North Carolina’s Advertising-Nexus Sales Tax Law

By , July 29, 2009

It now appears almost certain that North Carolina will become the third state (after New York and Rhode Island) to enact a blatantly unconstitutional “Advertising-Nexus” law, attempting to force out-of-state merchants to collect sales tax if they pay in-state web publishers for advertising.  Although Amazon responded to New York’s secret, retroactive enactment of the law in 2008 by collecting sales taxes from New York residents, the laws are having perverse effects in Rhode Island and North Carolina.

Dozens of out-of-state merchants (including Amazon and Overstock.com) first threatened and then actually terminated their advertising relationships with publishers in those states, and thus won’t be required to collect sales taxes under the new law. Surely there will be a nominal increase in sales-tax collections, but it will be far offset by the lost earnings and income-tax payments by North Carolina and Rhode Island web publishers.

Given the clarity of the situation, why would legislators in Rhode Island and North Carolina enact these laws, which merely penalize their own residents?

It’s important to recognize that the bookstore lobbyists and others who are pushing the bill are falsely (but effectively) arguing that Amazon made the same termination “threat” in New York, but changed its position after the law was passed. That’s not what happened: Amazon was “tricked” by New York’s retroactive enactment of the law. The ex-post-facto law asserted that even if Amazon immediately terminated all its advertising relationships with New York publishers on the date of enactment, it was already too late because the law’s effective date was weeks earlier. Amazon made a strategic decision not to fight the retroactivity provision, but instead chose to litigate only over the constitutional “Commerce Clause” issue. Amazon didn’t make the same “mistake” in other states, but instead terminated affiliates before the “effective date” in the pending bills. (As a result of New York’s trickery and North Carolina’s attempt to repeat the trick, North Carolina affiliates have already lost income, even before the law is enacted.)

Of course, the lobbyists who support the Advertising-Nexus law also argue that the law is constitutional, which I can assure you (as an attorney) is simply not true: it directly conflicts with U.S. Supreme Court rulings. Although these laws are void ab initio, merchants who want to avoid expensive litigation must terminate all in-state web advertising.

As a consultant who has advised many e-commerce merchants, I know that passage of an Advertising-Nexus law won’t significantly increase sales-tax collections. Instead, the law forces out-of-state merchants to end “in-state” web advertising, shifting those funds to out-of-state web publishers where the same ads will direct the same in-state consumers to buy from the same merchants, who will continue to sell to state residents without any duty to collect sales tax. There will be no meaningful increase in sales taxes collected. The primary impact will be the loss of income for in-state web publishers.

I’ve sent “thank you” letters to the governors of Rhode Island and North Carolina, since their enactment of these laws create more opportunities for me to profit from merchants’ affiliate programs, now that Rhode Island and North Carolina web publishers are unable to earn money from these advertising campaigns.

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