Update: Status of 2010 Affiliate Nexus Legislation

As we reported on March 9, New York-style “Amazon” affiliate nexus legislation was introduced in the 2010 legislative sessions of multiple states.  Even as the North Carolina Department of Revenue has introduced a program intended to entice retailers to register for sales and use tax purposes under its existing affiliate nexus statute (see our recent post for further discussion of the issue), other states are moving closer to adopting similar laws.  At the same time, affiliate nexus legislation has died, for this legislative season at least, in several states.  Here’s an update with regard to such legislation in a number of states:

Moving Forward:

• Connecticut: Bill favorably reported out of committee with recommendation that it “ought to pass”
• Minnesota: Committee hearing on bill scheduled for April 20
• Tennessee: Bill recommended for passage by Tax Subcommittee of Ways & Means, but Tennessee Department of Revenue has indicated that it does not believe mere affiliate relationship would be adequate for nexus

In Committee:

• California: Last action (re-referral to Committee on Appropriations) was April 28, 2010
• Illinois: Last action (referral) was March 19, 2010

Dead (it appears) for 2010:

• Iowa: General Assembly adjourned without acting on the bill
• Maryland: General Assembly adjourned without the bill getting out of committee
• Mississippi: Bill died in committee
• New Mexico: Bill tabled
• Vermont: Ways and Means Committee voted not to include affiliate nexus measure in tax legislation
• Virginia: Affiliate nexus legislation tabled in committee

UPDATE, Aug. 31, 2008:  Please see our most recent post concerning the status of the California Bill here. 

North Carolina’s “Carrot and Stick” Approach To Sales Tax Collection

Recently, a number of our clients received a letter from the North Carolina Department of Revenue, which contained an announcement by the Department of a new “Internet Transactions Resolution Program.” North Carolina, which is one of the three states that has adopted an Amazon Affiliate Nexus Law (see my blog post dated March 9, 2010), provides the following “carrot” as part of the Program: if a retailer registers for sales and use tax and agrees to collect and remit those taxes for four years, beginning September 1, 2010, the Department in turn will not assess tax, penalties or interest for the period prior to September 1, 2010.  In addition, the Department states that it will not seek to obtain information regarding names and addresses of the retailer’s customers prior to September 1, 2010.  (It is noteworthy that Amazon has sued the Department of Revenue on the ground that it has sought personally identifiable information from Amazon regarding Amazon’s customers.)

So, now to the “stick.”  The Department also notes in its letter to direct marketers that for those retailers who fail to participate but are “subject to nexus filing requirements,” the Department will assess all applicable tax, interest and penalties and will not waive any penalties.  Thus, the Department is offering the carrot of an amnesty for past tax liability and relief from any demand for customer information from the retailer for periods prior to September 1, 2010, in lieu of the enforcement.

Cybersquatting and the UDRP

Recently, I was a guest lecturer at the trademark law class at the University of Maine School of Law, invited by my colleague, Rita Heimes, director of the Maine Center for Law and Innovation.  I always enjoy an opportunity to discuss trademark law in an academic setting, and it is invigorating to meet aspiring young trademark lawyers.

The topic for my talk was the Uniform Dispute Resolution Policy (“UDRP”). For those unfamiliar with this policy, it helps protect businesses against “cybersquatting.”  For instance, if the owner of the Acme brand discovers that the domain name "acme.com" is registered by someone else, and is being used in bad faith, the UDRP is the most effective tool available for Acme to recover that domain name.  Prior to the creation of the UDRP, the prospects for success in a domain name dispute were uncertain, and the costs were potentially exorbitant.  In the mid to late 1990's, when widespread use of the Internet was first becoming prevalent, it was unclear whether existing trademark doctrine enabled the recovery of a domain name in this manner, and in any event, the only way to find out was to launch an expensive and time consuming lawsuit.  This time period was typified by a “gold rush” for ownership of domain names and many famous brand owners discovered to their dismay that their best option for securing the all-important “.com” domain name was to pay millions of dollars to the prescient person who had beaten them to the punch.

The UDRP was introduced at the insistence of brand owners by the Internet Corporation for Assigned Names and Numbers (“ICANN”), the entity that governs the allocation of Internet "real estate," in order to address the gap left by preexisting law.  Any person registering a domain name must consent to participation in the UDRP’s form of alternative dispute resolution, and agree to abide by the dispute resolution’s results. Typical costs to recover a domain name using this process are between $1500 and $3000, the success rate is very high (around 85%), and the process can be completed in a month or less.  The UDRP has been around for more than 10 years and has been used very effectively by brand owners to recover millions of improperly registered or used domain names.  Accordingly, it no longer qualifies for "cutting edge" status, although it is surprising how many brand owners remain unfamiliar with it.

In the course of preparing my remarks, however, I also had occasion to delve into some of the remaining challenges in this area, and to explore recent noteworthy developments. 

Publishers Should Address State Tax Exposure Regarding the New Agency Pricing Model

As discussed in eBooknewser on April 16, and in TechFlash on April 15, Amazon is now allowing some publishers to set their own prices on e-books sold for the Kindle.  The agency pricing model creates new responsibilities for some publishers in connection with state tax.  Publishers with agency agreements with Apple and Sony, the other main players in the e-book market, also face state tax ramifications stemming from agency pricing agreements.

A publisher becomes a retail seller required to collect and remit sales and use tax on all sales of digital books in each state where digital books are taxable and in which the publisher has nexus.  At this point, of the 45 states and the District of Columbia that impose sales tax, only 24 states actually tax digital products.  But that number is likely to increase as states search for additional revenue.

California Follows Colorado Down the Rabbit Hole

As we wrote last month, Colorado recently enacted legislation requiring retailers that do not collect Colorado sales tax to provide a list of their Colorado customers and the amount of Colorado purchases to the State Department of Revenue on an annual basis. Retailers must also inform purchasers of their duty to remit use tax and provide purchasers an annual statement of their purchases.

In that entry, Matt Schaefer wrote, “Voters in other states beware.” In fact, just days before Colorado’s bill was signed into law, the California Assembly introduced its own, similar legislation: AB 2078, as amended April 5, 2010. The bill is currently before the Assembly’s Committee on Revenue and Taxation. If passed in its current form, California would institute Colorado-type reporting requirements which, like Colorado’s law, are potentially in violation of Quill, discriminate against interstate commerce, and certainly invade consumers’ privacy.

New York Threatens to Discontinue Long-Standing Promotional Material Exemption

As a result of the U.S. Supreme Court’s decision in D. H. Holmes Co., Ltd. v. McNamara (486 U.S. 24 (1988)), a number of states began taxing promotional materials printed outside of the state and distributed within the state.  New York was one of those states until March 1, 1997.  At that time, New York enacted an amendment to New York Tax Law Section 1115(n) to exempt promotional materials distributed in the State.  The exemption has been broadly interpreted to include the finished product as well as mechanicals, layouts, artwork, photographs, and other pre-press services and materials, and also includes services relating to mailing lists.  In a search for revenue, New York now threatens to remove this exemption.  If passed, New York Assembly Bill - A.9710-B Budget Article VII – Part R would eliminate the exemption provided in Section 1115(n).

It is also reported that Pennsylvania is thinking of eliminating its exemption, too.  Other states, such as California, Michigan and Ohio, provide exemptions for promotional materials distributed in the state, and thus far have not sought to eliminate the exemptions.  In fact, I recently argued and won a case against the Board of Equalization at the California Court of Appeal, PeoplePC v. California BOE, in which the Court ruled that California’s printed sales message exemption applies not only to promotions printed on paper, but also to promotions printed on CDs.

As Matt Schaefer wrote in this blog last month, states have begun putting pressure on companies to collect use tax on promotional materials, even on sales to clients with no physical presence in such states.  Let’s hope that there is not also a trend to eliminate the exemption for printed sales messages where direct marketers are still protected.

Are You Selling "Children's Products"?

When Congress passed the Consumer Product Safety Improvement Act (the “CPSIA”) in 2008, it included a new definition of what constitutes a "children's product." Along with that new definition came a host of onerous testing, certification, and product design/composition standards. If the products you're selling fall into this category, your legal obligations expand dramatically to include third-party certification, substrate testing for lead, prohibitions on phthalates, product tracking labels, and more.  And so, the question of "What is a children's product?" becomes extraordinarily consequential for wholesalers, retailers, "private labelers," and importers.

As is traditionally the case with "age grading" of products, the CPSIA's definition generalizes things to the point of providing very little practical guidance on many products.  Under the new regime, a "children's product" is "a consumer product designed or intended primarily for children 12 years of age and under." While it is one thing to say roughly which products are intended for children who are two, or four, or six, or even eight, products of interest to many twelve-year-olds also appeal to older teens and even adults. Is a product primarily intended for twelve-year-olds if it broadly appeals to teenagers, for example? How closely must you parse the demographics of potential customers to figure out whether your audience is likely to be "primarily" twelve-year-olds? Coupling this with analysis of design aims and product "intentions" makes matters even more complex.

Into this analytical quagmire, the Consumer Product Safety Commission (“CPSC”) has now dropped 50 pages of industry guidance, including a brand new proposed regulation.  Once you dive in, it doesn't take long to realize that some of the products you thought were children's items may not be. Worse yet, some products that you reasonably might have concluded were "not designed or primarily intended for children 12 years" or younger may well be viewed very differently by the CPSC.  In other words, the CPSC has raised as many questions as it answers.

Message to State and Local Governments: Leave Regulation of Interstate eCommerce to Congress

Two recent, related developments should serve to remind state and local government and tax officials that under our Constitution’s Commerce Clause, it is Congress ― not states and localities ― that has the power “to regulate Commerce...among the several States.”  Art. I, Sec. 8, Cl. 3.

On January 25, 2010, the Supreme Court issued its decision in Hemi Group, LLC v. City of New York, 130 S.Ct. 983 (2010), rejecting an attempt by the City of New York to use the Racketeer Influenced and Corrupt Organizations Act (“RICO”) to punish a New Mexico-based online seller of cigarettes for allegedly costing the City millions of dollars in lost sales and use tax revenue on cigarettes purchased by New Yorkers.  The City did not claim that Hemi Group was obligated to collect and remit the $1.50 per pack New York City use tax on cigarettes. Rather, the City claimed that the Hemi Group failed to comply with its legal obligations under the federal Jenkins Act (15 U.S.C. §§ 375-378), which requires out-of-state cigarette sellers to register and file a report with state tobacco tax administrators listing the name, address and quantity of cigarettes purchased by New York state residents.  The State of New York had an agreement to share such information with the City of New York.  Hemi Group’s failure to comply, the City argued, meant that it received no information from the State about cigarette purchases by City residents from Hemi Group, and therefore could not bill them for any use tax that the residents failed to self-report and pay. According to the City, Hemi Group’s violation of the Jenkins Act also constituted a RICO violation that harmed the City through the loss of use tax revenues.

Maine Adopts Finnigan for Determining Sales Sourced to Maine for Corporate Income Tax

Maine is a unitary state for purposes of the corporate income tax. As is true for other states (e.g., California, Illinois and South Carolina), Maine adopted the Joyce approach for sourcing of sales by entities within a unitary group that did not have nexus with Maine under PL 86-272. See Appeal of Joyce, Inc., No. 66-SBE-070 (Cal. SBE, Nov. 23, 1966). This means that Maine-destination sales by an entity without nexus would not be included in the numerator of the sales apportionment factor.

However, in recently adopted legislation, P.L. 2010, c. 571, § GG, which is effective for tax years beginning on or after January 1, 2010, Maine adopted the Finnigan approach, which was first announced by the California Board of Equalization in 1988. See Appeal of Finnigan Corporation, No. 88-SBE-022 (Cal. SBE, Aug. 25, 1988) (Finnigan I); Opin. on Pet. for Rhrg., No. 88-SBE-022-A (Cal. SBE, Jan. 24, 1990) (Finnigan II). Finnigan rejected Joyce and provided that sales by a member of a unitary group to California are included in the numerator of the combined group’s sales apportionment factor even though the entity does not have nexus with California. It is noteworthy that California later renounced the Finnigan approach and has resorted back to the Joyce approach. See Appeal of Huffy Corporation , No. 99-SBE-005 (Cal. SBE, Apr. 22, 1999). See also FTB Reg. 25106.5. What makes this result particularly severe for unitary businesses is that Maine uses only the single apportionment factor of sales.