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frequently about the California affiliate nexus statute, AB 155, which was adopted in June 2011, but was temporarily repealed in September 2011, pending Congressional action on a bill rejecting the Quill physical presence test.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

Are You Minding The Store? Executives Held Personally Liable For Unreported Sales Tax

Two recent decisions provide an important reminder for executives and tax managers of Internet retailers and remote sellers: Make sure that you: (1) understand your company’s sales and use tax obligations; (2) have a defensible position on state tax issues; and (3) pay attention to notices from state revenue departments, including those that come from outside your home state ― or you could find yourself subject to personal liability for unreported sales and use tax.

Most states’ tax laws deem sales/use taxes collected by a company to be held in trust for the state, and allow the state to impose personal liability upon responsible corporate officers for the failure to report and remit such “trust fund” taxes. Some state statutes go farther and impose liability on corporate officers for unreported tax.

In a New York State Tax Tribunal Decision (DTA No. 822971) issued on February 23, 2012, the CEO of a publicly-traded, online vendor of wireless phone devices and accessories was determined to be personally liable for unpaid sales tax, largely with respect to shipping and handling fees charged by his company on sales to consumers. The CEO argued that he could not be held personally liable because, among other things: (1) the company had a tax department that handled such matters, on which he relied, and that reported to the company’s CFO; (2) the company further relied upon outside accountants and auditors to ensure tax compliance; (3) the size of the company and number of transactions involved made monitoring them impossible for the company’s chief executive; and (4) the CEO did not sign the company’s sale tax returns. The Tax Tribunal rejected all of the CEO’s arguments, holding that he was a responsible officer with the power to exercise oversight over all functions related to sales tax compliance, and could not avoid liability by arguing that he relied upon others – even a full tax department and outside tax professionals – to ensure the company’s compliance.

In Eberhardt v. Michigan Department of Treasury, Michigan Court of Appeals No. 299532 (March 8, 2012), the Court upheld the imposition of personal liability against the sole shareholder and responsible corporate officer of an Indiana retailer of spas and related supplies, for unreported tax on sales to Michigan residents. The Department had previously issued an assessment for unpaid sales/use tax to company, which failed to respond. The Department subsequently assessed the shareholder for the amounts not paid by the company on the theory that he was personally liable as a responsible corporate officer. The appellant responded by arguing that the State of Michigan lacked jurisdiction to issue the earlier assessment to the company. The Michigan Tax Tribunal upheld the assessment, and the Court of Appeals affirmed. The Court found that the corporate officer was barred by the company’s failure to respond to the original sales tax assessment to raise the issue of lack of jurisdiction over the company as a defense. The Court therefore affirmed the imposition of liability of over $225,000 against the appellant.

These recent decisions should be a wake-up call for all corporate officers and tax managers – whether they work in a sole proprietorship, small private company, or even in a large, publicly traded company – to be certain that the they are confident the company’s state sales/use tax affairs are being handled appropriately, and tax counsel consulted where they have meaningful doubt or uncertainty regarding the company’s compliance. Failure to exercise proper oversight responsibility could mean the company’s tax liabilities become their own.

A Reminder About The State Tax Implications of Passive Partnership Interests: U.S. Supreme Court Declines To Review State Court Ruling That Mere Partnership Interest Creates Income Tax Nexus

E-commerce companies that have affiliates doing business as (or even just investment interests in) partnerships or other pass-through entities in states in which the e-commerce company has no direct presence should be aware that such partnership interests may be deemed to create income tax nexus for the company.  A number of state laws and regulations provide that ownership in a pass-through entity establishes nexus for the owner.  See, e.g., 34 TAC Sec. 3.586(c)(13) [Texas]; 830 CMR 63.39.1(8) [Massachusetts]. To date, state tax tribunals have agreed. See, e.g., Shell Gas Gathering Corp. #2, N.Y. Tax Appeals Tribunal, DTA Nos. 821569 and 921570 (Sept. 23, 2010).

Do As I Say, Not As I Do: The FTC "Do Not Track" Initiative Could Cripple E-Commerce

Just as governments – including our own – are pursuing aggressive new initiatives to gather information about our individual browsing habits and electronic communications for law enforcement purposes, the FTC has decided to advise Congress on sweeping initiatives to prevent direct marketers from engaging in far less invasive practices that present none of the grave risks attendant to enhanced government surveillance.  Indeed, many of the commercial practices targeted by the FTC actually benefit consumers by assisting Internet sellers to configure their web sites, adjust their product offerings, and tailor advertising to the specific needs and interests of consumers.  While the FTC shrilly intones that consumer information about Internet browsing has been used by an unidentified "some" in "an irresponsible or even reckless manner," it fails to acknowledge forthrightly that the vast majority of direct marketers use such information solely to better serve their customers, and that new laws and FTC initiatives are unlikely to faze the tiny group of Internet pirates who misuse consumer data.

Although most headlines have focused on the FTC's proposal for a "do not track" list, the FTC report is about much more than that.  It foretells a highly aggressive new regulatory strategy that may change the landscape of Internet privacy without any concern for the cost impact on industry or a realistic assessment of the privacy interests of consumers.  It sweeps so broadly against business as to suggest that–if the FTC has its way–even entirely benign and non-intrusive information collection practices that do not track individual consumers will be sharply curtailed.  At the same time, new and intrusive requirements will be injected multiple times into virtually every consumer experience on the Web.  If you do business on the Internet, you need to know what the FTC is hoping to unleash on eCommerce.