Illinois and Colorado Adopt Two Different Approaches to Internet Click-Through Nexus Laws

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:

Did Wyoming Just Become an Internet Affiliate Nexus State?

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.

State Sales Tax Enforcement After the Supreme Court’s Denial of Cert in Amazon/Overstock

As we have discussed in prior posts, Amazon and Overstock.com filed petitions for certiorari with the U.S. Supreme Court seeking review of the New York Court of Appeals decision that the New York affiliate click-through nexus statute, on its face, did not violate the Commerce Clause. Late last year, the U.S. Supreme Court denied the petitions and, therefore, the New York Court of Appeals’ decision stands.

While the denial of cert means that the New York statute is constitutional on its face, it is not an indication that the U.S. Supreme Court agrees with the New York Court of Appeals’ decision or that the Court has blessed affiliate click-through nexus laws. It simply signifies that the issues presented in that case did not warrant review. Less than 5% of all petitions for certiorari are granted.

States, however, have taken the denial of cert as a prompt to propose affiliate click-through nexus laws. Thus, representatives have introduced bills in the legislatures of four states—Hawaii, Indiana, Tennessee, and South Carolina—that are modeled after the New York statute. There are some variations among this proposed legislation, but in general each provides for a presumption of nexus if the remote seller pays commissions to a person (the affiliate) who resides in the state for referrals by a website link or otherwise, if the retailer’s sales in the state from such referrals exceed $10,000. The bills would also permit the retailer to overcome the presumption by showing that the affiliate does not otherwise solicit sales on behalf of the retailer or otherwise make a market in the state. The New York Court of Appeals in the Amazon/Overstock cases stated that the presumption was rebuttable, so that the retailer could prove that the affiliate did not engage in solicitation activities on behalf of the retailer in New York. The rebuttable presumption saved the constitutionality of the statute.

Supreme Court Denies Petitions for Cert of Amazon and Overstock

As we recently wrote, last spring New York State’s highest court, the Court of Appeals, issued a decision upholding the state’s Internet affiliate nexus law after a challenge made by Overstock.com and Amazon.com. The Court of Appeals found that the law, which creates a rebuttable presumption of nexus for out-of-state vendors who employ in-state affiliates, satisfies substantial nexus requirements and does not violate the Due Process clause.

In September, Overstock.com and Amazon.com sought review of the decision of the Court of Appeals by filing petitions for certiorari with the United States Supreme Court. After extensive briefing by the petitioners, the State of New York, and many amicus curiae, on December 2, the Supreme Court denied the petitions for cert. (See the cases’ status here and here.)

This ends the petitioner’s facial constitutional challenge to the New York affiliate nexus law as Overstock.com and Amazon.com have now exhausted their appellate options. The decision by the Supreme Court not to hear the case, however, does not mean that every state’s affiliate nexus law is valid and enforceable. For instance, the Illinois Supreme Court held in October that Illinois’s Internet affiliate nexus statute was preempted by the Federal Internet Tax Freedom Act. The Supreme Court’s decision Monday has no impact on the now unenforceable Illinois law.

Illinois Supreme Court Rules Illinois “Click Through” Nexus Statute Is Void And Preempted By Federal Law

The Illinois Supreme Court issued its decision today in Performance Marketing Association v. Hamer, ruling that the Illinois “affiliate nexus” (also known as “click-through nexus”) law is “void and unenforceable” because it is preempted by federal law. Brann & Isaacson partners George Isaacson and Matthew Schaefer represented the PMA in this case, and Isaacson argued the case before the Illinois Supreme Court on May 22, 2013. The case was on appeal from the Circuit Court, which had had held that the affiliate nexus law was an unconstitutional violation of the Commerce Clause, and was also preempted by the Internet Tax Freedom Act (“ITFA”), because it impermissibly discriminated against electronic commerce. In affirming the lower court’s decision, the Illinois Supreme Court based its holding on a violation of the ITFA, and did not reach the Constitutional argument.

The Illinois law had purported to impose a use tax collection obligation on any out-of-state retailer or serviceman who had a contract with a person located in Illinois that paid a commission based on sales generated from referral links placed on that person’s website, provided the retailer realized a minimum in $10,000 in sales to customers through such links. Under the Internet Tax Freedom Act, states are prohibited from imposing “discriminatory taxes on electronic commerce.” A discriminatory tax is defined as a tax that “imposes an obligation to collect or pay tax on a different person or entity than in the case of transactions involving similar property, goods, services, or information accomplished through other means.” 47 U.S.C. §151 note.

The ruling is a significant victory for online retailers, and for the Illinois individuals who generate income through affiliate links.

Judge Enjoins Cook County from Enforcing Use Tax

We write frequently about the difficult task retailers face in complying with the myriad state and local tax regimes in this country. State and local tax rules are ever changing, both through legislative and regulatory efforts and also through actions of administrative bodies and even the courts. For your average retailer, keeping abreast of every change can be near impossible.

For instance, last November, Cook County, Illinois approved a use tax ordinance that went into effect April 1, 2013, and imposed tax on non-titled personal property purchased outside the county for use within the county. The Cook County use tax rate was set at 1.25%, while the County’s sales tax rate on similar purchases made inside the county was only 0.75%. The language used in adopting the use tax plainly stated the County’s purpose in adopting the new tax: “WHEREAS, it is in the interest of Cook County to take steps that will level the playing field among business interests, close tax loopholes, and incentivize the purchase of non-titled personal property within the County for use within Cook County.”

Illinois Update: Oral Arguments Heard in PMA v Hamer

On Wednesday, May 22, 2013, the Illinois Supreme Court heard oral argument in Performance Marketing Association v. Hamer.  The Court heard the State’s appeal from the ruling of the Cook Country Circuit Court that the Illinois Internet affiliate nexus law is unconstitutional.  Brann & Isaacson senior partner George Isaacson argued the case on behalf of the PMA.  A video of the oral argument is posted on the Court’s website.  Isaacson’s portion of the argument begins at 21:20 of the Court’s video.

February 2013: An Eventful Month In The Debate Regarding Use Tax Collection By Internet Retailers

If it seems like there has been a lull in the debate regarding whether ecommerce vendors should be required to collect sales and use tax, this month has seen a series of developments that demonstrate the conflict continues apace.

On February 6, 2013, New York’s highest court heard oral arguments by attorneys for Amazon.com, Overstock.com, and the state Department of Taxation and Finance in the Internet retailers’ respective constitutional challenges to the New York affiliate nexus law enacted in 2008. (The cases are captioned Amazon.com v. New York State Department of Taxation and Finance, Court of Appeals Case No.APL-2012-00045, and Overstock.com v. New York State Department of Taxation and Finance, Court of Appeals Case No. APL-2012-0001.)  Recall that, under the New York law, an out-of-state retailer is presumed to be soliciting sales through representatives in the state if it enters into a contract with a New York resident for the placement of a link on the resident’s website that refers internet users to the out-of-state retailer’s website, pays the New York resident compensation based on sales to customers completed through the link, and makes a minimum $10,000 in such sales to New York customers.  See N.Y.Tax Law § 1101(b)(8)(vi).  A retailer with an in-state representative that solicits sales is required under New York law to collect and remit use tax on sales to New York customers.  The state prevailed before the trial court and intermediate appellate court finding that the law was not unconstitutional on its face.  According to reports, the Justices on the Court of Appeals appeared somewhat receptive to Amazon’s arguments that (1) the law violates the Due Process Clause because the presumption cannot be effectively rebutted and (2) the law violates the Quill “physical presence” standard of nexus.  That said, the state has the advantage of having prevailed below.  Decisions by a state high court are usually issued several months after argument, and we will continue to monitor the case.

Traps for the Unwary: Taxation of Digital Products

Recently, I presented at a webinar hosted by Strafford Publishing on the subject of sales and use tax on digital products and services.  It almost goes without saying that the interstate sale of digital products—whether books or software—is complicated, if for no other reason than it requires analyzing the sales and use tax consequences of such transactions based upon forty-five states’ (and the District of Columbia’s) sales tax laws, which were adopted long before the advent of the digital age.  For example, the starting point for sales tax analysis in most states is whether the transaction involves the sale of “tangible personal property.”  Is a digital product such as a digital book that is downloaded by the customer tangible personal property?

The states do not provide for uniform treatment of the taxability of digital products from state to state, nor are all digital products taxed similarly within a given state.  Colorado, for example, taxes digital books and music, but does not tax digital software.  Twenty-five states tax digital books, music and videos, while thirty states tax prewritten software.

What makes analysis in this field even trickier are the different methods of delivery of digital products and the various pricing plans under which such products are sold.  For example,  under one delivery method, the seller provides the buyer an electronic access code to permit the buyer to download the digital product at the buyer’s convenience.  For a sale such as this, in addition to analyzing whether the underlying product is taxable, the seller must also determine whether the sale of the access code is taxable at the time of such sale.  The SSUTA, of which there are 24 member states, treats the sale of a “digital code” that entitles the purchaser to download a taxable digital product as a taxable transaction.  See Section 332(G).  But not every state, of course, is a member of the SSUTA and non-member states do not always follow this principle.  For instance, the non-member states of Texas, New York, and Illinois treat the sale of such access codes as tantamount to selling a gift card.  These states treat the sale of a gift card or access code as the sale of an intangible.  It is only when the gift card is redeemed that a taxable sale of tangible personal property has occurred.  See, for example, Ill. General Information Letter ST 10-0052-GIL (June 4, 2010).

Florida Introduces Affiliate Nexus Legislation

For the sixth year in a row, Florida legislators introduced a bill that (like many states before it) would create a rebuttable presumption that any out-of-state Internet retailer or mail order seller which enters into an agreement with a Florida resident (an “affiliate”) for paid referrals is subject to the State’s sales and use tax.  Referrals which subject out-of-state sellers to Florida tax are broadly defined and can be via “a link on an Internet website, an in-person oral presentation, telemarketing, or otherwise.”  Out-of-state sellers who have cumulative gross receipts of $10,000 or less from the referrals would not be subject to Florida tax.  As in several other states, the bill would allow sellers to rebut the presumption that they are subject to tax by submitting evidence that the affiliates “did not engage in any activity within [Florida] which was significantly associated with the dealer’s ability to establish or maintain the dealer’s market…during the 12 months immediately before the rebuttable presumption arose.”

As we have written previously, in response to a challenge by Amazon.com to a similar law enacted in 2008 in New York, a New York State appeals court held that the law was not unconstitutional on its face because it allows a retailer to rebut the presumption of solicitation.  The court remanded the case to the lower court to determine whether the law violated the Constitution’s Commerce and Due Process Clauses as applied to Amazon.com.  In the meantime, as similar affiliate nexus laws have been passed in a handful of other states, many retailers have terminated their affiliate relationships.  Also, last spring, in a case argued by George Isaacson and Matt Schaefer of Brann & Isaacson, an Illinois court found that Illinois’ affiliate nexus law, which does not allow an affected retailer to rebut the statute’s conclusive determination that having affiliates in the state creates nexus, violates the Commerce Clause as well as the Internet Tax Freedom Act.

Yet Another State (Georgia) Adopts a Click-Through Nexus Law

On April 20, 2012, Georgia Governor Nathan Deal signed legislation revising the definition of “dealer” in the Georgia statute. Under Georgia law, a dealer is required to collect and remit sales/use tax on all taxable sales to Georgia residents.


The first change to the dealer definition is to adopt a so-called “click-through nexus” law (or “Internet affiliate nexus” law), along the lines of the New York statute enacted in 2008. Georgia is now the eighth state to adopt a click-through nexus law. As previously reported in this blog, New York was the first state to adopt a nexus click-through statute, followed by Rhode Island, North Carolina, Arkansas, Illinois, Connecticut, California and Pennsylvania. (The California statute is effective only if federal legislation is not adopted, and will go into effect on January 1, 2013). (The Pennsylvania “law,” which is an administrative rule, does not commence until September 1, 2012).

*As previously reported in our blog, on April 25, 2012, the Illinois Circuit Court ruled from the bench that the Illinois “click-though nexus” (or “Internet affiliate nexus”) statute is unconstitutional under the substantial nexus requirement of the Commerce Clause and also violates the federal Internet Tax Freedom Act’s moratorium against discriminatory state taxes on electronic commerce.* (As a ruling of a court in a different state, the Illinois court’s decision striking down the Illinois statute has no direct effect on the Georgia click-through nexus law, but certainly would have some relevance in any review of the statute. )

Much like the New York law, the Georgia statute, HB 386 (LC 34 3484S/AP), provides that a retailer that enters into an agreement with one or more persons who are residents of Georgia under which the resident, for a commission or other consideration based on completed sales, directly or indirectly refers potential customers to the retailer, if the retailer’s cumulative gross receipts from sales by such persons exceed more than $50,000 during the preceding twelve months. (Under the New York law, the threshold is $10,000.) If the retailer enters into such an agreement, a presumption is created that the retailer is a dealer required to collect the Georgia sales and use tax. However, the presumption may be rebutted by submitting proof that the residents with whom the person has an agreement do not engage in any activity within Georgia that is significantly associated with the person’s ability to establish or maintain a market in Georgia during the preceding twelve months. The proof may consist of sworn written statements with the residents attesting to the fact that they have not engaged in any solicitation in the state on behalf of the retailer. It is somewhat unclear when this portion of the statute goes into effect; the earliest date is July 18, 2012 but it may be as late as December 30, 2012.

In short, the Georgia statute is modeled after the New York statute. Like the New York statute, a retailer can overcome the presumption of nexus by a showing that the resident does not engage in any activity in the state to maintain a market in the state. (This is in contrast to the Connecticut and Illinois statutes, which create a per se finding of nexus if the requisite relationship is found to exist).

The new Georgia law also provides for “affiliate nexus,” similar to the recently adopted Utah statute concerning companies related through common ownership, as discussed in my article in this blog dated April 2, 2012. This part of the law goes into effect on October 1, 2012. In particular, if a retailer and any other company under common ownership or control that has substantial nexus in Georgia sells a similar line of products in the state under a similar business name or use substantially similar trademarks or service marks, then a presumption of nexus is created. Again, this presumption can be rebutted by a showing that the in-state affiliate does not engage in any in-state activities on behalf of the retailer that are significantly associated with the retailer’s ability to establish a market.

The new Georgia law does provide a safe harbor for participation in trade show activities of five days or less and if the retailer “did not derive more than $100,000 of net income from those activities during the prior calendar year.” It is unclear whether the term “deriv[ation] . . . of net income” means sales less expenses made at the trade show or whether it means sales remotely made.

In sum, online retailers and other direct marketers should carefully scrutinize their existing relationships to make sure that their companies are not vulnerable to a finding of nexus under the new Georgia law. While such review does not necessarily mean discontinuance of click-through relationships, it does require making sure that any agreement with affiliates is tailored to overcome the presumption if sales through such affiliates are greater than $50,000.

Court Rules that the Illinois Internet Affiliate Nexus Law is Unconstitutional and Violates the Internet Tax Freedom Act

Yesterday (April 25, 2012), Judge Robert Lopez Cepero of the Illinois Circuit Court for Cook County granted summary judgment in favor of the Performance Marketing Association (“PMA”) in its constitutional challenge to the Illinois "Internet affiliate nexus" statute, Public Act 96-1544 (the “Act”), which took effect in July 2011. Judge Cepero ruled from the bench, after oral argument by the parties’ counsel, that the Illinois law is both unconstitutional under the “substantial nexus” requirement of the Commerce Clause and violates the federal Internet Tax Freedom Act's moratorium against discriminatory state taxes on electronic commerce. The Court will enter a formal order encapsulating its rulings, although Judge Cepero indicated that he does not plan to issue a written opinion, separate from his remarks made on the record at the hearing. The Defendant, the Director of the Illinois Department of Revenue, is said to be reviewing his options, but is expected to appeal the ruling directly to the Illinois Supreme Court. (George Isaacson and Matt Schaefer of Brann & Isaacson represent the PMA in the case.)


Like other “Internet affiliate nexus” laws, the Illinois statute seeks to impose a use tax collection obligation upon out-of-state Internet retailers who enter into contracts with affiliates located in the state, under which the affiliate places a link on its website connecting Internet users to the retailer’s website, and receives commissions or other compensation based on sales made to such customers. Under the terms of the Act, any Internet retailer that realized $10,000 in annual sales from customers who reached its website through links on the sites of Illinois Internet affiliates would be required to collect Illinois use tax. The Court held, however, that the activity described in the Illinois law was not sufficient to create use tax nexus with Illinois for purposes of the Commerce Clause. The Court also held that imposing a use tax collection obligation upon Internet retailers engaged in such online linking relationships, but not on other retailers engaged in similar offline adverting arrangements, is “premature” in light of the ITFA's moratorium, which remains in effect until November 1, 2014.

Pennsylvania DOR Puts Constitutionally-Suspect Affiliate Nexus Interpretation on Hold

On January 27, 2012, the Pennsylvania Department of Revenue delayed until September 1, 2012 the enforcement of its recently announced (and legally questionable) position regarding affiliate nexus.

We have written frequently about state affiliate nexus statutes and proposed legislation, as well as the challenge brought by our client, the Performance Marketing Association (“PMA”), against the Illinois affiliate nexus statute which took effect in July 2011. All of these affiliate nexus laws are of doubtful constitutionality. Indeed, Brann & Isaacson has argued on behalf of the PMA that the Illinois law impermissibly targets Internet performance marketing as a basis for asserting a use tax collection obligation on out-of-state retailers, in violation of both the Commerce Clause of the United States Constitution and the federal Internet Tax Freedom Act (“ITFA”). In an area of law where the authority of the states to expand their taxing power is very much in doubt, every state that has adopted an affiliate nexus law has done so through the legislative process by enacting a statute that purports to require reporting of use tax by remote sellers with no physical presence in the state.

On December 1, however, the Pennsylvania Department of Revenue determined that it did not require a new affiliate nexus statute in order to require use tax collection by Internet sellers advertising online through websites located in Pennsylvania. Instead, the Department issued Sales and Use Tax Bulletin 2011-01, regarding Remote Seller Nexus. The Department asserts in the Bulletin that a variety of activities, if conducted in the state by, or on behalf of, an out-of-state company, already constitute sufficient nexus under the Commerce Clause and state law to require the remote seller to collect Pennsylvania use tax. Some of the activities cited by the Department have been the basis for a finding of nexus for an out-of-state company in prior court decisions around the country (and, presumably, have long been reflected in the Department’s enforcement practice). The Department, however, also included “affiliate nexus” on the list. The Department will now make a finding of nexus for an out-of-state company even if the company’s only activity is merely having a contractual relationship with a person located in Pennsylvania whose website has a link to the remote seller’s website, if the in-state affiliate receives “consideration” for the contractual relationship with the retailer.

Performance Marketing Association Suit Challenging Illinois Affiliate Nexus Law Now in State Court

On July 27, the Performance Marketing Association (“PMA”) filed a complaint in the Illinois Circuit Court for Cook County, challenging the new Illinois “affiliate nexus” law (“HB 3659”). In the complaint, the PMA asserts the same claims first raised in its complaint filed in the United States District Court in Chicago on June 1. As detailed in the complaint, the PMA alleges that HB 3659 violates the Commerce Clause and impermissibly discriminates against electronic commerce in violation of the Internet Tax Freedom Act (“ITFA”).

In connection with filing the suit in state court, the PMA has voluntarily dismissed the federal court action.  The voluntary dismissal will prevent a protracted dispute with the Defendant, the Director of the Illinois Department of Revenue, regarding whether the federal court has jurisdiction over the case. Brann & Isaacson attorneys George Isaacson and Matt Schaefer are counsel to the PMA in the case.

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.”

California Adopts New Nexus Statute

On Tuesday, Governor Jerry Brown signed into law California’s new nexus legislation.  The law, which took effect immediately, expands the scope of activities requiring out-of-state retailers to collect and remit California sales and use tax by expanding the definition of “retailer engaged in business” in California.

The newly amended section 6203 of the California Revenue and Tax Code provides that a retailer engaged in business in the State includes any retailer that:

• has substantial nexus with the State within the meaning of the Commerce Clause;

• is a member of a commonly controlled group of corporations that includes another member which performs services for the out-of-state retailer in California (including the design and development of TPP sold by the out-of-state retailer or the solicitation of sales on behalf of the out-of-state retailer); or

• enters into an agreement under which a person in California refers potential customers to the out-of-state retailer via the internet or other means in exchange for a commission or other consideration.

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.

Performance Marketing Association Files Lawsuit Challenging Illinois Affiliate Nexus Law

Performance Marketing Association, Inc. (“the PMA”), the leading trade association in the United States representing the interests of businesses, organizations, and individuals using and supporting performance marketing methods, filed a lawsuit yesterday in Federal District Court in Chicago against the Director of the Illinois Department of Revenue, Brian A. Hamer. The lawsuit challenges the constitutionality of the Illinois affiliate nexus law, HB 3659.  Brann & Isaacson attorneys George Isaacson and Matthew Schaefer are counsel to the PMA in connection with the suit.

The case is captioned Performance Marketing Association, Inc. v. Hamer, Federal District Court, Northern District of Illinois, case no. 1:11-cv-03690. A copy of the PMA’s Complaint is available here.

In its complaint, the PMA asserts that HB 3659 unlawfully targets the business of online performance marketing in order to expand Illinois’ regulatory authority beyond its borders. We have previously written about HB 3659 several times, including here and here. The PMA alleges that the law, which goes into effect July 1, 2011, violates the Commerce Clause of the United States Constitution, and the federal Internet Tax Freedom Act (“ITFA”), by using the relationships between Illinois publishers of online advertisements and out-of-state advertisers as grounds for imposing use tax collection and reporting obligations on Internet retailers located outside the state. The enactment HB 3659 has damaged thousands of Illinois publishers through the loss of advertising contracts with Internet retailers.

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.