Despite Prior Veto, Missouri Governor Signs Click-Through Internet Affiliate Nexus Provision into Law

As we reported last month, on June 5, Missouri Governor Jay Nixon vetoed a bill that included an Internet affiliate nexus provision. What a difference a month makes. On July 5, Governor Nixon signed a different bill, S.B. 23, that amends Missouri’s definition of “engages in business activities in this state” under Mo. Stat. § 144.605(2) to add a presumption of nexus for retailers with “click-through” online advertising agreements with residents of the state. Under the Missouri statute, “a vendor shall be presumed to engage in business activities within this state if the vendor enters in an agreement with one or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers” to the vendor by an Internet link or otherwise, so long as the vendor realizes at least $10,000 in sales from such referrals. The presumption may be rebutted by submitting proof that the affiliates were not engaged in activities that were significantly associated with the retailer’s ability to make or maintain a market for sales in the state. In particular, such proof may consist of “sworn written statements from all of the residents with whom the vendor has an agreement stating that they did not engage in any solicitation in the state on behalf of the vendor during the preceding year.” See Mo. Stat. 144.605(e), (f).

The Missouri statute continues a disturbing trend among state “click-through” Internet affiliate nexus laws under which a presumption of nexus is created regardless of whether the compensation paid to the in-state affiliate is based on sales completed by the retailer. Statutes recently enacted in Kansas, Maine, and Minnesota contain similar language, as do statutes already on the books in Arkansas, North Carolina, Rhode Island, and Vermont (although Vermont’s statute is not yet in effect). By the plain terms of such statutes, a passive “pay-per-click” advertising arrangement would be sufficient to create a presumption of nexus. Such a presumption is inconsistent with the reasoning of the New York Court of Appeals’ decision upholding the New York affiliate nexus law. See Overstock.com, Inc. v. Department of Taxation and Finance, 20 N.Y.3d 586 (2013). In Overstock, the Court emphasized that “no one disputes that a substantial nexus would be lacking if [in-state] residents were merely engaged to post passive advertisements on their websites.” 20 N.Y.3d at 596. These several states’ affiliate nexus statutes are at odds, on their face, with this fundamental principle.

Tax Agencies Should Read the Language of the Statute and May Not Expand the Law’s Requirements

As some of our readers are aware, on June 28, 2011, California’s Governor Brown signed into law a bill (ABX1 28) that provides for “click-through nexus” under certain circumstances. This law is similar to “click-through nexus” legislation adopted in New York, Rhode Island, North Carolina, and Arkansas (which we have written about extensively in the past), inasmuch as it creates a rebuttal presumption of nexus if a company’s annual sales to California exceed $500,000 and if the company’s California sales exceed $10,000 from links or other referrals from companies (“affiliates”) who receive a commission from such referrals.

Unlike the Illinois and Connecticut statutes, which automatically create nexus in the event that sales from affiliates exceed the threshold, the California law provides that the retailer can rebut the determination of nexus based on affiliate relationships. Nevertheless, in a recent notice issued by the California Board of Equalization (Notice L-284, issued July 2011), the Board states that there are only two conditions to a finding that a retailer must be registered for sales and use tax collection: (1) that sales from affiliates exceeded $10,000 in the last 12 months; and (2) that the retailer’s total sales to California exceed $500,000 in the last 12 months. According to the Board, if a business meets the foregoing requirements and is not already registered with the Board, it must complete a “California Certificate of Registration—Use Tax.”

The Board is simply wrong. It misses two sections of the newly-enacted statute. Section 6203(5)(E) provides as follows: “This paragraph shall not apply if the retailer can demonstrate that the person in this state with whom the retailer has an agreement did not engage in referrals in the state on behalf of the retailer that would satisfy the requirements of the commerce clause of the United States Constitution.” This is similar (but not identical) to the clauses in the New York statute that permit the retailer to show that the affiliates do not engage in any solicitation in the state. Similarly, Section 6203(5)(C) provides that “an advertisement on a web site will not create nexus if the person entering the agreement with the retailer also directly or indirectly solicits potential customers in this state through use of flyers, newsletters, telephone calls, electronic mail, blogs, microblogs, social networking sites, or other means of direct or indirect solicitation specifically targeted at potential customers in this state.” Many affiliate relationships are based on advertisements placed on web sites.

In short, it is important to read not only the notices you may receive from a state tax agency, but also to review the underlying legislation and regulations. State tax agencies simply cannot expand a law. Legislatures and Governors adopt laws. State tax agencies are entrusted with enforcing the laws, not creating them.

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.

“Amazon Affiliate Nexus” Statutes: A Business-Savvy Alternative

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.