California Affiliate Nexus Law Repealed (At Least Temporarily) In Deal With Amazon

As we have previously reported, on June 28, California enacted an affiliate nexus law (ABX 1-28). Under the California law, an out-of-state retailer that has contracts with California affiliates to publish online advertisements linking consumers to the retailer’s website would have been required to collect California sales tax (or use tax) on all of its sales to California purchasers, if: (1) the in-state publishers also engaged in solicitation of customers in the state on behalf of the retailer through other means (such as by flyers, telephone calls, or e-mails) targeting California consumers; (2) the publishers of the advertisements were compensated based on sales made by the retailer; (3) over a 12 month period, the retailer realized at least $10,000 in cumulative sales to consumers accessing its site through such online ads; and (4) the retailer had California sales of at least $500,000 during such 12 month period.

Amazon.com responded to ABX 1-28 by supporting a campaign to repeal the new affiliate nexus law by citizens’ referendum, which was reportedly well on the way to gathering the necessary signatures to get the repeal measure on the ballot next year.

Now, political maneuvering between Amazon and the California General Assembly has resulted in a compromise. On Friday, September 9, the General Assembly enacted AB 155, which will become law immediately if Governor Brown signs the bill (as he is expected to do, despite some reported misgivings). AB 155 repeals, at least for a year (on the conditions described below), the California affiliate nexus law (i.e., ABX 1-28 described in the first paragraph), and also provides that the law will not be enforced for the period between June 28 and the effective date of AB 155. The bill also repeals (on the same conditions) the “controlled group” of corporations provisions of ABX 1-28. Those provisions purported to require use tax collection by any out-of-state retailer that is part of a group of corporations that includes a member that performs services in California in connection with tangible personal property to be sold by the retailer.

The repeal of the California affiliate nexus law is contingent upon the enactment by Congress of federal legislation to overturn the “physical presence” nexus requirement of Quill Corp. v. North Dakota, which prohibits a state from imposing a sales/use tax collection obligation on a remote seller or Internet retailer without a physical presence in a state. Amazon has reportedly agreed to lobby for such federal legislation and, in a press statement, said: “This [California] legislation will allow us to continue to work with Congress and the states to obtain a federal resolution to the sales tax issue as soon as possible.”

Here’s how the repeal works (if signed by Governor Brown):

• The California affiliate nexus provisions of ABX 1-28 enacted on June 28 are repealed and no longer of any effect, and also will not be enforced with respect to the period from June 28 through the effective date of AB 155 (i.e., the date Governor Brown signs the bill);

• If no federal legislation is adopted over-ruling Quill before July 31, 2012, then the California affiliate nexus provisions (as re-stated in AB 155, with one important change, noted below) will become law on September 15, 2012;

• If federal legislation overturning Quill is adopted by July 31, 2012, and California does not implement the requirements of such a federal law by September 14, 2012, then the California affiliate nexus provisions (again, as restated in AB 155, with the change noted below) take effect January 1, 2013; 

• If federal legislation over-turning Quill is adopted by July 31, 2012, and California implements the requirements of such a federal law by September 14, 2012, then the affiliate nexus provisions of AB 155 will NOT take effect.

Note that the affiliate nexus provisions of AB 155 that may later take effect ― in the event that Congress either does not enact federal legislation overturning Quill or California does not act to implement such federal legislation ― have been modified under AB 155 to increase the minimum sales threshold, so that they now will apply only to retailers that have in excess of $1,000,000 in cumulative sales to California residents in a 12 month period (although only $10,000 of those sales need to come from sales referred by in-state web affiliates).

This is a lot to take in, and remote sellers making sales to California residents should consult their legal advisors with any questions. At a high level, as a result of AB 155, e-commerce businesses and direct marketers that engage in online advertising through California affiliates get a temporary reprieve of at least 12 months from the effects of the California affiliate nexus law, and can continue to use California publishers of online advertisements during that period. But, they will likely need to scrutinize their California web affiliate relationships again before September 2012 and keep track of federal and California legal developments until at least January 2013.

The larger issue confronting each remote seller, however, may be whether the compromise struck in California is consistent with their own company’s goals and interests, and with the continued development of e-commerce more generally. Affected online retailers and publishers should stay informed and engaged regarding developments affecting the authority of all states to impose use tax collection obligations on out-of-state businesses. The time for sitting on the sidelines and watching the contest play-out between retail behemoths and the states has passed.