Florida Introduces Affiliate Nexus Legislation

For the sixth year in a row, Florida legislators introduced a billthat (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 Schaeferof 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.

On the federal front, where Congress is considering legislation which would authorize states to impose use tax collection obligations on remote sellers and ecommerce vendors with no physical presence in the states, each of the three bills introduced remain in committee at this time. But, none of the bills requires significant simplification of state tax systems.  In any event, with the end of the year fast approaching and Congress facing arguably more pressing matters such as the so-called “Fiscal Cliff,” it is unclear whether any of the remote collection bills will move forward.  A proposal to add one of the bills to a defense appropriations bill was recently defeated in the Senate.

We will continue to keep our readers informed of state and federal developments in this area as they arise.

California Affiliate Nexus Law Goes Into Effect

We have written frequentlyabout 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. 

Unfortunately, many of these important details were omitted from recent correspondence sent by the BOE to retailers, which included a form of nexus questionnaire. The BOE stated that a retailer is engaged in business in California and thus required to collect the California sales and use tax if it has a relationship with an affiliate operating in California that refers potential customers to the retailer. However, nowhere in the materials sent out by the BOE is there any mention of the exceptions to the finding of nexus discussed above.

Before making the decision either to discontinue affiliates or to collect California sales and use tax, ecommerce sellers should review the nature of their affiliate relationships to determine whether those relationships, as currently structured or as revised in the future, will create nexus in California under the actual provisions of the law. Moreover, a prudent e-tailer should not respond to the BOE questionnaire unless and until it has carefully reviewed its activities with competent professionals.

Committee Hearings Held on Remote Collection Bills; Coalition Forms to Demand True Simplification Of State Sales Tax Systems, Defend Quill

We have written previously about attempts by Congress to overturn the physical presence nexus standard of Quill Corp. v. North Dakota via the Main Street Fairness Act, the Marketplace Fairness Act, and the Marketplace Equity Act. The bills vary in their specifics as we discuss here and here, but most simply put, all three bills would permit states to require remote sellers to collect and remit sales and use tax despite such sellers having no physical presence in the state. While it is difficult to predict what Congress may do in an election year, it appears that so far, the Main Street Fairness Act has not made much progress through Congress since being introduced. The other two bills have seen some committee action lately, however, as discussed below.

Meanwhile, a coalition has formed to help protect remote sellers’ interests. The TrueSimplification of Taxation (“TruST”) Coalition was formed jointly by the Direct Marketing Association, the American Catalog Mailers Association, the Electronic Retailing Association, and NetChoice to represent “American businesses in the fight to keep interstate commerce and competition free from unfair tax burdens imposed by states where our businesses have no operations or representation.” Brann & Isaacson partners George Isaacsonand Martin Eisenstein assisted in forming the coalition and provide ongoing advice regarding the sales and use tax collection implications to remote sellers.

On July 24, 2012, the House Committee on the Judiciary held a hearing on The Marketplace Equity Act. At the hearing, the bill’s sponsors, and three others (the governor of Tennessee, a representative of the Streamlined Sales Tax Governing Board, and a visiting fellow at the Hudson Institute, a public policy think tank) all spoke in favor of the bill. On the other side, a representative from the Tax Foundation and Steve DelBianco, the executive director of NetChoice, one of the TruST Coalition members, defended the Quill standard as vital to the protection of online sellers – and in particular small Internet retailers -- in the absence of true simplification of state sales and use tax systems.

On Wednesday, August 1, 2012, at a hearing before the Senate’s Committee on Commerce, Science, & Transportation regarding the Marketplace Fairness Act, the committee heard a group of proponents testify, and Mr. DelBianco spoke on behalf of remote sellers and against the bill. However, one of the witnesses inadvertently helped make Mr. DelBianco’s case: the witness, a bookstore owner from Texas who voluntarily collects sales tax on remote sales, was found to be charging tax at the wrong rates on his remote sales, thus demonstrating just how complex remote collection can be. Perhaps through this testimony some Senators will begin to understand the challenges of nationwide use tax collection, but many may require additional education from their constituents who do business online.

Our readers should note, as well, that the July 31 deadline set by the California legislature for adoption of federal legislation overturning Quill has passed. This means that, barring any additional state legislation, California’s affiliate nexus provisions are back in play beginning September 15, 2012. We will continue to monitor each bill’s progress and keep our readers posted of developments in this area.

Storm Clouds on the Horizon for Direct Marketers Regarding Required Use Tax Collection

After the introduction in July 2011 of the “Main Street Fairness Act” by three senators from the Democratic Party, federal legislation intended to eliminate the Quill physical presence requirement for state sales and use tax collection has gathered increased support. A group of 10 Senators from both sides of the aisle introduced the “Marketplace Fairness Act” on November 9, 2011. The new bill, S.1832, is sponsored by Senators Mike Enzi (R-WY), Richard Durbin (D-IL), Lamar Alexander (R-TN), Tim Johnson (D-SD), John Boozman (R-AR), Jack Reed (D-RI), Roy Blunt (R-MO), Sheldon Whitehouse (D-RI), Robert Corker (R-TN), and Mark Pryor (D-AR).  On October 13, 2011, Representatives Steve Womack (R-AR) and Jackie Speier (D-CA) introduced in the House a similar, but not identical, bill called the “Marketplace Equity Act.”

As we wrote in our post on August 8, the Main Street Fairness Act, which was sponsored by Senators Durbin, Johnson, and Reed, does not provide meaningful measures to simplify the arduous burden of sales and use tax collection. The Marketplace Fairness Act (and its House counterpart) would provide even less simplification than does the Main Street Fairness Act. It is ironic that despite the unfairness of this proposed legislation to catalogers, online retailers, and other direct marketers, the Marketplace Fairness Act is more likely to pass than prior legislative efforts, because of the increased number of sponsors from both political parties, as well as the coalition of states, industry groups, and big retailers (including e-commerce giant Amazon.com), that have announced their support for this new bill. Thus, the alarm bells should be ringing loudly for Internet and other direct marketers.

Critical Additional Feature of the Marketplace Fairness Act

The Marketplace Fairness Act would extend collection obligations well beyond the Main Street Fairness Act to authorize any state that has not adopted the Streamlined Sales and Use Tax Agreement (“SSUTA”), but has adopted negligible simplification measures, to require tax collection by remote sellers.

If adopted, the Main Street Fairness Act would permit states that become members of the SSUTA to require companies without a physical presence in the state to collect sales and use tax in the states. (There are 24 states that are members of the SSUTA). The Marketplace Fairness Act, on the other hand, incorporates this authorization and then expands it to permit any state that implements (in the language of the proposed legislation) “minimum simplification requirements” to require catalogers, online retailers, and other companies that have national annual sales greater than $500,000 to collect the state’s sales tax on sales to residents of the state.

The Marketplace Fairness Act is Anything But Fair

Although the SSUTA provides some protection to remote sellers from the burden and expenses of sales tax collection, the “simplification requirements” of this new bill provide even fewer benefits to catalog and e-marketers, and increased burdens.

There simply is nothing in this new bill that provides meaningful simplification for remote sellers. In other words, there is no provision for uniformity in sales tax laws among states; the simplification is only within the state, and the term “simplification” even within the state is a misleading term, at best.

We have discussed the SSUTA in various posts, which is incorporated, in effect, into that Act. As we have written previously, the SSUTA does not provide significant relief from administrative burdens and expenses of sales tax compliance. Just as under the SSUTA, the Marketplace Fairness Act does not ease the tax burden by requiring common exemptions throughout the states, uniform treatment for shipping and handling charges, and a consistent definition of the selling price for determining the amount subject to sales tax.

Similarly, like the SSUTA, the Marketplace Fairness Act permits the imposition of many combined (state and local) rates within a state based on the destination of the sale, thus potentially permitting a large number of different tax rates on sales to residents of the state, in addition to the thousands of tax rates a remote seller would be required to impose on its sales throughout the country. While the Marketplace Fairness Act specifies that a state must provide adequate software and services to identify the destination local rate and to hold harmless remote sellers from liability for mistakes made by a provider of sales tax administration services, this clause does not eliminate the administrative burden, expense, and risk to a remote seller of billing for, and collecting, sales and use taxes at different rates on its sales throughout the country.

Moreover, the Marketplace Fairness Act adds another layer of complexity that is not even present for the SSUTA. The SSUTA does provide for common definitions of some terms to be used in the sales tax statutes of the member states. The SSUTA also requires uniform rules among the member states for the deduction by a retailer of bad debts. The Marketplace Fairness Act does not require states to adopt such definitions and uniform rules regarding bad debts. The result is that if this new Act were adopted, a remote seller would be potentially subjected both to the definitions and bad debt rules of the SSUTA states and the differing and varying definitions and bad debt rules set forth in the statutes of the more than 20 non-member states.

There is a Real Possibility that the Marketplace Fairness Act Will be Adopted

Unlike prior state efforts to persuade Congress to enact laws eliminating the Quill physical presence test, there is increasing support from both Democrats and Republicans and from diverse industry groups for the Marketplace Fairness Act.

Over the past 20 years, the states have repeatedly caused legislation to be introduced in Congress to abolish the nexus physical presence requirement. The likelihood of successful adoption of the Marketplace Fairness Act, however, differs from prior legislative efforts for several important reasons:

• There is significant support from both Democrats and Republicans in Congress.
• The states are facing large financial problems (including mounting and huge pension costs), while federal funding for the states is drying up because Congress is not receptive to providing funding to assist the states at the expense of other federal programs or increased taxes.
• The legislation is supported by big box retailers.
• Well-funded associations such as the National Retail Federation and the International Council of Shopping Centers support the law.
• Amazon had been one of the most vigorous opponents of prior legislation. Now, Amazon is offering the service of collecting tax on behalf of other retailers for a fee of 2.9% of the taxes collected.

The only ray of light in this gloomy picture is that Senators Wyden (D-OR) and Ayotte (R-NH) and Representatives Lungren (R-CA) and Lofgren (D-CA) have introduced resolutions in Congress opposing mandatory collection by online retailers of sales and use tax.

A perfect storm has developed to permit passage of anti-Quill legislation. The current legislation being considered does not provide significant protection to industry members. It is up to direct marketers to let their positions be known.

Bills Introduced in Congress to Override Quill in Favor of Streamlined Sales and Use Tax Agreement

On July 29, 2011, the so-called “Main Street Fairness Act” was introduced in both houses of Congress. The bills, introduced as H.R. 2701 in the House of Representatives and as S. 1452 in the Senate, are identical. Under the proposed law, Member States in the Streamlined Sales and Use Tax Agreement (SSUTA) would be authorized to require remote sellers (i.e., Internet retailers and other direct marketers with no physical presence in the state) to collect and remit state and local sales and use taxes notwithstanding the substantial nexus standard established by the Supreme Court in Quill Corp. v. North Dakota. There are currently 24 full and associate member states in the SSUTA, representing approximately 36% of the population of the United States. Many larger states, including California, Florida, Illinois, New York, Pennsylvania and Texas are not SSUTA members.

Similar bills have been introduced in past sessions of Congress, including in 2003, 2006, 2007 and 2010. Brann & Isaacson Senior Partner, George Isaacson, has testified with regard to such prior legislation in 2003, 2006, and 2007 that the SSUTA has not achieved the goal of genuine simplification and uniformity of states sales and use tax systems.  The requirements imposed on states by the current Congressional bills are substantially identical to prior versions and, in some respects, are even less demanding for states. In addition, H.R. 2701 and S. 1452 contain no express minimum level or “small seller” exemption that would protect smaller retailers from the obligation to collect use tax in all member states. Instead the bills defer to small seller exemptions established by the SSUTA states themselves.

We will keep you apprised of further developments regarding the bills.