Legal Matters: Removing the Confusion Surrounding State ‘Amazon Laws’
Amazon.com challenged the New York statute in New York state court on the grounds that the law violated the "substantial nexus" standard set forth in the Supreme Court's famous 1992 Quill decision, which requires that a retailer must have a "physical presence" in a state before it can be required to collect that state's sales tax. An intermediate appellate court concluded, however, that the presumption approach used in the New York statute didn't result in a violation of the Commerce Clause, which states the following: "The obligations imposed by the state to collect the tax only arise when the paradigm shifts from advertising to solicitation. Thus, until such time as the out-of-state vendor produces a certification from every one of its New York representatives that they have not engaged in solicitation, the facial challenge based upon the Commerce Clause must fail …"
In effect, the New York court ruled that because it's not unreasonable to assume that some web affiliates engage in "proactive solicitation" and aren't mere "passive" advertisers, it's reasonable for the legislature to adopt a statutory presumption that some of the in-state publishers are engaged in nexus-producing sales solicitation activity on behalf of the out-of-state internet retailer. The remote seller has the opportunity to counter that presumption by presenting evidence that no active solicitation, in fact, occurred. The Amazon case in New York hasn't yet reached that state's highest appellate court, so the Commerce Clause issue remains unresolved in that state.
Terminating Web Affiliates to Avoid the Statutory
Rather than having to assume the burden of obtaining certification from all in-state web affiliates attesting that they haven't engaged in solicitation activities (and running the risk of not being able to do so), many online retailers have simply decided to terminate their relationship with affiliates in New York, North Carolina, Rhode Island, Arkansas and Connecticut and have also informed their affiliate networks to exclude publishers in those states from participating in their advertising programs.
The web affiliate laws may be self-defeating. If online retailers terminate their agreements with publishers, the state doesn't benefit from any additional tax collection by these companies. The state will, however, lose income tax revenue that the publishers would otherwise have paid on the commissions they would have earned. Moreover, good jobs move out of state as affiliates relocate to states that haven't enacted web affiliate nexus laws.
Illinois' web affiliate law doesn't employ this same "presumption" approach to establish nexus. Instead, the Illinois statute provides that the mere presence of an Illinois web affiliate, with nothing more, gives rise to an obligation on the part of an out-of-state seller to collect use tax on all of its sales into the state. In other words, the absence of any additional in-state solicitation activity on the part of in-state publishers is irrelevant. The Illinois law is even more vulnerable to a constitutional challenge than the New York-style laws. In response to the Illinois law, many internet retailers have terminated their affiliate agreements with Illinois publishers.
Pay for Performance
vs. Pay Per Click
Do these Amazon laws apply only to performance-based compensation arrangements or to pay-per-click (PPC) compensation arrangements as well? The first of the so-called Amazon laws was enacted in New York. In a Technical Services Bulletin (TSB) issued by the New York Department of Taxation and Finance shortly after the new law was passed, the department stated that the law doesn't apply in those situations where the compensation for the link isn't "based on the volume of completed sales generated by the link."
For example, the TSB describes a linking relationship where the compensation is "based only on the number of clicks on the link … whether or not sales are made." According to the TSB, such PPC compensation doesn't give rise to a statutory presumption of nexus. Consequently, if the owner of a paid search website is compensated on a PPC basis, according to New York's current interpretation of its law, that web referral relationship shouldn't fall within the scope of the New York law.