A Recent Wave of Click Through Nexus Activity in the States

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A Recent Wave of Click Through Nexus Activity in the States


Online retailers, welcome to the 2015 state legislative season. No fewer than six states have new developments in the area of online “click through” affiliate nexus legislation, with most of the activity reflecting negative developments for remote sellers. These click through laws remain, in our view, constitutionally suspect, despite the decision of the New York Court of Appeals in 2013 upholding the original, New York click-through affiliate nexus law.

First and foremost, on January 1, 2015, the “new and improved” Illinois click through affiliate nexus statute, Public Act 98-1089, took effect. The new law replaces the version enacted by the Illinois General Assembly in 2011, which was stuck down by the Illinois Supreme Court for violating the Internet Tax Freedom Act (“ITFA”) in an action brought on behalf of the Performance Marketing Association by Brann & Isaacson. The General Assembly in 2014 sought to correct what it considered to be the fatal flaws in the prior version of the law, by extending the statute to cover referrals made not only via a link on an Illinois affiliate’s website, but also other types of referrals, including those in which a code provided in a print or broadcast advertisement allows the retail to track the source of the referral and make a payment to the ad publisher. The new Illinois statute also adopts a presumption of nexus, common to many of the state click through affiliate nexus laws, that a remote seller may seek to rebut. The Illinois statute remains more aggressive than most such laws, however. Among other things, the presumption of nexus under P.L. 98-1089 attaches to a remote seller regardless of whether the retailer makes any sales to customers in Illinois, so long as the retailer realizes at least $10,000 in sales to customers anywhere as a result of referrals from Illinois affiliates. Once the presumption attaches, a retailer is required to register to collect sales tax with the Illinois Department of Revenue and can only rebut the presumption subsequently upon audit.

As we recently reported, Michigan has also joined the ranks of states that have adopted a click through nexus law. Unlike the Illinois statute, Michigan Public Act No. 554 imposes a presumption of nexus when an out-of-state seller with in-state affiliates receives $10,000 in gross receipts from sales to in-state customers. The Michigan presumption also applies only if the retailer’s total gross receipts from all sales to Michigan purchasers exceed $50,000. The statute also specifies that a retailer can rebut the presumption if the retailer: (1) enters into written agreements with its affiliates that prohibit solicitation activities in the state; and (2) obtains written statements from Michigan affiliates stating that the affiliates did not engage in any solicitation activities in the state on behalf of the retailer over the prior twelve months.

As a result of the enactment of Michigan’s law, Vermont’s previously enacted, but not yet effective click through nexus statute was due to kick-in, because Michigan marks the fifteenth state to adopt such a law. However, as we noted in our most recent post, after Amazon took the preemptive step of terminating all of its Vermont affiliates in anticipation of the law coming into effect, the Governor of Vermont announced (through the Department of Taxes) that he plans to ask the Vermont legislature to amend the law so that it takes effect only after 25 states have adopted a click through nexus law. Retailers, therefore, may obtain a temporary reprieve in Vermont.  Amazon’s decision to terminate its Vermont affiliates shows that these ill-considered, and constitutionally suspect, click through nexus laws remain bad policy for most states. Often, the effect of enacting such a law is only harm to in-state internet businesses who lose advertising revenue from out-of-state online sellers, without any meaningful sales tax revenue resulting from the law.

Nevertheless, perhaps encouraged by the success of New York in defending its statute against a constitutional challenge, and discouraged by the complexities of the ongoing debate in Congress about the proper terms and conditions for granting states the authority under the Commerce Clause to impose sales/use tax collection obligations on remote sellers, the legislatures in at least three more states—Maryland, South Carolina, and Washington—are considering click through nexus bills in the 2015 legislative session. South Carolina bill S. 170 (introduced January 13, 2015), Washington Senate Bill 5541 (first read January 23, 2015) and Maryland House Bill 726 (introduced February 13, 2015), each represent standard form click through affiliate nexus legislation. Each bill establishes a rebuttable presumption of nexus for a remote seller that has contracts with in-state affiliates under which the affiliate is compensated based on sales referred to the retailer via a link on the affiliate’s website or otherwise, so long as the retailer obtains at least $10,000 in sales to residents of the state from such referrals. Washington’s bill is noteworthy in that the presumption of nexus also applies to the state’s Business & Occupation Tax. A hearing on Washington’s bill was already held on February 3. The Maryland House Ways and Means Committee will hold a hearing on its bill on March 3. The South Carolina bill has been referred to the Senate Committee on Finance.

Unfortunately, it appears that state legislatures are again turning in significant numbers to click through affiliate nexus laws as a way to try to compel online retailers with no physical presence in the state to collect sales and use taxes. Unless and until another of these laws is struck down as unconstitutional, or Congress makes significant progress toward a compromise on federal legislation that sets appropriate conditions for granting states authority to require sales tax collection by online retailers under the Commerce Clause, we are likely to see more states adopting click through nexus laws in this, and future, legislative sessions. We will keep our readers up-to-date on developments.

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