Pennsylvania DOR Puts Constitutionally-Suspect Affiliate Nexus Interpretation on Hold

On January 27, 2012, the Pennsylvania Department of Revenue delayed until September 1, 2012 the enforcement of its recently announced (and legally questionable) position regarding affiliate nexus.

We have written frequently about state affiliate nexus statutes and proposed legislation, as well as the challenge brought by our client, the Performance Marketing Association (“PMA”), against the Illinois affiliate nexus statute which took effect in July 2011. All of these affiliate nexus laws are of doubtful constitutionality. Indeed, Brann & Isaacson has argued on behalf of the PMA that the Illinois law impermissibly targets Internet performance marketing as a basis for asserting a use tax collection obligation on out-of-state retailers, in violation of both the Commerce Clause of the United States Constitution and the federal Internet Tax Freedom Act (“ITFA”). In an area of law where the authority of the states to expand their taxing power is very much in doubt, every state that has adopted an affiliate nexus law has done so through the legislative process by enacting a statute that purports to require reporting of use tax by remote sellers with no physical presence in the state.

On December 1, however, the Pennsylvania Department of Revenue determined that it did not require a new affiliate nexus statute in order to require use tax collection by Internet sellers advertising online through websites located in Pennsylvania. Instead, the Department issued Sales and Use Tax Bulletin 2011-01, regarding Remote Seller Nexus. The Department asserts in the Bulletin that a variety of activities, if conducted in the state by, or on behalf of, an out-of-state company, already constitute sufficient nexus under the Commerce Clause and state law to require the remote seller to collect Pennsylvania use tax. Some of the activities cited by the Department have been the basis for a finding of nexus for an out-of-state company in prior court decisions around the country (and, presumably, have long been reflected in the Department’s enforcement practice). The Department, however, also included “affiliate nexus” on the list. The Department will now make a finding of nexus for an out-of-state company even if the company’s only activity is merely having a contractual relationship with a person located in Pennsylvania whose website has a link to the remote seller’s website, if the in-state affiliate receives “consideration” for the contractual relationship with the retailer.

The Department’s very broadly-phrased affiliate nexus provision goes even beyond the expansive language of the 2011 Illinois law challenged by the PMA and, in our view, is plainly unconstitutional. The Department’s stated position also appears to be in violation of the ITFA. It remains to be seen if the Department will issue further guidance on affiliate nexus, or step back from its position altogether. For now, the Department press release states that it is delaying the “deadline” on enforcement until September 1, 2012, in order to give Internet retailers and remote sellers more time to comply. We will keep you posted on developments in Pennsylvania and in the area of affiliate nexus more generally.