The main legal question: Does having a single affiliate in a given state create a sufficient tax nexus for online retailers?
Right now, there isn’t a definitive answer. Some states, like California, have successfully implemented a so-called Amazon affiliate nexus tax; and other states, like Illinois, tried and failed to implement an online sales tax.
Case Law That Could Come Into Play When Arguing The Amazon Affiliate Nexus Tax
- Snail Mail Is Not A Sufficient Tax Nexus – When the sole connection between a customer and a state is snail mail or a “common carrier”, there is an insufficient nexus (National Bellas Hess v. Department of Revenue, 386 U.S. 753 (U.S. 1967)). It could probably be argued that the Internet is analogous to a catalog being sent through the US mail or common carrier. Amazon is close to meeting this standard, but it does have affiliates in a state, so it’s not exactly the same.
- Amazon Doesn’t Pay For Affiliate Offices – When a company hires salespeople and pays for their offices in a state, that state may impose a sales tax (Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (U.S. 1939)). Whether or not affiliates are “salespeople” is arguable, but this case probably wouldn’t apply to Amazon even if they were, since the suit also involved paying for offices, which Amazon doesn’t do.
- Sales Materials Don’t Create A Nexus To A State – When sales materials are sent to in-state residents, they do not establish a sufficient nexus if they become the property of the residents rather than remaining the property of the foreign corporation (SFA Folio Collections, Inc. v. Bannon, 217 Conn. 220, 229 (Conn. 1991)). It’s the affiliates, and not Amazon, who own their sales websites (except in the case of an aStore).
- Amazon Doesn’t Receive Benefits From States Where They Don’t Have Corporate Offices or a Distribution Facility – If imported property is used in a way that receives a benefit from a state, it can be taxed. When gasoline was imported for use in vehicles that used a state highway, it was subject to a use tax (Monamotor Oil Co. v. Johnson, 292 U.S. 86, 93 (U.S. 1934)). It’s hard to imagine an Amazon product that uses state resources.
- Soliciting and Filling Orders Doesn’t Always Equal A Tax Connection To A State – If the only connection with a state is soliciting and filling orders through interstate commerce, a business can’t be taxed (L.L. Bean, Inc. v. Commonwealth, Dep’t of Revenue, 516 A.2d 820, 825 (Pa. Commw. Ct. 1986)). If it’s established that using affiliates is simply interstate commerce, this case means that Amazon cannot be taxed.
- Tax The Buyer, Not The Retailer In California – A tax can be collected against the use of goods in a state by its residents, but the burden of collecting and paying sales tax on items cannot be shifted from residents to foreign corporations, in the absence of jurisdictional basis (Miller Bros. Co. v. Maryland, 74 S. Ct. 535, 540 (U.S. 1954)). So, just because Californians may be subject to a tax for purchasing something from Amazon, does not mean that California may require Amazon to pay those taxes instead of going after Californians directly.
- Print Advertisements Sometimes Constitute A Nexus – Taking out local advertisements can subject a business to the sales tax of that state (Nelson v. Montgomery Ward & Co., 312 U.S. 373 (U.S. 1941)). If Amazon advertises in California newspapers, rather than just on its website, it could create a Amazon affiliate nexus tax connection.
For more information on how a state affiliate nexus tax may affect your online business, contact a qualified affiliate marketing lawyer.