States on the Warpath

In the last few months, three states (Illinois, Arkansas and South Dakota) have enacted “nexus expanding” legislation effective on July 1, 2011. Other states are considering adopting such legislation. The legislation falls into three categories: (1) click-through nexus; (2) reporting obligations; and (3) “affiliate” or “attributional nexus.”

We have previously written about the Illinois click-through nexus law (here and here), which we believe is unconstitutional since it purports to establish nexus (with no opportunity to rebut the determination) for any retailer that contracts with a person “located in Illinois” who receives a commission from the retailer based on sales of goods facilitated by a link from the person to the retailer’s web site. We will not describe here the details as to why the statute is unconstitutional, other than to note that mere national advertising, which is what the click-through represents, has never been deemed to create nexus, as pointed out in the Quill v. North Dakota case. In addition, online retailers should carefully review the Illinois statute and its requirements before deciding whether it applies to them.

The other recently-adopted nexus click-through legislation is the Arkansas law, which, unlike the Illinois statute, creates only a presumption of nexus that can be rebutted by a showing that the person maintaining the web site that provides a link does not engage in solicitation on behalf of the retailer. The statute is modeled after the New York statute, and it is possible for a retailer to structure its program with its Arkansas affiliates so as not to be subject to Arkansas sales tax collection obligations.

Commercial Privacy Bill of Rights Introduced in Congress

The introduction of the so-called Commercial Privacy Bill of Rights by Senators Kerry and McCain on April 12, 2011 suggests that we may be about to enter an era of robust regulation of information gathering regarding the online browsing and shopping habits of consumers. This type of data has come to be an important tool for online marketers to improve the efficiency of online advertising buys, and to improve other marketing techniques. At a minimum, this development presents a risk that online merchants will need to build out substantial new technical infrastructure to accommodate a welter of new rules under this bill. Beyond that, it may make it difficult even for highly respected and responsible merchants to engage in marketing activities that are an important part of their tool kit in the information age.

Among other things, the bill contains the following requirements:

• Collectors of information must implement security measures to protect the information they collect and maintain.

• Collectors of information must provide clear notice to individuals of the collection practices and the purposes of such collection. Additionally, collectors must provide the ability for an individual to opt out of any information collection that is unauthorized by the Act and to provide affirmative consent (opt-in) for the collection of sensitive personally identifiable information. Respecting companies’ existing relationships with customers and the ability to develop a relationship with a potential customers, the bill would require "robust and clear" notice to an individual of his or her ability to opt-out of the collection of information for the purpose of transferring it to third parties for behavioral advertising. It would also require collectors to provide individuals either the ability to access and correct their information, or to request cessation of its use and distribution.

• Collectors must bind third parties by contract to ensure that any individual information transferred to the third party by the collector will only be used or maintained in accordance with the bill’s requirements. The bill requires the collector to attempt to establish and maintain reasonable procedures to ensure that information is accurate.

Update to eMarketers: Canada’s FISA Broader than US’s CAN-SPAM Act

Last late year, Canada enacted the Fighting Internet and Wireless Spam Act (FISA).  The framework established by FISA is fundamentally different from the United States’s CAN-SPAM Act.  First, while CAN-SPAM applies only to commercial email, FISA applies to any form of electronic message sent for marketing purposes (referred to as a “Commercial Electronic Message,” or “CEM”), including: email; SMS; instant messaging; and social media/networking. U.S. regulations have not to this point targeted communications with customers across social media.

Second, and perhaps more significantly from the standpoint of most U.S. firms, FISA requires affirmative consent from a potential recipient of a message before marketers can send a CEM.  This feature of the law stands in sharp contrast to CAN-SPAM, which permits at least “one free shot” at a recipient, provided that the message itself is CAN-SPAM compliant (ie. the message includes opt-out instructions, clearly identifies the sender, identifies itself as commercial email, etc.).

Accordingly, U.S. companies now will need to differentiate their approach to marketing to Canadian customers from their approach to marketing to U.S. customers in order to ensure compliance with both the Canadian and U.S. statutes.  Commonly utilized techniques for acquiring contact information, such as list rental, if used to market to Canadian customers, now have the potential to expose marketers to a violation of FISA.

Illinois Governor Signs "Amazon" Affiliate Nexus Law

On March 10, Illinois Governor Pat Quinn signed into law HB 3659, the affiliate nexus bill passed by the legislature in January. Quinn's signing makes Illinois the fourth state (along with New York, Rhode Island, and North Carolina) to enact such a law. The Illinois bill provides that once an out-of-state Internet retailer realizes $10,000 in receipts from sales made to customers linked to the retailer's website from the websites of its Illinois affiliates, the retailer will be deemed to be a “retailer having or maintaining a place of business in this State” and be obligated to collect and remit tax on all of its sales to Illinois consumers.

In response, Amazon.com promptly informed its Illinois affiliates that it is terminating its relationships with them. Look for further developments in the coming days.

DMA v. Huber Update: Huber Appeals to Tenth Circuit

As we reported in January, the Direct Marketing Association (the "DMA") recently won a landmark preliminary injunction in its lawsuit against the State of Colorado.  The preliminary injunction prohibits the Executive Director of the Colorado Department of Revenue from enforcing Colorado’s new notice and reporting law, H.B. 10-1193, which would require out-of-state direct marketers and online sellers who do not collect Colorado sales and use taxes to inform Colorado purchasers of their obligation to self-report tax and to provide Colorado customers summaries of their purchases, and also would require sellers to report specific customer purchase information to the State.  As we wrote previously, the Court, in granting the preliminary injunction, found that the requirements of H.B. 10-1193 likely both violated the Commerce Clause and would cause irreparable harm to out-of-state retailers if enforced

On February 25, the Defendant filed an interlocutory appeal of the District Court’s order granting the preliminary injunction, seeking review of the injunction by the Tenth Circuit Court of Appeals.  It will likely be six to nine months before the Tenth Circuit issues its ruling in the matter, but we will keep you updated as developments arise.

Additional States Introduce Affiliate-Nexus Legislation

On March 2, an Internet-affiliate nexus bill was introduced in the Arkansas State Senate (SB 738). Arkansas joins Arizona, California, Connecticut, Hawaii, Illinois, Massachusetts, Minnesota, Mississippi, New Mexico, Tennessee, Texas, and Vermont, as the thirteenth state this legislative season to consider such a measure. Nearly all of the bills -- with the exception of Illinois’s HB 3659, which was passed by the Illinois legislature and is now awaiting signature or veto by Governor Quinn, and Connecticut’s SB 5545 -- are patterned directly upon the New York affiliate nexus law enacted in 2008 and challenged in court, so far unsuccessfully, by Amazon.com. In other words, 11 of the 13 proposed laws create a rebuttable presumption that an out-of-state Internet retailer is obligated to collect and remit the state’s sales and use taxes if the retailer enters into an agreement with an in-state resident (an “affiliate”) pursuant to which the affiliate places a link from the affiliate’s website to the retailer’s site, and the retailer realizes at least $10,000 in sales to customers referred to it by the affiliate’s links. The presumption can be negated by proof that the in-state affiliates did not engage in any in-state solicitation on behalf of the retailer.

In its November 2010 ruling, the Appellate Division of the New York Supreme Court found that the ability of a retailer to rebut the presumption of solicitation was an important factor in determining that the New York law is not unconstitutional on its face. The Court, however, remanded the case for further proceedings on the issue of whether the law violates the Commerce Clause and Due Process Clause as applied to specifically to Amazon. As the ongoing proceedings in the New York case make clear, the constitutionality of such “New York-style” affiliate-nexus legislation is far from resolved.

At the same time, it is worth noting that the Illinois and Connecticut bills differ from the New York law in that neither bill provides that the presumption that a retailer must collect sales and use tax as a result of having in-state Internet affiliates may be rebutted. Imposing an irrebuttable presumption of nexus is highly suspect under both the Commerce Clause and Due Process Clause. Without a rebuttable presumption in place to protect retailers, Illinois and Connecticut would subject Internet retailers to burdensome state tax collection obligations when the retailers are effectively doing nothing more than advertising. For that reason, the progress of each of these bills bears watching. Stay tuned.

D.C. Circuit Cites Quill as Instructive in Analyzing the Due Process Ramifications of a National Tax Scheme

The Supreme Court’s analysis in Quill Corp. v. North Dakota, 504 U.S. 298 (1992) has been cited favorably again, this time with regard to a Due Process challenge to a federal statute. On February 18, the United States Court of Appeals for the District of Columbia Circuit vacated the denial of a motion for a preliminary injunction brought by a plaintiff challenging the constitutionality of a federal law regulating online sales of tobacco products, and remanded the case for further proceedings. Gordon v. Holder, 2011 WL559002 (D.C. Cir. Feb. 18, 2011). Previewing the issues to be addressed by the District Court on remand, the Court of Appeals cited Quill as “instructive” in analyzing the plaintiff’s claim that the federal statute violates the Due Process Clause.

In a statement likely to send shivers up the spines of the members of the Governing Board of the Streamlined Sales and Use Tax Agreement and other advocates for federal legislation to override Quill’s “physical presence” requirement arising under the Commerce Clause, the D.C. Circuit commented that “there remains an open question whether a national authorization of disparate state levies on e-commerce renders concerns about presence and burden obsolete” as a matter of Due Process. Id. at *4 (emphasis added). While this statement, and the Court’s opinion, does not alter the analysis under Quill of the constitutionality of state tax (and tax-related) laws under the Commerce Clause, it suggests that the concerns about “presence and burden” presented in Quill are potentially also relevant to determining whether a federal law authorizing state tax levies is consistent with the Due Process Clause.