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.

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?

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.)

February 28, 2009 – The “Amazon Tax,” Assembly Bill (AB) 178, was introduced in February 2009 by California Assemblymembers Nancy Skinner and Charles Calderon.

AB 178 if enacted into law as written, would seek to force nearly all out-of-state retailers to collect California sales tax if they pay any California residents (individual or corporations) for advertising. Based on the public statements by Nancy Skinner and my conversation with a legislative staffer, I expect that the bill will be revised quickly to narrow its scope to mirror New York’s “Amazon Tax,” which was intended to force many online retailers from outside New York to collect New York sales taxes if the retailer paid commissions to residents of the state in exchange for internet advertising promoting the retailer.

Under New York’s “Amazon tax,” if an internet merchant had an “affiliate program” with any New York residents participating, the merchant would be required to collect sales tax for all orders shipped to customers in the state. The New York law was interpreted by the state’s tax agency to exclude ordinary advertising on web sites, and to apply only to firms whose New York affiliates drive sales of $10,000 or more.

Although Amazon and a few other large internet retailers began collecting and remitting sales tax in New York, the law inspired many other retailers to terminated their “affiliate program” relationships with New York residents. A few retailers adopted cumbersome legal agreements to document that the New York law does not apply to them. Many internet retailers simply ignored the New York law (many are probably still not aware of it). The effect of the law was to limit the income of thousands of New York web publishers who participate in “affiliate programs,” thereby reducing the state’s income tax revenue while collecting “some” additional sales taxes.

As a California resident, I considered the New York law to be unwise, but of course its most likely effect on me was that my income might increase because New York publishers could no longer participate in many affiliate programs, but I could.

But now I’m facing the same problem: the State of California wants to impose a “loophole” that would collect “some” additional sales tax revenue while substantially reducing the income of thousands of California residents — me included.

Under a U.S. Supreme Court decision (Quill), a state can only force out-of-state companies to collect sales taxes if the company has a “nexus” or “physical presence” in the state (such as hiring an employee who works in the state) or if the sales-tax-collection requirement does not impose an unacceptable “burden on interstate commerce.” The U.S. Supreme Court ruled that a national office-supply retailer whose only “nexus” was that they mailed catalogs into many states could not be required by those states to collect sales tax. This is because of the complexity of different states’ tax laws, and the costs associated with computing, collecting, and remitting sales taxes to many different states. (Many states have multiple sales tax rates depending on the resident’s location, and different states tax different types of products and services.) In addition, few companies wish to face the prospect of paperwork compliance with dozens of different taxing agencies — nor potential audits by so many different tax agencies.

Ever since the Quill decision, there have been several “multi-state sales tax collection” efforts, seeking to either impose a single federal sales-tax collection system (which is very unlikely) or to create a “streamlined multi-state sales tax” system that would allow retailers to easily compute, collect, and remit sales taxes for many states. California has not participated fully in these negotiations.

After a lot of thought and discussion, I’ve concluded that the only likely way to block passage of an “Amazon Tax” in California would be to clearly document that the actual sales tax revenue from this law would not justify the loss of jobs (and income tax revenue). Unfortunately, I don’t believe there is any valid way to compute how much additional ales tax New York has collected because of the law, nor is there any clear way to measure lost jobs, income, and income-tax revenue for New York residents. Unfortunately, this really means that I must focus my efforts on planning my business in light of the likely passage of AB 178.

There is a very active discussion of the New York and California laws on an affiliate discussion forum called “ABestWeb.com,” with special sub-forums set up specifically for New York and California affiliates: NYaffiliates.com and CAaffiliates.com.

Here are some other links to resources about AB 178:

Assemblymember Nancy Skinner’s News Release Announcing AB 178 “Amazon Tax”

Blogs and Articles Opposing the Bill:

• · NYAffiliateVoice (Melanie “mellie” Seely)
• · Drivelocity (Sacramento)
• · 5starAffiliatePrograms.com
• · SuperchargeYourBrain.com 1¶
• · Pacific Research Institute (Daniel R. Ballon) (reprinted at CaliforniaRepublic.com and Insider Online)
• · AM Navigator (Geno Prussakov)
• · PartnerCentric (Wade Sisson, Linda Woods)
• · There is a lengthy comment from Fred Nicely of The Council on State Taxation as an add-on to the at news-blog post by Josh Richman.

Supporters of AB 178:

• · American Booksellers Association – they are circulating a “sample letter” for booksellers to sign and send to their legislators in support of AB 178.

News Articles:

• · ibabuzz.com extended news blog post by Josh Richman (Oakland Tribune, ANG Newspapers, San Francisco Bay Area)
• · Oakland Tribune article by Josh Richman (ANG Newspapers, San Francisco Bay Area) (also published by BusinessWeek online)
• · KABC News (Los Angeles)
• · Towson Tax Attorney (Maryland)
• · Sales Tax Institute
• · CCH Group (reprinted at Center for Tax Studies and Finley & Cook)
• · Yetter Consulting Services
• · Nienow & Co. CPAs by Paul Nienow
• · Grant Thorton

Other sites:

• · StreamlinedSalesTax.org (Multi-State Streamlined Sales Tax)
• · Multistate Tax Commission (Multistate Tax Compact)
• · StateTaxCentral.com
• · UC Davis Multistate Sales & Use Tax Track
• · Sales Tax Institute (“Educating Businesses About Sales Tax”)
• · CCH Multi-State Sales Tax Guide

On July 1, I originally wrote:

I’ve stuck with the term “Amazon Tax” because:

• Amazon was the the booksellers’ primary target in writing this bill, and they continue to refer to opponents as “Amazon apologists”;
• Amazon probably collects more sales tax for New York than the total collected by all other merchants (combined) who were “captured” by the law last year;
• Legislators are viewing this as primarily a tax on Amazon, and don’t care about other out-of-state merchant any more than they do about Amazon;

I agree that it’s troublesome that this term “shifts the focus” away from the in-state web publishers (small business owners) who will suffer most, as well as excluding many smaller out-of-state merchants.  By calling this the “Amazon Tax,” the focus is instead on the practices of a huge out-of-state corporation.

The term also implies that if passed, the law will actually cause Amazon to collect the sales tax — which simply isn’t true.

Unfortunately, all the “alternate” terms used to identify the law have their own problems. I’ve discussed this before, too:

• For legislators and voters, the term “affiliate” is likely to bring to mind the intensely close relationship between a national TV network and its local affiliate station;
• The term “associate” evokes the idea of a Best Buy or Wal-Mart sales representative;
• The term “partner” is a deal-killer, because it assumes a complete integration of the parties;
• The words “referral” or “commission” are associated with the idea of in-person sales representatives.
• The term “click-through advertiser” or “click-through agreement,” used by some legislators, seems to actually broaden the scope of the law, which is worded very broadly but has been very narrowly interpreted in New York;
• The word “nexus” might be the best alternative, but isn’t quite accurate (because the law doesn’t seek to re-define the word nexus, but instead to pretend that an advertising contract creates a “physical presence,” which is the threshhold required by the U.S. Supreme Court to establish nexus). Of course, neither legislators nor voters have any idea what “nexus” is, so the word could be a confusing distraction. (On the other hand, it emphasizes the obscurity of the “trick” which legislators are trying to use.)
• The law uses “advertising” with “local web publishers” as the “hook” (and the law is broadly worded so it really includes all in-state publishers and broadcasters, although New York has interpreted in more narrowly, and it’s unlikely that states will seek to apply it to “offline” advertising). The real emphasis belongs there: this is really an “advertising” law, providing that merchants who pay any in-state media outlet for advertising in a state must collect sales tax there.  In effect, it’s an “anti-local advertising” law, imposing a “penalty for advertising in this state” — as well as a penalty for paying in-state businesses for advertising anywhere else.

Okay, I’m convinced that “Amazon Tax” is not the right name to use when referring to this language. Governor Schwarzenegger certainly helped me reach that conclusion, when he specifically referred to Overstock.com when explaining why he vetoed the budget bill.

I’m now planning to use the term “Advertising-Nexus Tax” to refer to this issue. I agree that it’s important to clarify that what’s being targeted is advertising (not “sales agents”), and the word “nexus” helps people see that this is an obscure “trick” and not a legitimate policy.

It’s also important to recognize that the plain language of the bills (the language written by the booksellers’ lobbyists) isn’t limited to commission-based or performance-based advertising, nor to online or internet advertising. As written, the law provides that any in-state advertising could trigger the sales-tax collection duty. Thus, terms like “affiliate tax” or “internet tax” are unfairly limiting.

In general, I probably won’t refer to “the Advertising-Nexus Tax,” but instead to “Advertising-Nexus Tax Law” or “Advertising-Nexus Tax language.” (These bills don’t seek to “tax advertising.” Instead, they would create tax laws which are triggered by an advertising-nexus. Likewise, they aren’t “affiliate taxes” since they don’t seek to “tax affiliates,” and the term “Amazon Tax” is somewhat unfair because states aren’t asking Amazon and other merchants to pay a tax, but instead to serve as forced tax-collection agents for the state).