Alright, what is going on? The phrase, “everybody’s doing it,” seems to come to mind lately when you think of the tax law changes states are proposing or enacting.
For example, “Amazon” nexus. Several states have either enacted or proposed an “Amazon” nexus rule similar to New York’s.
On April 23, 2008, Governor Paterson signed into law N.Y. Tax Law § 1101(b)(8)(vi) ("Commission-Agreement Provision"), which provides:
"a person making sales of tangible personal property or services taxable under this article ("seller") shall be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a resident of this state under which the resident, for a commission or other consideration, directly or indirectly refers potential customers, whether by a link on an internet website or otherwise, to the seller, if the cumulative gross receipts from sales by the seller to customers in the state who are referred to the seller by all residents with this type of an agreement with the seller is in excess of ten thousand dollars during the preceding four quarterly periods ... This presumption may be rebutted by proof that the resident with whom the seller has an agreement did not engage in any solicitation in the state on behalf of the seller that would satisfy the nexus requirement of the United States constitution during the four quarterly periods in question."
Quickly after it was enacted, Amazon and Overstock.com litigated and argued that the law was unconstitutional. They lost.
The New York Supreme court stated in a couple of excerpts from the case:
In any event, the statutory presumption is by its terms and effect rebuttable. The Commission-Agreement Provision does not conclude that all commissioned residents definitively will solicit business for the seller in a manner that would justify tax collection. Sellers can establish that none of their contractors engage in New York solicitation for them. Out-of-state sellers know exactly with whom they are contracting and can reasonably control and remain informed about whether their New York contractors solicit business from other New York residents.
Out-of-state sellers can shield themselves from a tax-collection obligation by altogether prohibiting in-state solicitation activities referring to them or encouraging sales on their behalf that would subject them to a tax-collection requirement and, as a condition of compensation, requiring that their New York contractors attest to compliance. To the extent that the exercise may be burdensome, it is a cost of doing business associated with the decision to contract with New York residents and offer them incentives for bringing them sales when such an arrangement is profitable to the vendor.
In the end, the Commission-Agreement Provision does not broadly tax any and all internet sales to New York consumers. It requires a substantial nexus between an out-of-state seller and New York through a contract to pay commissions for referrals with a New York resident along with realization of more than $10,000 of revenue from New York sales earned through the arrangement. The neutral statute simply obligates out-of-state sellers to shoulder their fair-share of the tax-collection burden when using New Yorkers to earn profit from other New Yorkers.
Amazon.com LLC v. New York Department of Taxation and Finance, New York Supreme Court, New York County, Index No. 601247/08, January 12, 2009
Since the loss, other states have quickly jumped on the bandwagon, such as:
Maryland (SB 1071, introduced 3/28/09)
Hawaii (HB 1405, introduced 3/10/09)
Minnesota (HF 401, SF 282, introduced 1/29/09)
North Carolina (SB 487, introduced 3/09/09)
Tennessee (SB 1741, introduced 2/12/09)
California has had public hearings and provided information regarding their position. An Information Paper released on June 18, 2008 by California stated the following:
Out-of-state online retailers offer affiliate programs with persons in California. The California person’s website includes specially formatted links that connect customers to the online retailer’s website to purchase items. The online retailer tracks these sales and pays the affiliate referral fees on qualifying revenue made through their links. Online retailers maintain that these links are similar to website banner ads, and affiliates are advertisers, not salespeople operating on behalf of the out-of-state company.
An out-of-state company has nexus in California if it has a salesperson engaged in authorized selling activities on behalf of the out-of-state retailer. Staff does not believe that a link on a retailer’s affiliate’s website suffices to establish that the affiliate is an authorized salesperson of the out-of-state retailer under section 6203(c). Consequently, under the current provisions of California law, staff does not require out-of-state companies to collect tax based solely on such links on affiliates’ websites. However, other California activities an affiliate may engage in to promote the link may suffice to establish that the affiliate is an authorized salesperson of the out-of-state retailer.
If staff’s understanding of New York’s law is correct, the main difference between New York’s approach and California’s approach regards who has the burden to prove (or disprove) that other activities in support of the link exist that are sufficient to create nexus. Since New York’s approach involves a rebuttable presumption, staff believes that under New York law, as under California law, the existence of a link on an affiliate’s website does not, on its own, conclusively create nexus.
Section 6203 of California statutes provides that “engaged in business” includes maintaining, occupying, or using, permanently or temporarily, directly or indirectly, or through a subsidiary, or agent, by whatever name called, an office, place of distribution, sales or sample room or place, warehouse or storage place, or other place of business in California. Thus, subsidiaries that are engaged in selling activities on the out-of-state retailer’s behalf create nexus in California for the out-of-state retailer. The out-of-state retailer will be required to collect sales and use tax on all of its sales of taxable property in California. The Board’s Out-of-State District office routinely investigates subsidiaries located in California to determine if their activities create nexus for their out-of-state parent companies. Staff is not aware of an Amazon subsidiary in California that participates in a selling activity on behalf of Amazon.com, such as a warehouse or distribution center.
Conclusion
Online retailers have new sales tax collection responsibilities to worry about.
If you have questions regarding these provisions or their impact on your company or client, please contact me at leveragesalt@earthlink.net.
