"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?