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.

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.”

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.

Amazon Wins First Amendment Challenge to North Carolina DOR Information Request

Amazon.com LLC (“Amazon”) has prevailed in its highly-publicized court challenge to a demand by the North Carolina Department of Revenue for information regarding purchases made by Amazon’s North Carolina customers during the period August 1, 2003 to February 28, 2010. The Federal District Court for the Western District of Washington (where Amazon is headquartered) issued a ruling on October 25, 2010, in Amazon.com LLC v. Kenneth R. Lay, in his capacity as Secretary of the North Carolina Department of Revenue, Case No. C10-664 MJP. The ruling enjoins the North Carolina DOR from requiring that Amazon provide the Department with names and addresses of its North Carolina customers and details regarding the products they purchased from Amazon.

The Department, in connection with an investigation of Amazon’s possible liability for uncollected use tax on sales to North Carolina residents, had requested that Amazon provide it “all information for all sales to customers with a North Carolina shipping address” for the six-and-a-half year period under examination. Amazon provided the DOR detailed records of products shipped to North Carolina for the entire period, but refused to provide the names or personal information of its customers purchasing such products. When the Department pressed for the information, Amazon sued in federal court, asserting that the Department’s request violated the First Amendment by chilling the exercise of the freedom of speech of Amazon’s customers (and of Amazon itself). On October 25, the Court agreed.

Update: Status of 2010 Affiliate Nexus Legislation

As we reported on March 9, New York-style “Amazon” affiliate nexus legislation was introduced in the 2010 legislative sessions of multiple states.  Even as the North Carolina Department of Revenue has introduced a program intended to entice retailers to register for sales and use tax purposes under its existing affiliate nexus statute (see our recent post for further discussion of the issue), other states are moving closer to adopting similar laws.  At the same time, affiliate nexus legislation has died, for this legislative season at least, in several states.  Here’s an update with regard to such legislation in a number of states:

Moving Forward:

• Connecticut: Bill favorably reported out of committee with recommendation that it “ought to pass”
• Minnesota: Committee hearing on bill scheduled for April 20
• Tennessee: Bill recommended for passage by Tax Subcommittee of Ways & Means, but Tennessee Department of Revenue has indicated that it does not believe mere affiliate relationship would be adequate for nexus

In Committee:

• California: Last action (re-referral to Committee on Appropriations) was April 28, 2010
• Illinois: Last action (referral) was March 19, 2010

Dead (it appears) for 2010:

• Iowa: General Assembly adjourned without acting on the bill
• Maryland: General Assembly adjourned without the bill getting out of committee
• Mississippi: Bill died in committee
• New Mexico: Bill tabled
• Vermont: Ways and Means Committee voted not to include affiliate nexus measure in tax legislation
• Virginia: Affiliate nexus legislation tabled in committee

UPDATE, Aug. 31, 2008:  Please see our most recent post concerning the status of the California Bill here. 

North Carolina’s “Carrot and Stick” Approach To Sales Tax Collection

Recently, a number of our clients received a letter from the North Carolina Department of Revenue, which contained an announcement by the Department of a new “Internet Transactions Resolution Program.” North Carolina, which is one of the three states that has adopted an Amazon Affiliate Nexus Law (see my blog post dated March 9, 2010), provides the following “carrot” as part of the Program: if a retailer registers for sales and use tax and agrees to collect and remit those taxes for four years, beginning September 1, 2010, the Department in turn will not assess tax, penalties or interest for the period prior to September 1, 2010.  In addition, the Department states that it will not seek to obtain information regarding names and addresses of the retailer’s customers prior to September 1, 2010.  (It is noteworthy that Amazon has sued the Department of Revenue on the ground that it has sought personally identifiable information from Amazon regarding Amazon’s customers.)

So, now to the “stick.”  The Department also notes in its letter to direct marketers that for those retailers who fail to participate but are “subject to nexus filing requirements,” the Department will assess all applicable tax, interest and penalties and will not waive any penalties.  Thus, the Department is offering the carrot of an amnesty for past tax liability and relief from any demand for customer information from the retailer for periods prior to September 1, 2010, in lieu of the enforcement.

“Amazon Affiliate Nexus” Statutes: A Business-Savvy Alternative

Tax and trade journals report about each new state that is considering adopting an “Amazon Affiliate Nexus” statute, patterned after the New York statute adopted in 2008. As of this writing, North Carolina and Rhode Island have each enacted a New York-type online affiliate nexus statute, and several other states, including California, Connecticut, Illinois, Maryland, Minnesota, Tennessee, Vermont and Virginia are considering whether to adopt similar statutes. Should an online retailer discontinue its affiliate relationships in those states? Should the online retailer begin collecting and remitting sales and use tax in states with such statutes even where it has no physical presence? Should the online retailer challenge the statute in court by suing the state and disputing the constitutionality of the statute, as was done by Amazon.com and Overstock.com in New York? There are clearly problems with each approach. If the retailer elects to discontinue its online affiliate relationships, the retailer may hurt its business. Besides, the retailer may not have identified all of its affiliates, each of which contributes to a presumption of nexus under the statute, and thus may face a risk of nexus in any event. On the other hand, a retailer’s collection of the sales and use tax means remitting the sales and use tax on all of its sales in the state, even if the affiliate-generated transactions are only a small percentage of its sales. Least attractive of all may be the litigation approach, which can take a long time to reach resolution and which has an uncertain outcome.