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.
The next obvious question is how enticing is the carrot and, conversely, how threatening is the stick? Clearly, if a retailer does not have an affiliate program, and does not otherwise have a physical presence in North Carolina, neither the carrot nor the stick may be enough to induce the retailer to register for sales and use tax purposes. If, however, a retailer has an affiliate program involving North Carolina companies or individuals, or creating a physical presence in North Carolina, then the offer from the Department may be attractive.
A retailer, guided by its counsel, should look at the nature of its affiliate relationships and, in particular, the terms and conditions of its affiliate program, to determine how it fits within the nexus provisions of the North Carolina statute. For example, the North Carolina statute states that if a retailer uses an affiliate that is a North Carolina resident and is not able to overcome the presumption that the affiliate is engaged in traditional solicitation activities in the state, then the retailer has nexus. For retailers that may have difficulty rebutting the presumption, the Department’s offer may be attractive. If, however, a retailer believes that it can overcome the statutory presumption of nexus resulting from its affiliate relationships, then it would need to engage in a traditional cost-benefit analysis, i.e., do the costs of registering to collect tax (administrative expense, possible negative impact on sales) outweigh the benefits of registering (eliminating any risk of liability for uncollected tax, past and future).
In any event, the decision should not be a knee jerk reaction, but should be based upon a careful analysis of the facts and circumstances of the retailer, and reviewed by counsel for the retailer. I will be assisting my clients in making such reasoned business decisions, informed by the relevant legal considerations.