Should All Merchants Adopt the “New York Solution” (Advertising-Nexus Tax Laws)

By , July 9, 2009

Okay, I’m going to leap out on a ledge and suggest something that none of us (in the “affiliate marketing” community) like: Merchants should seriously consider adopting the “New York Solution” for all of their web publishers, whether located in an “Advertising-Nexus” state or not.

The “New York Solution” is a procedure aimed at meeting the “safe harbor” guidelines issued by New York’s tax agency. To comply, a merchant must add specific language to its agreements with publishers, and must also require that publishers annually submit a certification:

> “that the resident representative [web publisher] is prohibited from engaging in any solicitation activities in New York State that refer potential customers to the seller including, but not limited to: distributing flyers, coupons, newsletters and other printed promotional materials, or electronic equivalents; verbal solicitation (e.g., in-person referrals); initiating telephone calls; and sending e-mails. In addition, if the resident representative [web publisher] is an organization such as a club or a non-profit group, the contract or agreement must provide that the organization will maintain on its Web site information alerting its members to the prohibition against each of the solicitation activities described above [and must also] contain a statement alerting the representative [publisher] that the certification and any information submitted with it is subject to verification and audit by the Tax Department.” <

Many merchants who chose to continue their relationships with New York publishers adopted language which also excludes some other specific activity (including direct-to-merchant PPC).

Merchants who chose to terminate their advertising relationships with New York publishers did not adopt this language (perhaps at their peril, as discussed below).

Why Should Merchants Adopt the “New York Solution” for All Publishers?

There are two issues to address.

First, of course, is the risk that additional states will enact the “Advertising-Nexus” tax language; Rhode Island has already done so, and North Carolina appears very likely to do so (asserting retroactivity). The governors of Hawaii and California vetoed this legislation, but the law might re-appear in new budget bills, or the Hawaii governor’s veto might be overridden. It’s also possible that the “Advertising-Nexus” tax language will appear in the budget laws enacted in other states, without advance warning. It is possible (though not certain) that states enacting the identical “Advertising-Nexus” tax language as New York might adopt the exact same interpretations.

Second, unfortunately, is the risk that “affected publishers” (publishers who reside in a state which enacts the “Advertising-Nexus” tax law) might attempt to deceive merchants and the states by using “address games” or “entity games,” using addresses in other states even though the publisher continues to reside in the affected state. Unfortunately, there have been a substantial number of discussion threads in the Affiliate Tax Laws sub-forums, inquiring about or suggesting the use of strategies that I consider to be “address games” or “entity games.”

I assume that merchants who seek to terminate their relationships with publishers in “Advertising-Nexus” states are more likely to encounter this behavior than those who adopt the “New York Solution.” However, merchants who use the “New York Solution” might also encounter publishers who fabricate another address because they wish to engage in specific activities which are prohibited in “affected states” but not elsewhere.

If all “Advertising-Nexus” states adopt the New York interpretation, then merchants who apply the “New York Solution” to all publishers might still avoid being “stung” by an affiliate who conceals their residence in an affected state.

I hate the idea, but I’m worried that merchants who don’t take this extremely expensive and burdensome step might risk being “caught” with active affiliates in an affected state, and might be forced to not only collect sales tax going forward, but also to pay sales taxes which were never collected from consumers for past transactions (after the law’s effective date), plus interest and penalties.

Of course, merchants who adopt the “New York Solution,” and the required paperwork hassles, would probably be much less likely to accept publisher applications without a clear expectation that the publisher will actually carry the merchant’s advertising (currently, 90% or more of publishers who are accepted into a merchant’s “affiliate program” never actually post any advertising on their web sites).

An Alternative: Merchants might choose to simply impose the “New York language” in all publisher agreements, but not require the certification procedure (or require certifications only from publishers who reside in affected states).

It’s actually unclear to me how a state where the merchant has no “nexus” (because of the contractual language) could compel the merchant or its publishers to incur the burden and expense of collecting “certifications.” (Publishers who reside in the state can be compelled to respond to audits by their state’s tax agency, but I don’t see how this would extend to the merchant.)

Another Alternative: Perhaps affiliate networks (or another service provider) could provide the “certification” service for merchants who require it (for a reasonable fee). This might substantially reduce the cost and burden for all parties.

This is not legal advice, nor a recommendation; it is really just an expression of concern, and an idea for a possible solution to a problem that hasn’t yet manifested itself.

What do other folks think of this issue? What alternate solutions might there be?

Some added thoughts:

The reason merchants should seriously consider this suggestion is to reduce their risk of being “tricked,” either by a state which enacts the law quietly or retroactively, or by a single unethical publisher who conceals their place of residence.

The “trade-off” here is the benefit a merchant receives from the specific practices which are prohibited under the “New York Solution.” For many merchants, those benefits are very significant and justify the slight risk.

I expect that 90% of merchants who consider this suggestion will choose not to implement it (even though I believe that most attorneys who consider the idea would probably recommend it.)

One Response to “Should All Merchants Adopt the “New York Solution” (Advertising-Nexus Tax Laws)”

  1. markwelch says:

    It is still unclear whether Rhode Island and North Carolina will accede to this “safe harbor.” (Rhode Island has disclosed that its enactment of the Advertising-Nexus tax law resulted in no additional sales tax collections.)

    Following the enactment of a different unconstitutional sales-tax law in Colorado, Amazon and some other merchants have elected to terminate their advertising relationships with web publishers in Colorado, despite the absence of any “nexus” language in the new law. (The new law purports to require all large out-of-state merchants to inform Colorado customers that they owe sales tax to the state, and also requires the merchants to compute the amount of the tax.) I suspect that Amazon is worried that in any litigation over the new law, the state would assert that Amazon has nexus because of its “associates program,” even though the legislature rejected the “advertising-nexus” language.

    Even more alarming, a few merchants have cited the “advertising-nexus” and other internet-sales-tax laws as the reason they are closing their “affiliate programs” completely, ending all their performance-based advertising. I suspect that many of these merchants are merely using the internet-sales-tax issue as a pretext, when they are actually ending their affiliate programs for other reasons. It’s also possible that these merchants are shifting from public programs on affiliate networks to private in-house affiliate technologies (quietly inviting only those publishers whose visitors have a history of responding to the merchant’s advertising).

    The “advertising-nexus” and “internet-sales-tax” issues are certainly not the only factors leading Amazon and other merchants to decide to end their performance-based advertising activity (either in individual states, or entirely). Thus, it’s important for web publishers to recognize that even if you reside in states that have chosen not to enact either of these unconstitutional laws, you are still vulnerable to “immediate terminations” by individual merchants.

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