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frequently about the California affiliate nexus statute, AB 155, which was adopted in June 2011, but was temporarily repealed in September 2011, pending Congressional action on a bill rejecting the Quill physical presence test.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. 

Borders’ Gift Card Holders Not Permitted Recovery in Bankruptcy

We’ve written about gift cards in this space in the past, and have covered escheat issues related to gift cards, as well. But, in a different wrinkle, last month, the Bankruptcy Court for the Southern District of New York addressed the impact of bankruptcy law on companies’ requirements to honor gift cards.

By way of background, in February 2011, Borders filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code. In general, retailers are not obligated to honor gift cards in bankruptcy, despite any state requirements that gift cards be honored for a certain period of time. Instead, gift card holders are generally treated like all other creditors and are required to timely file proofs of claim prior to a bar date set by the court in order to receive the value (or a portion of the value) of the gift cards. Note though, that in California, at least, retailers in bankruptcy may be required to honor gift cards.

But, via a motion filed with the Bankruptcy Court, Borders indicated that it planned to honor gift cards issued prior to the petition date. That is, customers could continue to use Borders gift cards in Borders stores and on its website. Later, following the September 2011 liquidation of Borders’ retail stores and the end of its e-commerce operations, Borders no longer honored its gift cards since it no longer had any retail channels through which it could do so. In January 2012, after confirmation of the bankruptcy plan, several holders of gift cards who had not yet redeemed the cards filed a motion seeking to allow late proofs of claim so that they could recoup the value of their unused gift cards. They argued that because of data systems Borders had in place, Borders should have been required to provide each gift card holder actual, individual notice of the bar date to file claims, rather than the general notice provided via publication in the New York Times. Since they did not receive adequate notice, they argued, their failure to file proofs of claim was due to excusable neglect and late claims should have been permitted.

Retailers Beware of the new New Jersey Gift Card Law

In the wake of the 2011 decision of the Third Circuit Court of Appeals in New Jersey Retail Merchants Association v. Sidamon-Eristoff, 669 F.3d 374 (3rd Cir. 2012),  condemning a large portion of the New Jersey statute adopted in 2010 regarding gift cards, gift certificates, and other stored value cards, the New Jersey legislature amended the statute.  S.B. (1928), Laws 2012, effective June 29, 2012.  The statute removes some of the more objectionable provisions of the old law regarding stored value cards, which are defined broadly to include gift certificates, gift cards, and any other record (tangible or electronic) that reflects a promise, for money, by the issuer or seller that the owner of the record may obtain merchandise, services, and/or cash in the amount of the face value of the record.  The statute, however, does add some strict prohibitions regarding stored value cards, and gift cards and certificates in particular.  These prohibitions are such that a retailer that issues gift cards could be exposed to significant penalties unless it makes sure its practices conform to the requirements of this statute.  At the same time, the law reduces the potential escheat of unredeemed gift cards. It also protects small issuers of stored value cards.  A company that issues stored value cards of less than $250,000 per year is not subject to the escheat and consumer protection provisions of the New Jersey statute.  Now for the details:

The features of the new law that are beneficial to retailers are that:  (1) it repeals the provision of the old law that if the issuer does not maintain the address of the owner or purchaser of the stored value card, the value of the card must be escheated to New Jersey if the card was issued there; (2) it eliminates the requirement of the old law that the issuer obtain information about the gift card purchaser or owner, but instead requires that by July 1, 2016, the issuer maintain a record of the zip code of the owner or purchaser; (3) it extends the period of abandonment (i.e. an unredeemed gift card not claimed) from two years after issuance to five years; and (4) it requires escheat of only 60% (as opposed to 100%) of the proceeds of all stored value cards other than general purpose reloadable cards, which are cards issued by a bank or other financial institution.

Committee Hearings Held on Remote Collection Bills; Coalition Forms to Demand True Simplification Of State Sales Tax Systems, Defend Quill

We have written previously about attempts by Congress to overturn the physical presence nexus standard of Quill Corp. v. North Dakota via the Main Street Fairness Act, the Marketplace Fairness Act, and the Marketplace Equity Act. The bills vary in their specifics as we discuss here and here, but most simply put, all three bills would permit states to require remote sellers to collect and remit sales and use tax despite such sellers having no physical presence in the state. While it is difficult to predict what Congress may do in an election year, it appears that so far, the Main Street Fairness Act has not made much progress through Congress since being introduced. The other two bills have seen some committee action lately, however, as discussed below.

Meanwhile, a coalition has formed to help protect remote sellers’ interests. The TrueSimplification of Taxation (“TruST”) Coalition was formed jointly by the Direct Marketing Association, the American Catalog Mailers Association, the Electronic Retailing Association, and NetChoice to represent “American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where our businesses have no operations or representation.” Brann & Isaacson partners George Isaacson and Martin Eisenstein assisted in forming the coalition and provide ongoing advice regarding the sales and use tax collection implications to remote sellers.

Congressional Privacy Caucus Begins Inquiry into Data Brokers

The Bipartisan Congressional Privacy Caucus, chaired by Representatives Ed Markey (D-Mass.) and Joe Barton (R-Texas), announced this week that they are launching an inquiry into data brokers.  Members of the caucus sent letters to nine data brokers – Acxiom, Epsilon (Alliance Data Systems), Equifax, Experian, Harte-Hanks, Intelius, Fair Isaac, Merkle, and Meredith Corp.  – requesting that they provide information about their practices. 

The Caucus’s letters request information including:

• The names of entities that have provided consumer information to the data broker;
• The data items collected from or about consumers and the methods by which the data was collected;
• Products or services offered to third parties that utilize consumer data;
• The information consumers are given access to, if it is requested, and any policies around sharing or deletion of that data; and
• Encryption or other safety protocols used to protect data.

The data brokers were asked to respond within three weeks. 

New Hampshire Does Not Tax Internet Access

Reaffirming its state’s anti-tax DNA, the New Hampshire legislature confirmed what some state tax practitioners have been arguing all along: the New Hampshire communications services tax does not apply to Internet access charges. (New Hampshire does not have a sales tax.) On June 21, 2012, the Legislature enacted a statute, 2011 NH 1418, that bars imposition of the communications services tax on “Internet access” charges. The statute also prohibits the New Hampshire Department of Revenue from enforcing any existing assessments of communications services tax on charges for Internet access and requires the prompt withdrawal of any pending assessments. Even though the effective date of the legislation is the date of its enactment, June 21, 2012, the law prohibits the Department from issuing any “additional” assessments with respect to Internet access charges. The statute does not limit the prohibition to Internet access services provided after June 21, 2012, so a fair reading of the statute is that any future assessments for Internet access charges, regardless of when the services were provided, are precluded.

The new law defines the term Internet access in the same way as that term is defined in Section 1105(5) of the Internet Tax Freedom Act (“ITFA”), codified as a note to 47 U.S.C. § 151. The law should apply not only to services provided by Internet Service Providers (“ISPs”) but to services purchased by such ISPs in order to provide Internet access.

Prior to the June 21, 2012 legislation, the New Hampshire Department of Revenue had taken the position that the Communications Services Tax applied to Internet access charges, and that such tax was not prohibited by the ITFA. See New Hampshire Department Technical Information Release, TIR 2008-006, September 15, 2008. In that TIR, the Department took the position that it is grandfathered under the ITFA.

Is the EU About to Break the Internet?

In a move that has the potential to do severe damage to the e commerce user experience, some E.U. countries are beginning to implement the E.U. privacy directive on internet cookies (small information files which websites use to remember customers and preferences). In principle, the so-called “Cookie Directive” requires that website users receive explanations of the particular cookies used by a website (except those which are “strictly necessary”) and then actively choose to accept them before the cookies can be automatically stored on the user’s computer. Businesses fear that their retail websites will frighten customers with pop-up boxes of legal language and strange file names. In addition, should users choose not to permit the use of cookies, their browsing and shopping experience stands to be severely compromised, impacting merchant performance.

The UK appears to be in the vanguard of jurisdictions charging ahead with implementation of an aggressive version of the directive. In the May 26, 2012 revisions to Regulation 6 of its Privacy and Electronic Communications Regulations 2003 (“PECR”) and the latest guidance from its Information Commissioner’s Office, the burden is on websites to include:

• An information page providing a general explanation of what cookies are, the file names of the cookies in use on the website and explanations of each cookie’s function;
• A sufficiently prominent link to that page from its homepage; and
• A pop-up box, gateway window, or header/footer bar by which a user must choose to “accept” the cookies from that website after having the option to read the information page.