Despite Prior Veto, Missouri Governor Signs Click-Through Internet Affiliate Nexus Provision into Law

As we reported last month, on June 5, Missouri Governor Jay Nixon vetoed a bill that included an Internet affiliate nexus provision. What a difference a month makes. On July 5, Governor Nixon signed a different bill, S.B. 23, that amends Missouri’s definition of “engages in business activities in this state” under Mo. Stat. § 144.605(2) to add a presumption of nexus for retailers with “click-through” online advertising agreements with residents of the state. Under the Missouri statute, “a vendor shall be presumed to engage in business activities within this state if the vendor enters in an agreement with one or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers” to the vendor by an Internet link or otherwise, so long as the vendor realizes at least $10,000 in sales from such referrals. The presumption may be rebutted by submitting proof that the affiliates were not engaged in activities that were significantly associated with the retailer’s ability to make or maintain a market for sales in the state. In particular, such proof may consist of “sworn written statements from all of the residents with whom the vendor has an agreement stating that they did not engage in any solicitation in the state on behalf of the vendor during the preceding year.” See Mo. Stat. 144.605(e), (f).

The Missouri statute continues a disturbing trend among state “click-through” Internet affiliate nexus laws under which a presumption of nexus is created regardless of whether the compensation paid to the in-state affiliate is based on sales completed by the retailer. Statutes recently enacted in Kansas, Maine, and Minnesota contain similar language, as do statutes already on the books in Arkansas, North Carolina, Rhode Island, and Vermont (although Vermont’s statute is not yet in effect). By the plain terms of such statutes, a passive “pay-per-click” advertising arrangement would be sufficient to create a presumption of nexus. Such a presumption is inconsistent with the reasoning of the New York Court of Appeals’ decision upholding the New York affiliate nexus law. See Overstock.com, Inc. v. Department of Taxation and Finance, 20 N.Y.3d 586 (2013). In Overstock, the Court emphasized that “no one disputes that a substantial nexus would be lacking if [in-state] residents were merely engaged to post passive advertisements on their websites.” 20 N.Y.3d at 596. These several states’ affiliate nexus statutes are at odds, on their face, with this fundamental principle.

Nexus of Subsidiary Not Automatically Attributable to Parent Company

Recently, a number of states have adopted statutes providing that an out-of state retailer is presumed to have nexus in the state by virtue of ownership of a subsidiary that does business in the state. See California (ABX 1, but note its implementation was delayed by AB 155); Colorado (Colo. Rev. Stat. § 39-26-102(3)(b)(II)); and Arkansas (Ark. Code Ann. 26-52-117(b)). While each of these state statutes provides that mere ownership creates only a presumption of nexus, which a retailer can rebut, some commentators have interpreted these laws as attributing the nexus of in-state affiliates to related out-of-state companies.

But an out-of-state retailer’s mere ownership of a company without the company acting as an agent or representative of the retailer will not create nexus for the retailer under the constitutional standard. Quill and a number of cases decided both before and after Quill stand for the proposition that mere ownership of another company that has an in-state presence does not create nexus for the parent, absent the in-state subsidiary engaging in activities on behalf of the parent to create a market in the state for the parent. We wrote an article back in 1996 that discusses the case law. See Defending Against Affiliate Nexus in Sales and Use Tax Collection Liability Cases, State Tax Notes (March/April 1996). In other words, the subsidiary must be acting as an agent or representative of the parent company in the state for the nexus of the subsidiary to be attributed to the parent.

Tax Agencies Should Read the Language of the Statute and May Not Expand the Law’s Requirements

As some of our readers are aware, on June 28, 2011, California’s Governor Brown signed into law a bill (ABX1 28) that provides for “click-through nexus” under certain circumstances. This law is similar to “click-through nexus” legislation adopted in New York, Rhode Island, North Carolina, and Arkansas (which we have written about extensively in the past), inasmuch as it creates a rebuttal presumption of nexus if a company’s annual sales to California exceed $500,000 and if the company’s California sales exceed $10,000 from links or other referrals from companies (“affiliates”) who receive a commission from such referrals.

Unlike the Illinois and Connecticut statutes, which automatically create nexus in the event that sales from affiliates exceed the threshold, the California law provides that the retailer can rebut the determination of nexus based on affiliate relationships. Nevertheless, in a recent notice issued by the California Board of Equalization (Notice L-284, issued July 2011), the Board states that there are only two conditions to a finding that a retailer must be registered for sales and use tax collection: (1) that sales from affiliates exceeded $10,000 in the last 12 months; and (2) that the retailer’s total sales to California exceed $500,000 in the last 12 months. According to the Board, if a business meets the foregoing requirements and is not already registered with the Board, it must complete a “California Certificate of Registration—Use Tax.”

Connecticut Amends Its Affiliate Nexus Law To Mirror Illinois

We have written frequently in recent months about affiliate nexus legislation introduced this legislative session in a number of states, and enacted recently in Illinois, Arkansas, Connecticut and, on a deferred basis (to take effect only after 15 states have adopted similar legislation) Vermont. (A similar bill has been passed in California, but has not yet been signed by Governor Brown.) Nearly every such bill has closely paralleled the affiliate nexus law adopted in New York in 2008, which provides for a presumption of nexus that can be rebutted by a retailer if the retailer can establish that its in-state affiliates have not engaged in any active solicitation in the state, but have merely posted online advertisements on behalf of the retailer that link to the retailer’s website. Illinois was the only state to adopt a law without such a rebuttable presumption.

The Connecticut legislature has now amended the affiliate nexus statute it passed in May 2011, to eliminate the rebuttable presumption and, instead, to closely mirror the Illinois law. Connecticut HB 6652, signed by Governor Malloy on June 21, repeals the affiliate nexus statute adopted in May, and instead modifies the definition of “retailer” (as well as the definition of “engaged in business in the state”) to classify as a Connecticut retailer any company that has affiliate relationships with persons in Connecticut pursuant to which the affiliates refer customers to the retailer in return for commissions or other consideration based on sales, via an online link or otherwise. The retailer must realize cumulative gross receipts of at least $2,000 on sales to Connecticut customers as a result of such referrals in order to be “engaged in business in the state.” In addition, HB 6652 makes the change in the definitions of “retailer” and “engaged in business” retroactive to May 4, 2011 – prior to the date on which the previously enacted affiliate nexus law was even adopted.

It warrants mention that the Connecticut legislature amended its affiliate nexus statute after the Performance Marketing Association filed suit in federal court in Chicago challenging the constitutionality of the Illinois law. Brann & Isaacson represents the PMA in that action.

The Lone Star State Follows a Different Path Regarding Nexus

Bucking the trend of other states, Texas’ Governor recently vetoed proposed legislation to expand the scope of the Texas sales and use tax law regarding collection of sales and use tax. The proposed legislation—HB 2403—was approved by both houses of the Texas legislature, but vetoed by Governor Perry on May 31. This legislation was not as aggressive as that in other states that have recently adopted nexus legislation. (Illinois, Connecticut, Arkansas and Vermont are examples). It merely provided that a retailer has nexus with Texas if it has an affiliated company that operates a distribution center in Texas or if an affiliated company located in Texas performs services on behalf of the retailer or sells under the same brand name as the retailer. This was in part directed at the Amazon situation in which an affiliate of Amazon.com operated a distribution center in the state of Texas (that reportedly led to a $269 million assessment of sales tax by the Texas Comptroller of Public Accounts).

A piece of good news for sellers of digital goods does result from the legislature’s work on the bill. The legislation, as introduced, also provided that use by a remote seller of a website on a server in Texas from which digital goods are sold or delivered creates nexus. However, the House Committee that first reviewed the bill removed the language before submitting the bill to the full House for a vote. This may signify that such activity does not create nexus in Texas. But, before embarking on any such activity in Texas, a seller of digital products should examine carefully the Texas law and applicable constitutional cases in light of the proposed sales activity.

Another State Adopts Nexus Click Through Legislation

Following the model of New York, Rhode Island, North Carolina and Arkansas laws, Connecticut recently adopted click-through nexus legislation that is effective on July 1, 2011. The new law states that any retailer that has an agreement with a Connecticut resident, under which the resident, for a commission or otherwise, refers potential customers (by a web site link or other contact) to the retailer, is presumed to have nexus with Connecticut if its sales as a result of such agreements in Connecticut exceed $2,000 for the preceding year. As is the case in the four states described above, the presumption can be rebutted by proof that the residents do not undertake in-state solicitation activities that would create nexus under the constitutional standard.

The Connecticut statute differs from the statutes enacted in New York and other states, in that the threshold for sales is a lower amount–$2,000 as opposed to $10,000 (or $5,000 in the case of Rhode Island). It also differs from the recently-enacted Illinois statute inasmuch as the Illinois statute does not permit a retailer to rebut a finding of nexus that is based upon a relationship with an affiliate located in Illinois that provides a link to a retailer’s Internet site that facilitates the sale of tangible personal property.

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.

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.