We have written often about state Internet “click through” nexus laws, including the New York affiliate nexus statute unsuccessfully challenged by Amazon.com and Overstock.com, and the Illinois Internet affiliate nexus law stuck down by the Illinois Supreme Court in response to a suit brought by the Performance Marketing Association (for which Brann & Isaacson served as counsel). In most states, meaningful risk of Internet affiliate nexus for an out-of-state seller arises only after the legislature adopts a statute that, like New York’s law, creates a rebuttable presumption of “click through” nexus. In our view, even such a rebuttable presumption suffers from serious constitutional failings. Thus, an even more aggressive position, such as asserting that an Internet affiliate relationship, by itself, can create nexus for an out-of-state vendor without providing any opportunity to rebut the presumption, is plainly at odds with the Constitution.
On April 3, 2014, the Wyoming Supreme Court waded into the “click through” nexus arena and raised the possibility that, under Wyoming case law, the mere existence of an Internet affiliate relationship with an in-state website may be deemed sufficient to create nexus for an out-of-state retailer. See Travelocity.com et al. v. Wyoming Department of Revenue, 2014 WY 43 (Apr. 3, 2014). The case is one in an extensive series of cases around the country involving challenges to state tax assessments brought by online travel companies. At issue typically in these cases is the question of whether online travel companies (“OTCs”)
are subject to a state sales/use tax collection obligation on the portion of their charge to consumers that is not paid to the hotel that provides the
room (as to which tax is often collected by the OTC, paid to the hotel, and remitted remitted to the state). The OTCs have argued that the portion of the charge not paid to the hotel is a service fee collected by the OTCs, not a part of the charge to the consumer for the room.
The OTC cases raise numerous issues under both state sales and use tax law and federal constitutional principles, including substantial nexus. Since nexus requires a sufficient connection between the state and both the seller and the activity/transaction being taxed, see Complete Auto Transit Inc. v. Brady, 430 U.S. 274, 279 (1977), the OTCs have argued that nexus is lacking with regard to the transaction in question, since their sales occur on servers located outside the state in which the room is provided. In other words, the OTCs assert that the state lacks nexus with the activity being taxed, regardless of whether there is sufficient nexus with the OTCs themselves as sellers.
This post was not written to critique the relative merit of this nexus argument by the OTCs. For present purposes, it suffices to note that the Wyoming Supreme Court, after accurately characterizing the OTCs nexus argument in Travelocity, then garbles its analysis. In the process, the Court asserts that the Internet “click through” affiliate relationships entered into by the OTCs with Wyoming websites are an additional basis for finding that the OTCs had nexus with the state, beyond the OTCs’ contracts with the hotels located in Wyoming. The Court gives as an example of such a relationship Travelocity’s agreement with the Cheyenne Area Convention and Visitor’s Bureau. Apparently, a consumer booking a room through the Bureau’s website is actually doing so though a booking engine operated by Travelocity, with Travelocity paying a commission to the Bureau for each booking completed through the site. See Travelocity, 2014 WY 43 at ¶ 81. The Court cites the decision in Overstock.com, Inc. v. New York Department of Taxation & Finance, 20 N.Y.S. 3d 586 (N.Y. 2013) (in which the New York Court of Appeal upheld the New York affiliate nexus law’s rebuttable presumption of nexus) as establishing that “through these types of affiliate agreements, a vendor is deemed to have established an in-state sales force.” Travelocity, 2014 WY 43 at ¶ 82.
The Wyoming Supreme Court badly misreads the decision in Overstock.com and, in the process, introduces confusion as to whether Internet “click through” nexus is now the law in Wyoming, despite the Wyoming legislature not having adopted a “click through” affiliate nexus statute. In Overstock.com, the New York Court of Appeals made very clear that mere passive advertising relationships, even if they involve compensation based on sales, do not create nexus under the New York statute. Overstock.com, 20 N.Y.3d at 596 (“no one disputes that a substantial nexus would be lacking if New York residents were merely engaged to post passive advertisements on their websites”). There is no basis for reading the Overstock.com decision as holding that “click through” affiliate arrangements with in-state websites, without more, create nexus with a state for an out-of-state retailer. Furthermore, because the Wyoming Court discussed the OTCs’ Internet affiliate relationships as an additional nexus factor, beyond their contractual relationships with the Wyoming hotels themselves, it is now unclear whether out-of-state retailers whose only connection with Wyoming is via Internet affiliate arrangements will be deemed by the Wyoming Department of Revenue, the Wyoming Board of Equalization, or Wyoming courts, to have nexus with the state as a result.
Ultimately, the Court’s careless analysis may spell trouble for Wyoming affiliates. In many cases, retailers react to the introduction of a state law or ruling which institutes affiliate nexus by terminating their relationships with in-state affiliates. In the end, it is the in-state small businesses that rely on online advertising revenue derived from contracts with out-of-state online retailers that suffer the most.
Retailers with affiliate programs that include Wyoming affiliates should consult their tax advisors to determine whether or how to adjust their programs in response to the Court’s ruling.