California Affiliate Nexus Law Goes Into Effect

We have written frequently about the California affiliate nexus statute, AB 155, which was adopted in June 2011, but was temporarily repealed in September 2011, pending Congressional action on a bill rejecting the Quill physical presence test. Since Congress has not enacted such a law, AB155 is set to go into effect tomorrow.

The California Board of Equalization (“BOE”) undertook a lengthy rulemaking process over the past year to flesh out the requirements of the law. Much of this effort is reflected in the BOE’s newly amended version of California Regulation 1684. Here are some of the key points:

• The law provides that an affiliate relationship will create nexus only if the payment to the affiliate is based upon a completed sale of tangible personal property; i.e., a commission-based arrangement. Thus, pay-per-click payment arrangements with affiliates do not create nexus. 
• The statute, and Regulation 1684 which interprets the statute, provides that if the arrangement with the affiliate is for the purchase of advertisements to be delivered on the Internet, the retailer will not be deemed to have nexus if the affiliate does not directly or indirectly solicit customers in California through the use of flyers, newsletters, telephone calls, email, blogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in California. Thus, if a retailer places content on the website of a California affiliate that provides information regarding the retailer’s products and the affiliate links to the retailer’s website, so long as the affiliate does not make any solicitations on behalf of the retailer that specifically target CA residents, the retailer should not have nexus under the California statute. 
• Regulation 1684 provides for a safe harbor if (1) the agreement between the retailer and affiliate provides for a prohibition of California solicitation activities on behalf of the retailer, such as distributing flyers or coupons or sending emails; (2) the retailer obtains certificates annually from the California-based affiliates that it has not engaged in any such prohibited solicited activities; and (3) the retailer accepts such certificates in good faith. 

Unfortunately, many of these important details were omitted from recent correspondence sent by the BOE to retailers, which included a form of nexus questionnaire. The BOE stated that a retailer is engaged in business in California and thus required to collect the California sales and use tax if it has a relationship with an affiliate operating in California that refers potential customers to the retailer. However, nowhere in the materials sent out by the BOE is there any mention of the exceptions to the finding of nexus discussed above.

Before making the decision either to discontinue affiliates or to collect California sales and use tax, ecommerce sellers should review the nature of their affiliate relationships to determine whether those relationships, as currently structured or as revised in the future, will create nexus in California under the actual provisions of the law. Moreover, a prudent e-tailer should not respond to the BOE questionnaire unless and until it has carefully reviewed its activities with competent professionals.