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.

I also note that there is pending legislation in several states that is similar to the Arkansas statute and not the Illinois statute. (See our recent discussion of pending legislation here.)

The South Dakota statute requires all non-collecting retailers that have annual gross sales into South Dakota of $100,000 or more to provide a “transactional notice.” The transactional notice should appear both on the retailer’s web site and in catalogs and purchase orders/receipts. Because the law applies only to non-collecting retailers, who by definition do not have a physical presence in the state and who are out-of-state retailers, it suffers from the same constitutional infirmities that caused the Colorado federal court to issue a preliminary injunction staying the enforcement of a very similar statute in Colorado.See Direct Marketing Ass’n v. Huber, 2011 WL 250556 (D. Colo. 2011).

In the final category of statutes, both Arkansas and Illinois also provide for attributional nexus for commonly-owned companies when an affiliate has a physical presence in the state. The Illinois statute provides that an out-of-state retailer has nexus with the state if it has a contract with an affiliate who both sells a similar line of products under a substantially similar name as the online retailer and receives a commission from the out-of-state retailer. The Arkansas statute provides a more expansive definition of a company required to collect sales tax and bases its requirement upon either the retailer’s use of the in-state affiliate to act on behalf of the retailer or the retailer’s use of substantially similar trademarks or tradenames as used by the in-state affiliate.

In short, much of the new legislation is constitutionally suspect. How the states choose to enforce the laws, and how the industry reacts, is a work in progress. Individual companies should carefully review their own nexus profile and circumstances to determine the applicability of this new legislation.