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.
But, the use of an affiliate in a state with an affiliate nexus statute does not automatically create nexus. Rather, under each of the statutes already enacted and under those proposed in other states, use of an in-state affiliate creates a presumption of nexus that can be rebutted by a showing that the affiliates do not engage in traditional solicitation activities in the state. While each state provides a general description of the type of showing an online retailer needs to make in order to avoid a finding of nexus, it is only New York that provides an actual road map to rebut the finding of nexus. New York TSB-M-08(3.1)S provides a “safe harbor” method of rebutting the presumption of nexus when an out-of-state retailer uses New York affiliates. Thus, one alternative for a retailer to consider is what I call a “New York style” approach. Namely, the online retailer would provide in each agreement with its affiliates (the “Terms and Conditions”) that the affiliate agrees (covenants) not to engage in any traditional solicitation activities in the state that result in referring potential customers to the retailer. In addition, the agreement with the retailer should provide that the affiliate will provide to the retailer on an annual basis a certificate attesting to its satisfaction of the “no solicitation” clause and agreeing that the failure to submit such a certificate terminates the affiliate relationship and the payment of commissions or other compensation to the affiliate. While the implementation of an agreement along the foregoing lines will not automatically overcome the presumption in states other than New York, it is a proactive approach to rebutting the presumption they create and is worthy of serious consideration by an online marketer, depending upon its particular circumstances and in consultation with its counsel.
