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  1. #1
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    Let's Dissect this Proposed Legislation - Here's the Text
    The specific problematic clause in the proposed legislation is an update to the North Carolina General Statutes § 105 164.8. Retailer's obligation to collect tax; mail order sales subject to tax.
    Here are the current parts of the statute that have proposed changes relating to nexus:
    § 105 164.8(b) Mail Order Sales. – A retailer who makes a mail order sale is
    engaged in business in this State and is subject to the tax levied under this
    Article if atleast one of the following conditions is met:

    § 105 164.8(b)(3) The retailer has representatives in this State who solicit
    business or transact business on behalf of the retailer, whether the mail
    order sales thus subject to taxation by this State result from or are related
    in any other way to such solicitation or transaction of business.
    Here's the proposed legislation:
    § 105 164.8(b) Remote Sales. – A retailer who makes a remote sale is
    engaged in business in this State and is subject to the tax levied under this
    Article if at least one of the following conditions is met:

    § 105 164.8(b)(3) (3) The retailer solicits or transacts business in this State
    by employees, independent contractors, agents, or other representatives
    whether the remote sales thus subject to taxation by this State result from
    or are related in any other way to the solicitation or transaction of business.
    A retailer is presumed to be soliciting or transacting business by an
    independent contractor, agent, or other representative if the retailer 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 Web site or otherwise, to the
    retailer, if the cumulative gross receipts from sales by the retailer to
    purchasers in this State who are referred to the retailer by all residents with
    this type of agreement with the retailer is in excess of ten thousand dollars
    ($10,000) during the preceding four quarterly periods. This presumption may
    be rebutted by proof that the resident with whom the retailer 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.

  2. #2
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    I'd like to see our legislators diagram these sentences.

  3. #3
    Analytics Dude Kevin's Avatar
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    This presumption may
    be rebutted by proof that the resident with whom the retailer 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.
    Hmmm. Is this an out? Or merely a veiled attempt to keep this "constitutional"?
    Kevin Webster
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  4. #4
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    NC Advertising-Nexus Law identical to NY, RI (and equally unconstitutional)
    The language appears to be identical to the New York and Rhode Island statute.

    The "rebuttal" language is meaningless without any standard (New York chose a very narrow interpretation of the law, and provided a "safe harbor" process; Rhode Island has not done so, and North Carolina also appears unlikely to allow any exceptions). In fact, the "rebuttal" language is simply a sleazy attempt to pretend that the entire law doesn't directly contradict relevant U.S. Supreme Court precedent; no rebuttal is needed because the entire law is void ab initio.

    Consider the logic here: the U.S. Supreme Court has clearly said that states may not impose unreasonable burdens by extending sales-tax collection duties on out-of-state merchants, unless those merchants hire active in-state sales agents who solicit and accept orders in the state. Although "advertising" clearly does not meet this standard, this law provides that paying an in-state media outlet for advertising (all advertising, any advertising -- not just online advertising, not just 'pay-per-sale' advertising) triggers the sales-tax collection requirement. (This law doesn't prevent companies from selling to state residents, nor from aggressively advertising to state residents -- provided that they don't advertise in media outlets which are "residents" of the state. Let's face it, the law's immediate effect will be to "drive advertising dollars out of the state.")

    Perverting the situation further, the states grudgingly accept that maybe the law might be unconstitutional, to which the law responds: "okay, instead of incurring the burden of collecting our sales tax, you can instead choose to accept a much greater burden by hiring a North Carolina lawyer to try to 'prove' to our state tax collectors that the law can't constitutionally be applied to your company." And by the way, the legislators voting for this law have made it very clear that they don't believe there are any exceptions, and that every out-of-state merchant must collect sales tax on all orders, period; how do you think the tax agencies are going to rule on these cases?

    The law is unconstitutional; the states have the burden of proving that there is an in-state presence that meets the standards set by the U.S. Supreme Court. The law is void ab initio.

    Alas, the fact that these laws are void does not mean they can be ignored: merchants seeking to avoid expensive constitutional litigation really have no choice but to terminate all their advertising relationships with in-state web publishers. As I suggested in another discussion thread, another option might be for merchants to adopt the "New York solution" for all web publishers in every "Affiliate-Nexus Tax Law" state (or even on all web publishers everywhere), but by continuing any relationships with in-state web publishers, such merchants create the risk of expensive litigation with the states, and possibly retroactive imposition of sales taxes which weren't collected.

    I have great respect for those few merchants who have proudly stood up and said, "These laws are unconstitutional, and we will not comply with them, period."

    I'm a great fan of "standing on principle," but I've also experienced the high litigation costs that can result from principled stands, and I honestly can't recommend this strategy to merchants who don't have the absolute support of all owners and shareholders.

    I have less respect, but still some respect, for those merchants who appear to "bury their heads in the sand" and simply ignore the laws -- taking no action to comply with the laws, but neither announcing their defiance. Hopefully, these merchants have carefully considered the situation and have decided not to comply with the laws, but also not to deliberately provoke any state action.

    After these two options (open defiance and quiet non-compliance), the other options for merchants are:
    - Conformance (collecting the sales tax);
    - Attempted Conformance-to-prove-inapplicability (using the "New York solution");
    - Inapplicability (we don't generate enough sales to the state to meet the "threshhold" stated in the law).
    Last edited by markwelch; July 29th, 2009 at 12:33 PM.

  5. #5
    Analytics Dude Kevin's Avatar
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    I suspected it was the latter.

    As Mark points out, it's NY's Tax and Finance departments interpretation of the legal language that kept NY affiliates in business, although not completely unaffected.

    And any interpretation can change without so much as a wink and a nod, simply a brief document.

    So RI has slicked up the slippery slope further, and NC is bound to add some oil.

    I'll be opening my SSTI cafepress store soon, I guess. If I'm allowed to as a NY resident... ;p
    Kevin Webster
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