Some of you may have read the headline in CCH’s State Tax Day on March 27, 2012, “Affiliate Nexus Bill Enacted,” and wondered whether this describes yet another state that provides that nexus is established by virtue of a link from a web site “affiliate” to a remote seller’s web site. The State Tax Day article describes a statute signed into law on March 24, 2012 by Utah Governor Gary R. Hebert. The Utah law, H.B. 384, Laws 2012, however, does not provide for nexus on the basis of a link to a web site. Rather, the law provides that nexus is established for a remote seller based upon certain specified relationships between the remote seller and affiliated entities; i.e. parent, subsidiaries or other companies under common ownership. In other words, the law has no click–through nexus provisions, so the Utah statute does not specify that a company has nexus simply because a blogger or other internet site links to the company’s web site and receives commissions from the company sales that resulted from such a link.
There are two types of “affiliate nexus” statutes. The first type is of the Utah variety, in which the word “affiliate” means the companies are affiliated through common ownership. Several states have adopted statutes of this type, in part in response to the localized distribution model Amazon has begun to implement in which an affiliate of Amazon.com opens a distribution center in a state and drop ships to Amazon.com’s customers. Texas, for example, enacted S.B. 1, Laws 2011 (effective January 1, 2012), that provides that a retailer is engaged in business in Texas if an affiliate distributes goods to the retailer’s customers from a distribution center in the state. The new law in Utah (as does a proposed law in Virginia, SB 597), provides that a remote seller is engaged in business in the state if its affiliate has a place of business or employee in the state that advertises, promotes or facilitates sales by the remote seller. Such a provision in not controversial from a constitutional perspective, in that if the Utah–based affiliate operates as an agent or representative of the remote seller to make a market for the remote seller in Utah, the physical presence requirement of Quill is probably satisfied. (Please note that the proposed Virginia law reference above, SB 597, has an effective date of September 1, 2013, as part of an arrangement with Amazon to permit Amazon to open a fulfillment center in that state without being liable for taxes prior to that date. Similar arrangements for a delayed effective date, combined with Amazon opening a distribution center in the state, were reportedly agreed upon between Amazon and lawmakers in both Indiana and Tennessee, as well.)
The second type of “affiliate nexus” statute, which is more controversial from a constitutional perspective, is a click–through nexus statute in which the “affiliate” has no ownership connection to the remote seller, but refers potential customers to the remote seller’s web site. Thus far, seven states have adopted click through nexus statutes: Arkansas, California, Connecticut, Illinois, New York, North Carolina and Rhode Island. In addition, Pennsylvania has adopted a regulation, Sales and Use Tax Bulletin 2011-01 (issued December 1, 2011 with a delayed effective date of September 1, 2012) with similar provisions. The click–through nexus laws are of two kinds. In the first kind, modeled after the New York law, a contract or other arrangement with a resident of the state by which the resident receives a commission from a remote seller for referrals to the seller creates a presumption of nexus if the annual sales from such arrangements exceed a certain threshold. All but the Connecticut, Illinois and Pennsylvania laws contain a presumption, which may be rebutted by a showing that the in–state company does not engage in any other solicitation or other promotional activity in the state on behalf of the remote seller. While there are potential arguments to challenge the constitutionality of these “presumptive nexus” laws, many remote sellers prefer to avoid the expense of litigation and structure their relationships with affiliates to be able to show that the affiliates do not engage in activities on their behalf in the various states that have adopted nexus presumption statutes.
The Connecticut, Illinois and Pennsylvania laws do not permit a remote seller to introduce evidence that the affiliates do not conduct in–state services on their behalf. These statutes, therefore, raise serious constitutional questions. While I will not discuss those in detail, because they are the subject of pending litigation of which Brann & Isaacson represents the plaintiff in a constitutional challenge, I note that a critical feature in the New York appeals court’s decision in Amazon.com LLC v. New York State Dep’t of Taxation and Finance, 81 A.D.3d 183, 913 N.Y.S.2d 129 (App. Div. 2010) that the New York statute was constitutional, is that under the New York law the out–of–state company could avoid a nexus determination by presenting evidence that the online affiliate did not conduct solicitation in New York.
I should also point out that there are a number of state legislatures that are reviewing proposed nexus click–through statutes. They include Georgia, Kansas, Minnesota, Mississippi , and New Jersey. The Georgia Bill, H.B. 386, has both types of “affiliate nexus” provisions and has been adopted by both the House and Senate, but is awaiting approval or rejection by the Governor. As of the writing of this blog, none of the other proposed laws has been enacted.