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.

May News Roundup: Michigan Repeals MBT; Louisiana Proposes Click-Through Nexus Legislation

On Wednesday, Governor Snyder signed into law Michigan’s new corporate income tax, which will replace the Michigan Business Tax. The new corporate income tax, effective January 1, 2012, uses a single factor (sales) for apportionment purposes and has a flat rate of 6%. However, despite the repeal of the MBT, the new corporate income tax will retain the economic nexus standard of $350,000 in gross receipts, which we have written about previously here. Any business with a physical presence of at least one day in the state would also be required to report the corporate income tax. Unlike the MBT, however, P.L.86-272 applies to the tax and provides some protections, as we have most recently written about here. Internet sellers and direct marketers should consult their tax counsel regarding the significance of the new tax and its impact on their businesses.

In other news, this week, the Louisiana legislature threw its hat into the ring of states proposing click-through nexus laws with H.B. 641. We have written previously about nexus-expanding legislation throughout the country here and here. Although Vermont and Texas legislatures recently passed their own versions of the law, as of this writing, the governor in each state has yet to sign the bill. We will keep you posted as developments arise.

Have a safe and festive Memorial Day, all!

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.

Colorado Federal Court to Consider Possible Final Judgment on DMA’s Constitutional Challenge to the Colorado Notice and Reporting Law in DMA v. Huber

This post is to update our readers regarding the status of the Direct Marketing Association’s challenge to the constitutionality of Colorado HB 10-1193, the law enacted in 2010 that imposes discriminatory notice and reporting obligations on out-of-state retailers that do not collect Colorado sales tax. Brann & Isaacson attorneys George Isaacson and Matt Schaefer are counsel to the DMA in the case

In January 2011, the federal District Court for the District of Colorado granted the DMA’ s motion for a preliminary injunction and suspended enforcement of the law on the grounds that it likely violates the Commerce Clause of the United States Constitution on two separate, and independent grounds. In February, the Defendant appealed to the Tenth Circuit, but subsequently withdrew the appeal after the District Court approved a proposal by the parties to file cross-motions for summary judgment seeking a final ruling by the Court on the Commerce Clause issues, while staying further proceedings on all other claims in the case. The District Court agreed that, if it awards summary judgment to either party, it will certify the matter for immediate appeal to the Tenth Circuit Court of Appeals, so that the Commerce Clause issues may be finally resolved.

Each party filed a motion for summary judgment with the District Court on May 6. Responses are due May 27, and replies are due June 10. A ruling by the Court on the motions, and likely an appeal to the Tenth Circuit, will follow. We will continue to update readers with further developments.

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.