We have written extensively about Internet click-through nexus laws. Indeed, Brann & Isaacson prevailed, on behalf of the Performance Marketing Association, in the challenge to the Illinois Internet click-through nexus law. On October 18, 2013, the Illinois Supreme Court ruled that the Illinois statute violated the federal Internet Tax Freedom Act (“ITFA”), which is found at 47 U.S.C. §151 note, because the Illinois statute discriminated against electronic commerce. The lower court, the Circuit Court of Cook County, had held that the Illinois statute also violated the Commerce Clause because it mandated that any retailer that had an affiliate relationship with an Illinois company (i.e. the Illinois company referred potential customers to the retailer for a commission or other consideration) was required to collect and remit the Illinois sales and use tax. Because of its ruling under the ITFA, the Illinois Supreme Court declined to address the Commerce Clause issue.
In February 2014, the DMA, also represented by Brann & Isaacson, obtained a preliminary injunction from the District Court of Colorado, enjoining the enforcement of the Colorado reporting nexus law. The Colorado law required those companies that do not have a physical presence in Colorado to file reports with the Colorado Department of Revenue, make certain disclosures on their websites and catalogs and notify their customers through mailings describing the customers' obligation to remit sales taxes to the Colorado Department of Revenue. We reported on this decision in our February 20, 2014 blog post.
Subsequent to both the Illinois and Colorado victories for the industry, the legislatures in both of these states amended their statutes to address click-through nexus arrangements. Their approaches are different, though:
The Illinois statute, SB0352, which will go into effect on January 1, 2015 if signed by the governor, provides that a retailer is presumed to have nexus with Illinois if it pays a person (the “affiliate”) located in Illinois a commission or other consideration based upon the sale of tangible personal property for referrals to the retailer, if the affiliate provides potential customers a promotional code from the retailers to track purchases by such potential customers. The promotional code can appear on a web site or be included on written advertising materials used by the affiliate to promote sales by the retailer or it can appear on other broadcast media distributed by the referring person. The presumption may be rebutted by proof that the activities of the person located in Illinois, including the referrals on the Internet or by other advertising, were not sufficient to meet the nexus standards of the U.S. Constitution.
The Illinois statute is obviously an attempt to cure the constitutional and statutory deficiencies of the prior law. It differs from click-through nexus laws adopted in other states, in that under other states' laws, the retailer may overcome the presumption by proving that the affiliate does not engage in any other solicitation activities in the state that constitute nexus under the constitutional standard. See, e.g., NY Tax Law Sec. 1101(b)(8)(vi), NY TSB-M-08(3)S. The Illinois law requires that the retailer must establish that the actual referral relationship between the affiliate and the retailer does not establish nexus under the Commerce Clause.
The Colorado statute, House Bill 14-1269, takes the exact opposite approach as that of the Illinois statute. It provides that a click-through arrangement between a retailer without a physical presence in Colorado and a Colorado affiliate does not create nexus. In other words, it provides a “safe harbor” for a retailer doing business with Colorado blogs and other websites that provide links to the retailer. It should be noted that the Colorado statute does provide for affiliate nexus in certain situations in which the nexus of a company under common ownership with the retailer will be attributed to the out-of-state retailer.
In short, while some commentators have suggested that states will go on the warpath to adopt more aggressive affiliate nexus statutes in the absence of federal legislation, one state–Colorado–has not done so, at least insofar as click-through nexus statutes.