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  1. #1
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    Which States will surprise us with Sales-Tax-Nexus laws?
    Several states have inserted the "Amazon Tax" (affiliate-nexus) language into their state budget bills. We've heard about states like California, where bills were already pending; however, other states (including Rhode Island) appear to be jumping on the bandwagon.

    It certainly won't surprise me if we don't actually find out about this language being in some bills until many weeks after they become law, in several states.

    This may create some very tricky problems for publishers and merchants, especially if these are enacted as "urgency" or "immediately effective" laws.

    In such states, publishers and merchants may not even learn about the laws' enactment until it's too late: if the merchant processes orders (referred by in-state publishers) that meet the laws' threshhold ($2,000 or $10,000) after the effective date but before they learn about the laws, they may be forced to pay the sales tax (even though they didn't actually collect it from the consumer), and to collect the tax going forward.

    Another option, of course, is for merchants to simply disobey these unconstitutional laws, and deal with any possible enforcement actions if states initiate them. (Has anyone heard about any "demand letters" or other enforcement action by New York's tax agency?)

    However, merchants who don't want to accept the risks, and who intend to terminate affiliates in states with "Amazon Taxes" (affiliate-nexus language), should probably consider just shutting down their entire affiliate programs, or limiting them only to affiliates who don't reside in U.S. jurisdictions with sales taxes. (In other words, they'd accept U.S. affiliates from only five of the smallest U.S. states.)

    There are more concerns, of course: as written, the "Amazon Tax" or affiliate-nexus language in these laws is incredibly broad, and facially includes ALL advertising in ALL media (not just performance-based advertising, and not just online advertising and sales). If any state chooses to enforce the law literally, or to interpret it more broadly than New York's tax agency interpreted this language, then it might not even matter whether a merchant has an "affiliate program" or any kind of performance-based advertising program, nor whether the merchant sells online (vs. phone- or mail-order).
    Last edited by markwelch; June 23rd, 2009 at 03:20 PM.

  2. #2
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    In TX (and I think most states), we have a sales and use tax which essentially means if you purchase something across state lines then (you) the purchaser is liable for TX Use Tax. People rarely (more like never) pay the tax and the state can not possibly police or enforce the use tax. They simply don't have the resources and the numbers are usually too small to justify enforcement.

    Essentially, what the states are doing is transferring the responsibility to the merchants because it is easier to find the merchant and enforce the collection of a tax against the merchant. With the current economic situtation, more and more states are going to be doing this to increase revenue. Ultimately, all states will require the collection of sales tax regardless of where the merchant is located.

  3. #3
    Affiliate Manager Alan Hamilton's Avatar
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    Mark,

    Your comment about the laws being unconstitutional intrigues me. I suspect that this new revenue source will pass in nearly every state it is proposed. That tends to be the way legislation works. One state passes a new law and then the dominos fall as various state reps scurry to author look-a-like legislation. When I was a legislator in the late 70's I referred to it as the "feather in the hat" syndrome.

    In the case of a state sales tax however, I am curious as to what would support a claim of it being unconstitutional. Hopefully it would be found to be so, but I'm not real optimistic of that happening. Our federal income tax is certainly not in keeping with the contitution, which states that no tax of any kind would be permitted unless it is an "apportioned" tax on all. As I understand it, the constitution also restricts the federal government from imposing a tax on income and yet the federal government taxes our income and certainly taxes on income are not apportioned (such as a fair tax or consumption tax would be). I am not aware of any challenges being heard or ruled on by the supreme court with regard to income tax, so my guess would be that a state imposed sales tax (as much as I oppose it) may not be heard by the court. I'd be very interested in why you feel that the nexus tax is unconstitutional.
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  4. #4
    Affiliate Manager Matt McWilliams's Avatar
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    When has unconstitutionality ever been a deterrent for anyone in government let alone some podunk state legislator from rural wherever who thinks he is someone special?

    As Alan said it will not surprise me, unfortunately, to see at least attempts by a majority of states soon. They are always after another way to grab our money to spend on some frivolous government program what will totally fail, but will continue to siphon off money from the pockets of hard-working people.

    I fear that I may go into a political/rageful rant if I continue, so I am posting and shutting up now.

    </rant>
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  5. #5
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    Alan, the law (as intended and interpreted) is unconstitutional because it directly contradicts recent U.S. Supreme Court decisions which ruled that the Commerce Clause of the U.S. Constitution prohibited states from requiring out-of-state merchants to collect sales taxes unless the merchant has a "physical presence" in the state. There have been many, many discussions of this in other threads here. Some have described this as a requirement of "boots on the ground" in the state, but of course it's not quite that simple.

    The bookseller lobbyists (who wrote the language that everyone is using) are trying to extend the concept of "physical presence" to include any advertising in the state, which courts have previously rejected (many decades ago); they worded the law to try to make advertising relationships looks like "sales representatives" or "sales agents."

    Facially, the issue seems like a "jurisdiction" issue -- what actions by a merchant will make the merchant subject to the laws of a state? But the real issue here is the "undue burden" that would result if small merchants were required to compute, collect, report and remit sales taxes on behalf of 45 states (+DC) which have incredibly complex and contradictory sales tax rules and geographic-specific rates.

    Historically, it's incredibly rare for the U.S. Supreme Court to rule that the Commerce Clause bars a particular action. But the U.S. Supreme Court also did something else that's quite unusual: it essentially offered a blueprint for how states could create a system which would require merchants in other states to collect sales taxes for states where they have no physical presence. That blueprint (tax simplification and harmonization) has been followed by the 19 states which have fully joined the Streamlined Sales Tax Project (and by 3 states which are "associate members" and several other states which are in the process of joining).

  6. #6
    Affiliate Manager Alan Hamilton's Avatar
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    Thanks Mark, appreciate the added remarks. It will be interesting to see if the supreme court eventually hears a case on these laws.

    Matt, I hear you so loud, I need ear muffs but I've put my soap box away in the interest of self peace...

    just a thought out loud...

    If I recall correctly, the threshold for a merchant being required to collect / pay these taxes varies from $2k to $10k annually depending on the state.

    Have any merchants (or anyone here) discussed or bounced around the possibility of limiting an affiliate's yearly participation to an amount that stays under the threshold? Seems if needed, this would not be as overwhelmingly cumbersome on merchants. It could also be a better alternative than terminating their affiliate programs. Just a thought...
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  7. #7
    Advocate mellie's Avatar
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    Quote Originally Posted by Alan Hamilton
    Have any merchants (or anyone here) discussed or bounced around the possibility of limiting an affiliate's yearly participation to an amount that stays under the threshold? Seems if needed, this would not be as overwhelmingly cumbersome on merchants. It could also be a better alternative than terminating their affiliate programs. Just a thought...
    I've heard from a couple of affiliates that some merchants are doing this. Very risky area. If a merchant is that close to the threshold that they have an affiliate hold off sales what would happen if one of their other affiliates from that state improves and sale jump? The merchant would have to pause all affiliates within that state.

    If an affiliate has to remove a merchant from their site, how likely are they to put them back in the next fiscal year?

    Much better, as far as NY situation is concerned, is to add the non solicitation clause to terms. That way affiliates are less likely to target within state.
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  8. #8
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    This discussion about "limiting affiliate sales" might lead some people to believe that the issue is the amount of sales generated by each web publisher, when in fact the issue is the total in-state sales volume by all in-state web publishers, combined.

    I am intrigued by the suggestion that web publishers might protect their relationships (and their advertisers' exemption from collecting sales tax) by excluding in-state traffic from the publishers' web sites. This might even work, in small states: if the merchant reviews its records and finds that Hawaii web publishers referred Hawaii customers who spent $5,000 with the merchant last year -- but 90% of those sales came from just one web publisher, the merchant might ask that publisher to "turn off" promotions for in-state visitors, in order to make sure the merchant won't exceed the $10,000 threshhold (the strategy is much less plausible in states with a $2,000 threshhold).

    In-state traffic could be throttled in two ways. First, if the publisher buys traffic (for example, using Google AdWords), the publisher could implement geo-targeting so that ads for the publisher's web site are not generally shown to people within the state. Second, the publisher could implement IP-lookup functionality and suppress the display of that particular merchant's links for visitors who are recognized as being in that state.

    I agree with Mellie that this strategy would be very, very risky (this type of throttling isn't perfect, and an unexpected surge or an unexpected failure of geotargeting might bump the merchant over the threshhold). In addition, very few (if any) web publishers would agree to the technical work that would be required to implement this type of throttling; in fact, this strategy should really only be considered by merchants who have already chosen to allow participation in the "affiliate program" by only one web publisher in the state.

  9. #9
    OPM and Moderator Chuck Hamrick's Avatar
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    I stand by my previous statements that the affiliate tax nexus is a witch hunt by states to find additional tax revenue and it is unconstitutional. There is no mechanism for a state tax department to track affiliate or merchant sales made solely in their state. Yes Amazon, EBay and Overstock are large enough to target and they decide to axe the affiliates rather than take on the liability. For the majority of merchants this is not a concern until they get scared and unfortunately the attention that the affiliate industry is producing is encouraging merchants to duck and run. What I haven't heard is what the networks think about this as they are a bigger nexus than any single affiliate or merchant.

  10. #10
    Affiliate Manager Alan Hamilton's Avatar
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    I agree that it is a witch hunt for revenue. I also agree that there is no mechanism in place on a state level to monitor every affiliate or merchant. I'm sure the states realize this too. What they count on is that fear will cause most to comply and an occasional "example" can be made of someone who they target in order to shore up the intimidation.

    My thought about limiting a publisher from reaching the threshold is more an idea for bouncing as an alternative to a merchant shutting off all affiliates. It had been my assumption that the threshold was on a per affiliate basis, but apparently that is not always the case, as Mark mentioned.
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  11. #11
    OPM and Moderator Chuck Hamrick's Avatar
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    I have not exhaustively studied the law in New York but it is my opinion that the use of the term affiliate was not specifically targeted to online affiliates of the ilk that tread these forums. That said evidently it was taken serious enough that merchants shut down programs. So answer me this, states that just cut education budgets, who barely understand the Internet are now going to find a technology means to hunt down lost sales tax revenue from out of state merchants? Alan I agree that the law added language to scare the merchant into complying and a result is many shutting down programs. I also agree that with enough time and money any state can pursue collecting these sales taxes. But the key term here is money which they are lacking.

  12. #12
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    Chuck wrote: > "I have not exhaustively studied the law in New York but it is my opinion that the use of the term affiliate was not specifically targeted to online affiliates of the ilk that tread these forums." <

    Chuck, the New York law was written by lobbyists for the American Booksellers Association specifically to attack Amazon.com by pretending that the web publishers who accept advertising through Amazon's "Associates Program" were a network of sales agents walking the streets in New York trolling for customers.

    Since it's not legal to create a law that just targets one company (akin to "bills of attainder"), the law is written more broadly, but it was absolutely, positively written specifically to target merchants with advertising relationships with web publishers "of the ilk that tread these forums."

    After New York enacted its "Amazon Tax," the lobbyists assured legislators in other states that Amazon would absolutely not end its advertising relationships with web publishers; they pointed to Amazon's total surrender when the New York law passed. (Amazon might have decided to comply in New York because it anticipated a quick court ruling that the law was unconstitutional. Or it might have felt that there were other "nexus" reasons why it should collect the tax even if the law were invalid.)

    Even after Amazon announced that it would terminate its advertising relationships with web publishers in Hawaii, Connecticut, and North Carolina if those states passed the "Amazon Tax," I still believed it quite unlikely that Amazon would terminate its highly profitable advertising relationships with tens of thousands of web publishers in a large state like California (once again, I'm proven wrong).

    I don't think the booksellers expected (nor desired) that Amazon or other merchants would terminate their advertising relationships with in-state web publishers -- they wanted Amazon and other merchants to collect sales taxes, which would remove one financial advantage that the online resellers have against local bookstores. (Most of us agree: states should adopt a simplified, harmonized sales-tax solution like the SSTP so that merchants have a practical solution to collect sales taxes from all customers who owe them.)

    I'm sure that in hindsight, when these new laws fail to achieve the intended effect, the booksellers' lobbyists will still be glad to have stripped away this advertising tool from Amazon and other out-of-state merchants. Many local booksellers participate in the American Bookseller Association's BookSense/IndieBound affiliate program, so Amazon's expulsion of in-state affiliates will directly profit ABA-member booksellers in those states.)
    Last edited by markwelch; June 24th, 2009 at 11:14 PM.

  13. #13
    OPM and Moderator Chuck Hamrick's Avatar
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    Mark, thanks for a clarification, I stand corrected. So this furthers my case that New York or any state for that matter can not possibly determine affiliates or merchants that are making sales in their state. It comes down to how much liability can you stand if they come after you in the future. Obviously if you are an A/O/E they have a better chance of pulling you into court due to the potential size of a won case. If the state really wants to go after someone see my comment at the end of post #9.

  14. #14
    Affiliate Manager Alan Hamilton's Avatar
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    Quote Originally Posted by mellie
    Much better, as far as NY situation is concerned, is to add the non solicitation clause to terms. That way affiliates are less likely to target within state.
    My thought on the above is that this might be a short term solution for NY based affiliates attempting to work around the NY law. But what happens when 30 - 45 states pass nexus legislation? Do the affiliates then block traffic from all of these states? In the long term, that could result in limiting an affiliate to marketing only in a few states. Thoughts?
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  15. #15
    OPM and Moderator Chuck Hamrick's Avatar
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    That would mean the end of affiliate marketing without a single affiliate or merchant taken to court. What is ridiculous is that I don't see this applied to other online advertising. And affiliates do not have a proper representation but lets see the states take on the well organized association like the IAB.

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