Legal Matters: Removing the Confusion Surrounding State ‘Amazon Laws’
State legislatures continue to experiment with novel nexus legal theories in their persistent drive to compel use tax collection by retailers located beyond their borders. The most recent state efforts are aimed directly at online retailers through passage of so-called "Amazon laws."
States With Web Affiliate Nexus Laws
To date, six states have adopted web affiliate nexus laws, which amend their definition of "retailer" or "vendor" or "engaged in business in this state" to include internet merchants who 1.) enter into agreements with residents of the state for referral of potential customers via a link on the resident's website to the out-of-state retailer's website and 2.) pay "a commission or other consideration" for this referral service. The states that have adopted such laws are New York, North Carolina, Rhode Island, Arkansas, Illinois and Connecticut. Several other state legislatures are considering similar bills.
The legal theory underlying these new laws dates back to a 1960 United States Supreme Court case, Scripto v. Carson, in which the high court ruled that the presence of 10 commissioned sales agents in Florida created nexus for a Georgia company, despite the fact that the sales agents were independent contractors and not employees of the Georgia company.
Scripto assigned an exclusive sales territory to each of its manufacturer's representatives. The salesmen were furnished catalogs, samples and advertising materials. They regularly solicited sales and took customer orders, which were then sent by the salesmen to the Atlanta office for acceptance and fulfillment. Scripto argued that because its sales agents were independent contractors and not employees, their presence in Florida didn't create nexus for the out-of-state seller.
The Supreme Court rejected Scripto's argument and concluded the following: "True, the 'salesmen' are not regular employees of appellant devoting full time to its service, but we conclude that such a fine distinction is without constitutional significance." Borrowing on the reasoning used in the Scripto decision, states that have adopted web affiliate laws maintain that in-state website owners (often referred to as "publishers") are the modern day electronic equivalents of the commissioned sales agents in the Scripto case.
Laws Create an Assumpiton of Nexus
Of course, a web referral relationship is much more passive than the active solicitation and order taking done by the Scripto salesmen. Most states that have enacted Amazon laws are aware of this difference, so their web affiliate nexus statutes stop short of declaring that any company with an in-state publisher must collect state taxes. Instead, the legislation only creates a "presumption" that a remote seller has nexus in the state if it enters into a contract with an in-state resident for referral of prospective customers via a website link. The burden of proof then switches over to the retailer, who must present evidence (usually in the form of a certification signed by each in-state affiliate) that none of its publishers engage in solicitation activity on behalf of the internet merchant.