Is there a Way Around Internet Sales Tax Nexus?
As states rush to consider Internet taxation legislation, many of them have included something called a ‘rebuttable presumption’ test. This is what the states claim will allow an online retailer to possibly escape a nexus finding, and helps to forestall an argument that cross-state taxation isn’t legal under current federal law. But there are a lot of grey areas, and it seems clear that legislators don’t have all the answers.
How the “Rebuttable Presumption of Nexus” Test Works
Basically, this test allows your business to escape, or “rebut” the affiliate tax nexus trap if you can prove certain things and maintain certain documentary standards.
There are two parts to the New York rebuttable presumption test (North Carolina and Rhode Island follow similar procedures):
- First, you must enter into written agreements with your affiliates, where those affiliates specifically agree not to do anything other than provide links on a website. Your affiliates can’t advertise your business, or those links directly, so no coupons, emails, phone calls, etc.
- Second, each year you must get (and keep) a signed Certificates of Compliance annually from each and every resident affiliate, confirming that the affiliate has not engaged in any “prohibited” solicitation activities in New York on your behalf.
According to New York, it’s pretty easy for a retailer to get out of sales tax nexus if they follow these two simple rules. But there are a lot of unanswered questions. For example:
- If someone signs the contract, provides the Certificate of Compliance, and then engages in nexus-creating activities anyway, will your business be found responsible if you didn’t know, or if you found out and immediately terminated that affiliate?
- What happens if some affiliates don’t return their Compliance Certificates? A strict reading of the rebuttal language says, in essence, that if just one person doesn’t send in their Certificate, you’ll be found to have nexus in the state. If you only have a few affiliates, that’s one thing – but what if you’ve got thousands of affiliates? How are you going to track all those people, knowing that just one non-compliant affiliate is enough to pull your business in?
- What happens if someone says he isn’t a New York resident, so doesn’t sign an agreement or return a Compliance Certificate, but actually is a resident and is found out later? New York has very different standards for individuals and businesses when it comes to being considered a resident.
- What form and language does the Compliance Certificate take? New York provides some suggestions, but has no specific form with approved language.
- Finally, there are grey areas in what is or isn’t considered soliciting on behalf of the retailer. Flyers, coupons, phone calls, emails or in-person advertising are definitely out. But what about text on an affiliate’s website, pointing readers towards a link that takes readers to your site? How can affiliates advertise their own websites? What happens if an affiliate engages in aggressive SEO activities to draw visitors to its website? Would those activities be considered as promoting the affiliate, or your business?
New York has engaged in an active campaign to keep businesses from pulling out of in-state affiliate marketing activities, but until all of these questions are firmly answered, it’s hard to take that kind of risk, with so much money potentially at stake. States may not even have to pass affiliate nexus laws to lose out. Amazon cancelled affiliate marketing contracts in both Hawaii and Missouri, even though neither state actually passed the legislation.