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Monday, June 6, 2011

Texas Governor Vetoes Affiliate Nexus Bill HB 2403

HB 2403, an "affiliate nexus" bill that passed in the Texas legislature, was vetoed by Governor Perry on 5/31/11. In his veto message, the governor noted the need to have a broad discussion on how sales tax should work in the 21st century. He said:

"I have serious concerns about the impact and appropriateness of House Bill No. 2403. In particular, I believe this legislation risks significant unintended consequences. My strong preference is to conduct a thorough policy discussion with Texas lawmakers, consumers, retailers and technology experts – and with other states and even the federal government – about interstate commerce and the structure of state sales taxes in the 21st century. That conversation is underway, and I believe that a consensus can and should be reached that balances the competing interests, respects federalism, and is fair and equitable. I call on the legislature to review this issue further while we reach out to our federal delegation and our friends in other states to build consensus."

Several states have enacted affiliate nexus laws for sales tax including New York, Arkansas and Nevada. California has a proposal - AB 155.

A few items I find interesting with the Texas activity and affiliate nexus in general:

  • Existing law in Texas provides that Texas Code 151.103 defining retailer doing business in Texas includes someone who advertises in Texas. That doesn't sound right.
  • The use of an affiliated entity is referred to as the "business-model loophole."
  • Supporters view HB 2403 as within the legalities of the Quill decision. They say that HB 2403 would "not violate [Quill] because it would apply only to companies present in Texas through their subsidiaries, which perform related business functions. It would not affect businesses lacking a physical nexus to the state." But, they (and other states that have done this) still need to get past the justification for treating the corporations as connected without an agency relationship or some operational or financial reason why the separate legal structure should, in effect, be ignored. While HB 2403 calls for at least a 50% ownership connection, in SFA Folio Collections, Inc. v. Timothy F. Bannon, Commissioner of Revenue Services, 585 A2d 666 (Conn. 1991) SFA was a wholly-owned sub of its parent that did have nexus in the state. Yet, the court found that nexus of the parent could not be attributed to the sub.
  • Supporters say the HB 2403 approach is better than the legislation that finds nexus for Internet vendors via the New York/Amazon/Associate approach. They go on to question the validity of such legislation. "HB 2403 would not use the “affiliate” definition of nexus because this likely would violate Quill. Adopting affiliate nexus would mean considering a business to be engaged in business in Texas if it entered into an agreement with a resident Texan entity and the resident received a commission for referring potential customers to the retailer by any means, including a link on a website. There is not enough evidence that this commission-based relationship would constitute physical presence." Wow - I wonder if this is going to get mentioned in the ongoing litigation in NY on the constitutionality of the NY/Amazon law.

The saga continues. I think the Governor's suggestion for a broad discussion on sales tax in the 21st century is a good one. While there have been some discussions, more is needed to get all parties to the table and be realistic on finding viable, legal solutions. Such solutions should also consider how technology can be used to improve sales tax assessment and collection

For more background on this big saga including news that always seems to have the word "Amazon" in it, see a post by Janet Novack of Forbes (2/27/11).

For my technology suggestion - see page 6 of my testimony submitted to a February 2011 California Assembly Revenue & Taxation Committee hearing.

What do you think about these issues?


Chris said...

Question: If an Amazon affiliate living in New York could somehow block ALL New York residents from viewing his/her website, and thus block them from ordering anything from Amazon, and only promoted sales to the other 49 States, wouldn't that negate the nexus with New York?

Professor Nellen said...

Chris, that is a good question.

The NY resident would still be, as the NY court interprets the NY law, soliciting sales for Amazon. The 2008 New York law provides: "A seller of taxable tangible personal property or services is presumed to be soliciting business through an independent contractor or other representative and is a vendor required to be registered for sales tax purposes, if both of the following conditions are met:

a) The seller enters into agreements with New York State residents (resident representatives), under which, for a commission or other consideration, the resident representative directly or indirectly refers potential customers to the seller, whether by link on an Internet Web site or otherwise.

b) The cumulative gross receipts from sales by the seller to customers in New York State as a result of referrals to the seller by all of the seller’s resident representatives under the agreements total more than $10,000 during the preceding four quarterly sales tax periods. (Sales tax quarterly periods end on the last day of February, May, August and November)."

So, under Chris's question, if all of Amazon's NY-based affiliates did not sell to any NY customer, requirement (b) above would not be met. But it would likely be hard to prove all of that.

If New York really wanted to push that there is sales solicitation rather than advertising, they might be able to find nexus without use of the 2008 law change, but perhaps difficult to do (otherwise, why would NY have enacted the law in the first place)?