Practical Ecommerce

Sales Tax Update: Illinois Says Affiliates Create a Nexus

Illinois is the latest state to try to capture taxes from Internet sales. That state recently passed a so-called “Amazon Tax,” which uses affiliate programs to create a “nexus.” Many states require a nexus — or physical presence — in the state to compel a retailer to collect sales tax from customers in that state. However, Illinois’ law was changed to expand the definition of physical presence to include affiliates that contract with a retailer. This follows a similar sales-tax law passed by New York.

The Illinois Sales Tax Law

The title of the Illinois law is “Mainstreet Fairness Bill.” The name is derived from the push by brick and mortar retailers in the state to achieve a “level playing field,” to use their term. These retailers argue that Internet merchants have a 6 to 10 percent price advantage because they are not required to collect sales taxes, like brick and mortar retailers. There are counter arguments as to whether there really is any price advantage and whether Internet retailers should be subjected to collection in each state in which they sell products.

With the economy still struggling to regain momentum, most anything that has to do with local business development and job protection — or creation — is popular politics. Therefore, the excuse for taxing Internet sales to protect local retailers helps the underlying quest, which is to collect more taxes for struggling state budgets. These two forces — local retailers and state government — will continue to try to subject Internet retailers to collect sales taxes and these affiliate laws are just the beginning, in my view.

Response by Amazon and Overstock

Amazon and Overstock.com are taking their own political stances against states that target affiliate programs to create nexus. Amazon, the company that created affiliate marketing, is reportedly terminating contracts with those affiliates that are located in “affiliate-nexus” states. The Amazon termination letter states that the reason is because the state enacted legislation that “compels” it to terminate the affiliates. For Amazon’s Illinois’ affiliates, the correspondence aims at the state and at Amazon’s big box competitors:

“We had opposed this new tax law because it is unconstitutional and counterproductive. It was supported by national retailing chains, most of which are based outside Illinois, that seek to harm the affiliate advertising programs of their competitors. Similar legislation in other states has led to job and income losses, and little, if any, new tax revenue. We deeply regret that its enactment forces this action.

“As a result of the new law, contracts with all Illinois affiliates of the Amazon Associates Program will be terminated and those Illinois residents will no longer receive advertising fees for sales referred to Amazon.com, Endless.com, or SmallParts.com. Please be assured that all qualifying advertising fees earned prior to April 15, 2011 will be process and paid in full in accordance with the regular payment schedule.”

The letter from Amazon goes further and states that if the affiliate leaves the state and moves to another state – where this type of law is not in effect — the affiliate can apply for reinstatement to the program. Amazon is trying to create its own political pressure by using the threat of loss of Amazon’s business (or the business of affiliates) from states that pass laws targeting affiliates. However, some of the big box stores are reportedly fighting back by issuing their own invitations to affiliates that have been terminated by Amazon.

Summary

Although these affiliate laws could capture additional income from Internet sales, the laws have minimum affiliate sales levels — $10,000 total statewide annual affiliate sales, in Illinois’ case. As such, they affect mainly large Internet retailers like Amazon and Overstock.com. Generally, smaller retailers who sell over the Internet still remain free from collecting sales tax, unless they have a physical presence in a particular state. States that are also considering including affiliates in the “nexus” test include California, Arizona, Connecticut, Hawaii, Minnesota, Mississippi, and Vermont.

Jeff Jacobson, Jd, Llm

Jeff Jacobson, Jd, Llm

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  1. Greg Percifield March 24, 2011 Reply

    Wow. First Illinois raises income tax from 3% to 5%, and the corporate tax rate from 4.8% to 7%, and NOW they are fumbling with definitions of "physical presence" to rake in even more money, just as ASCAP and the RIAA often do with the definition of "public performance".

    I understand the State is in debt, but what more can they do to try and push small business out of Illinois and into another state?

    And what’s this about trying to achieve a "level playing field?” Isn’t there a whole lot of leverage in having a brick and mortar shop? Retail stores dominate the traffic in their local area, and they can do further promotion and sales online. Customers can actually look at and inspect the products at a retail store. And customers can take the product home with them the same day at a brick and mortar shop. The playing field is already level and fair!