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Internet Tax Foes Watch MFA - As 3 States Pass Affiliate Nexus Tax

author photo of Jerry Donnini

There has been endless coverage this year regarding the Marketplace Fairness Act of 2013. However, while the concern is “new” taxes, many Internet retailers are missing the more important news. More attention should be directed to another issue related to Internet taxation - namely click-through and affiliate nexus.

In order to understand the issue, it’s first necessary to recognize that Marketplace Fairness (MFA) legislation is not proposing new taxes. Rather, the MFA is largely trying to determine who must collect and remit the sales (or use) tax associated with an online or remote transaction. (While that may sound like a rather obvious statement to some, it a point missed by many, based on the articles and posts in many online and print news sources). By comparison, click-through or affiliate nexus legislation can in fact result in a state requiring a company to charge and collect sales and use taxes– taxes which would not have been necessary prior to that new legislation. While the most recent MFA legislation was not finalized, in 2013 alone, three new states implemented click-through or affiliate laws.

By way of background and in order to understand the click through/affiliate nexus issue, it is worth briefly describing the landmark cases from a state tax nexus perspective. In 1977, Complete Auto v. Brady began the winding road of nexus law in the area of state and local tax. The concept was further explored by the famous 1992 case, Quill v. North Dakota. In Quill, the Supreme Court explained what “nexus” meant by analyzing an office supply company which sent catalogs into North Dakota to solicit sales and had no other property in that state. The United States Supreme Court said that a taxpayer has nexus with a state if it has some physical presence in that state. The common example is having an agent or property in the state. It held that sending catalogs into a state did not create nexus.

Since 1992, commerce changed forever with the invention of the Internet. During the same time period, no new case has changed nexus jurisprudence. The Supreme Court still has not taken a sales tax case since the mail order catalog era in Quill. How do these principles apply in the Internet era? Does using or having a server in a state create nexus? Where is a website “physically present?” One can quickly see the problems with a ‘physical presence’ test concerning many items being sold online.

In the mid 2000’s, many states began adopting click-through or affiliate nexus statutes. Whether or not these laws are constitutional is still open for debate. Over the summer of 2013, three states joined the affiliate nexus trend by enacting their own law. Being that the Supreme Court has not taken a case, one reasonable interpretation is that the Court does not have a problem with the state of the law. Therefore, a state may reason that it is forgoing substantial revenues if it does not enact an affiliate nexus statute, which is exactly the trend throughout the country.

In May, 2013, Minnesota decided it wanted affiliate nexus to apply within its borders. Following the trend in New York, the state created a presumption of nexus for anyone who has an agreement with a resident of Minnesota, with the arrangement producing $10,000 within a 12 month period.

On June 5, 2013, Maine joined the party by enacting an affiliate nexus statute. The statute is typical to many states’ affiliate nexus statutes and reads:

A seller is presumed to be engaged in the business of selling tangible personal property or taxable services for use in this State if an affiliated person has a substantial physical presence in this State or if any person, other than a person acting in its capacity as a common carrier, that has a substantial physical presence in this State

The statute further defines a seller to mean:

The person “directly or indirectly refers potential customers, whether by a link on an Internet website, by telemarketing, by an in-person presentation or otherwise, to the seller;” and

The cumulative gross receipts from retail sales by the seller to customers in the State who are referred to the seller by all persons with this type of an agreement with the seller are in excess of $10,000 during the preceding 12 months.

In July, 2013, Missouri joined the trend by enacting a different version of a formerly vetoed bill, S.B. 23. The law amends the definition of a vendor in Missouri, and requires someone who uses click-through or advertising agreements with residents of Missouri. The Missouri definition is similar to Maine as well, and has the $10,000 floor requirement for affiliate referrals.

My count now has affiliate nexus laws passed in 12 states. Those states include Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Minnesota, Missouri, New York, North Carolina, Pennsylvania, and Rhode Island. With no federal limitation or guidance in place (such as the proposed Marketplace Fairness Act), states have been taking the idea of affiliate nexus to its limits. Is this a case of the old saying "pigs get fat and hogs get slaughtered" or are states truly within their constitutional bounds?

Until the federal government enacts a law or the Supreme Court hears a case, there is little to stop the states from enacting a law and requiring tax collection requirements for online affiliate arrangements.

It is likely that there will be significant delays regarding new internet sales tax legislation given the varying perspectives. Legislators are reluctant to put their stamp on it given the perception that it is a new tax. The small business community is concerned that new compliance burdens are unfair to small, online retailers. And yet others believe that the current tax laws are adequate and that the states must simply do a better job of enforcing those laws, in particular the collection of use tax. From the states' perspectives, the reality is that few constituents actually remit the required use tax on their "tax free" internet purchases – and that is unlikely to change (or be more effectively enforced). The end result is a state and local tax community which faces increasing uncertainty and diminishing revenues – which leads them directly to click-through and affiliate nexus legislation. (And quite honestly - if I were a state trying to balance a budget, I too would probably follow the same strategy. ) As a Florida tax attorney, it will be interesting to see how many states follow suit on the affiliate nexus front and it is worthwhile as a state and local tax professional to follow any potential legislation in your state.

About the Author: Mr. Donnini is a multi-state sales and use tax attorney and a shareholder in the law firm Moffa, Sutton & Donnini, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini earned his LL.M. in Taxation at NYU. He is also a co-author of the CCH Expert Treatise Library: State Sales and Use Taxation. Please feel free to visit his firm’s web-site or his blog .

Questions? If you have any questions please do not hesitate to contact him via email at or call 954-642-9390.

Other recent “Sales Tax Nexus” posts by Jerry Donnini:

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