States on the Warpath

In the last few months, three states (Illinois, Arkansas and South Dakota) have enacted “nexus expanding” legislation effective on July 1, 2011. Other states are considering adopting such legislation. The legislation falls into three categories: (1) click-through nexus; (2) reporting obligations; and (3) “affiliate” or “attributional nexus.”

We have previously written about the Illinois click-through nexus law (here and here), which we believe is unconstitutional since it purports to establish nexus (with no opportunity to rebut the determination) for any retailer that contracts with a person “located in Illinois” who receives a commission from the retailer based on sales of goods facilitated by a link from the person to the retailer’s web site. We will not describe here the details as to why the statute is unconstitutional, other than to note that mere national advertising, which is what the click-through represents, has never been deemed to create nexus, as pointed out in the Quill v. North Dakota case. In addition, online retailers should carefully review the Illinois statute and its requirements before deciding whether it applies to them.

The other recently-adopted nexus click-through legislation is the Arkansas law, which, unlike the Illinois statute, creates only a presumption of nexus that can be rebutted by a showing that the person maintaining the web site that provides a link does not engage in solicitation on behalf of the retailer. The statute is modeled after the New York statute, and it is possible for a retailer to structure its program with its Arkansas affiliates so as not to be subject to Arkansas sales tax collection obligations.

Commercial Privacy Bill of Rights Introduced in Congress

The introduction of the so-called Commercial Privacy Bill of Rights by Senators Kerry and McCain on April 12, 2011 suggests that we may be about to enter an era of robust regulation of information gathering regarding the online browsing and shopping habits of consumers. This type of data has come to be an important tool for online marketers to improve the efficiency of online advertising buys, and to improve other marketing techniques. At a minimum, this development presents a risk that online merchants will need to build out substantial new technical infrastructure to accommodate a welter of new rules under this bill. Beyond that, it may make it difficult even for highly respected and responsible merchants to engage in marketing activities that are an important part of their tool kit in the information age.

Among other things, the bill contains the following requirements:

• Collectors of information must implement security measures to protect the information they collect and maintain.

• Collectors of information must provide clear notice to individuals of the collection practices and the purposes of such collection. Additionally, collectors must provide the ability for an individual to opt out of any information collection that is unauthorized by the Act and to provide affirmative consent (opt-in) for the collection of sensitive personally identifiable information. Respecting companies’ existing relationships with customers and the ability to develop a relationship with a potential customers, the bill would require "robust and clear" notice to an individual of his or her ability to opt-out of the collection of information for the purpose of transferring it to third parties for behavioral advertising. It would also require collectors to provide individuals either the ability to access and correct their information, or to request cessation of its use and distribution.

• Collectors must bind third parties by contract to ensure that any individual information transferred to the third party by the collector will only be used or maintained in accordance with the bill’s requirements. The bill requires the collector to attempt to establish and maintain reasonable procedures to ensure that information is accurate.