirements are facially discriminatory” in violation of the Commerce Clause of the United States Constitution. As a result, remote sellers that do not collect Colorado sales tax are not required to comply with the law’s provisions, pending further action by the Court as the case proceeds.

Readers will recall that the DMA previously obtained both a preliminary and permanent injunction against the Colorado law’s enforcement from the federal District Court for the District of Colorado. The injunction was dissolved in late 2013 after the federal Court of Appeals for the Tenth Circuit ruled that the Tax Injunction Act (“TIA”) deprived the federal District Court of jurisdiction to enter the injunction. In response, the DMA filed an action in state court in November 2013, challenging the law.

The DMA is represented in the case by Brann & Isaacson partners George Isaacson and Matthew Schaefer.

The state court will hold a status conference in the next few weeks to determine further proceedings in the case. We will keep readers apprised of further developments in the case.

Thursday, February 6, 2014

State Sales Tax Enforcement After the Supreme Court’s Denial of Cert in Amazon/Overstock

As we have discussed in prior posts, Amazon and filed petitions for certiorari with the U.S. Supreme Court seeking review of the New York Court of Appeals decision that the New York affiliate click-through nexus statute, on its face, did not violate the Commerce Clause. Late last year, the U.S. Supreme Court denied the petitions and, therefore, the New York Court of Appeals’ decision stands.

While the denial of cert means that the New York statute is constitutional on its face, it is not an indication that the U.S. Supreme Court agrees with the New York Court of Appeals’ decision or that the Court has blessed affiliate click-through nexus laws. It simply signifies that the issues presented in that case did not warrant review. Less than 5% of all petitions for certiorari are granted.

States, however, have taken the denial of cert as a prompt to propose affiliate click-through nexus laws. Thus, representatives have introduced bills in the legislatures of four states—Hawaii, Indiana, Tennessee, and South Carolina—that are modeled after the New York statute. There are some variations among this proposed legislation, but in general each provides for a presumption of nexus if the remote seller pays commissions to a person (the affiliate) who resides in the state for referrals by a website link or otherwise, if the retailer’s sales in the state from such referrals exceed $10,000. The bills would also permit the retailer to overcome the presumption by showing that the affiliate does not otherwise solicit sales on behalf of the retailer or otherwise make a market in the state. The New York Court of Appeals in the Amazon/Overstock cases stated that the presumption was rebuttable, so that the retailer could prove that the affiliate did not engage in solicitation activities on behalf of the retailer in New York. The rebuttable presumption saved the constitutionality of the statute.

Thursday, January 30, 2014

Traps for the Unwary: California’s Prop 65

In a previous blog post in our ongoing series about legal and regulatory challenges specific to the multichannel merchant, I indicated that I would next discuss quirky California laws that can create traps for unwary merchants. The first of these is one of the many voter-initiated statutes enacted by referendum in California. Popularly known as Prop 65, the Safe Drinking Water and Toxic Enforcement Act of 1986 requires the State of California to publish a list of chemicals known to cause cancer or birth defects or other reproductive harm. This list, which must be updated at least once a year, has grown to include approximately 800 chemicals since it was first published in 1987.

Many of the chemicals on the list are present in common, every day products, and would require massive doses every day for a lifetime to produce an observable effect. For example, acrylamide is a chemical found in many common food products such as potato chips, breads, coffee, tomato sauce, breakfast cereal, and fruit preserves.  See But an individual would have to consume massive quantities of any of these foods every day to create any kind of appreciably increased cancer risk.  See id.  Nevertheless, Proposition  65 requires businesses to notify Californians about the presence of acrymalide and hundreds of other chemicals in the products they purchase.

Friday, December 20, 2013

The Year In Review

As the year draws to a close, it’s worth looking back over a range of important legal developments in the world of electronic commerce, a number of which set the stage for fireworks in the months and years ahead.  Wishing all of our readers a wonderful holiday season, and the best and brightest New Year, we hope you enjoy our “top five” list.

Coming in at number five ...

Friday, December 13, 2013

Song Beverly Strikes Again: Email Address Collection Added to Potentially Worrisome Activity

As we've previously blogged, retailers who sell products to consumers in California and Massachusetts, as well as a number of other states, run the risk of costly class action lawsuits if they collect customer zip codes in connection with purchase of goods by credit card.  The prohibitions in those states, as we've explained, often go beyond zip codes, and can include -- in California, for example -- any information that does not appear on the face of the credit card.

A recent decision by the United States District Court in California involved the collection of e-mail addresses in credit card transactions, and found against a retailer on a motion dismiss -- propelling the case to trial.  That decision adopted what some might call an inordinately expansive interpretation of the underlying law by the Supreme Court of California, and made things far worse by adding an apparent misreading of the statute to the mix.  Not for the faint of heart, but certainly important for the prudent direct marketer who hopes to avoid costly and sometimes bogus lawsuits, the decision helps underscore the risks faced by even the most diligent companies -- risks high enough that companies are often forced to settle when they know in their heart of hearts that they're right.