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Update: State Internet Affiliate (Click Through) Nexus Laws
By Martin Eisenstein of BRANN & ISAACSON

Congressional action on the federal bill, the "Marketplace Fairness Act" ("MFA"), has largely dominated the discussion of nexus issues recently. If the MFA were enacted, Internet and catalog vendors would likely be required to collect use tax in states where such remote sellers have no physical presence. Under the version of MFA passed by the Senate and now being considered by the House of Representatives, if a state adopts minimum simplification standards, as specified in the MFA or under the Streamlined Sales and Use Tax Agreement (neither of which in our opinion provide significant reduction of the administrative burdens on remote sellers), the state would be permitted to impose sales and use tax obligations on Internet and other direct marketers if the seller has as little as $1 million of sales nationwide. This federal legislation would supersede the physical presence standard of "substantial nexus" for sales and use taxes applicable under Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Despite its passage in the Senate on May 6, 2013 the MFA is not yet law, and may well be rejected, modified, or replaced by a competing bill in the House. Indeed, as recently as last Thursday, June 6, Bob Goodlatte, the Chair of the House Judiciary Committee, which is responsible for holding hearings on the MFA, announced that the House is working on alternatives to the MFA. Moreover, there is at least a 6 month period from adoption of the MFA until a company is required to collect and remit sales taxes.

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 by Martin Eisenstein of BRANN & ISAACSON
 
Congressional action on the federal bill, the “Marketplace Fairness Act” (“MFA”), has largely dominated the discussion of nexus issues recently.  If the MFA were enacted, Internet and catalog vendors would likely be required to collect use tax in states where such remote sellers have no physical presence.  Under the version of MFA passed by the Senate and now being considered by the House of Representatives, if a state adopts minimum simplification standards, as specified in the MFA or under the Streamlined Sales and Use Tax Agreement (neither of which in our opinion provide significant reduction of the administrative burdens on remote sellers), the state would be permitted to impose sales and use tax obligations on Internet and other direct marketers if the seller has as little as $1 million of sales nationwide.  This federal legislation would supersede the physical presence standard of “substantial nexus” for sales and use taxes applicable under Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  Despite its passage in the Senate on May 6, 2013 the MFA is not yet law, and may well be rejected, modified, or replaced by a competing bill in the House.  Indeed, as recently as last Thursday, June 6, Bob Goodlatte, the Chair of the House Judiciary Committee, which is responsible for holding hearings on the MFA, announced that the House is working on alternatives to the MFA.  Moreover, there is at least a 6 month period from adoption of the MFA until a company is required to collect and remit sales taxes.
 
In the meantime, state legislatures around the country have continued to consider, and in some cases enact, so-called “Internet affiliate nexus” laws (also known as “click through nexus” laws).  Remote sellers need to stay abreast of these laws in order to understand their impact on the remote seller’s business, and to determine how to respond to new state “click through” nexus statutes as they are enacted.  I am writing to provide you an update on the status, nationwide, of state Internet affiliate “click through” nexus laws, eleven (11) of which are now in effect or scheduled to go into effect in the next few months.  See the attached chart.
 
The constitutionality of state “click through” nexus statutes has always been in doubt, in light of the physical presence standard of “substantial nexus” for sales and use taxes under Quill.   In May 2012, the Illinois Internet affiliate statute was declared unconstitutional on its face by the Cook County Circuit Court, in response to a challenge to the law brought by Brann & Isaacson on behalf of the Performance Marketing Association.  See Performance Marketing Association v. Hamer (Ill. Cir. Ct. May 11, 2012) (appeal pending).  Earlier this year, however, the New York Internet affiliate nexus law was upheld by New York’s highest court, the Court of Appeals, against a facial constitutional challenge brought by Amazon and Overstock.com.  See Overstock.com v. New York Department of Taxation and Finance (N.Y. March 28, 2013).
 
The spilt in authority over the constitutionality of state “click through” nexus statutes has resulted in additional state legislatures electing to adopt such laws, most of which are patterned after the New York statute.  A central difference between the New York law and the Illinois law is that the New York statute simply creates a rebuttable presumption that a retailer with Internet affiliates in a state (and the required minimum level of sales to customers referred by the affiliates) has sufficient presence in the state to require the retailer to collect the state’s use tax.  The Illinois statute, by contrast, creates a conclusive rule of law that cannot be rebutted, requiring a retailer with affiliates in the state, and the requisite minimum level of sales, to collect use tax.   
 
Since March 2013, three more states (Kansas, Minnesota, and Maine) have enacted an Internet affiliate nexus law.  The attached chart provide a comprehensive listing of the states with Internet affiliate “click though” nexus laws as of June 10, 2013.  States with a “click through” nexus law now in effect, or soon to go into effect, include: Arkansas, California, Connecticut, Georgia, Kansas, Maine, Minnesota, New York, North Carolina, Pennsylvania, and Rhode Island.  The Illinois law, as noted, was declared unconstitutional in 2012 in PMA v. Hamer.  That ruling is now on appeal before the Illinois Supreme Court.  Vermont’s “click though” nexus statute was enacted in 2010 but is not yet in effect.  Finally, the legislature in Missouri passed a bill in 2013 creating a presumption of “click through” nexus, but the Missouri Governor vetoed the bill on June 5, 2013.  (The Missouri legislature will have an opportunity to override the veto in a session in September.) 
 
While it is difficult to state a principle that applies to all states that have adopted “presumptive nexus” laws like New York’s statute, as a general matter the presumption can be overcome by a showing that the affiliates do not engage in other means of solicitation of customers in the state where the affiliate is located.  Of course, you should carefully consider the nature of your affiliate program and an individual state’s laws before deciding whether to continue an affiliate nexus program and how to structure any program to reduce the risk to your company under the state statute. 
 
If you have any questions regarding the provisions of any of these state Internet affiliate “click through” nexus laws and their potential impact on your company, please do not hesitate to contact me or my partner Matt Schaefer by phone (207-786-3566) or email at meisenstein@brannlaw.com or mschaefer@brannlaw.com.
 
 
 


Published: 06/11/13