Tax Analysts Blog

What Will Become of Physical Presence?

Posted on Dec 31, 2012
Amazon will begin collecting tax in Massachusetts in the fall of 2013. Gov. Deval Patrick announced in a press release that in addition to collecting sales tax, Amazon and the governor will “work together toward enactment of federal legislation to resolve the sales tax issue by creating an equitable and simple framework for collecting sales taxes. Amazon also plans to create hundreds of high tech jobs in Massachusetts in coming years.”

The exact details of the deal are not known. Patrick’s office has declined to provide a copy of the agreement, saying that it is confidential. It is always curious when states' won’t provide information on a tax deal. Tax Analysts will be investigating that aspect of the story.


At this point, though, it seems that Amazon should make as many deals as possible with states to capitalize on the goodwill of state officials, customers, and even local businesses. Amazon knows that federal legislation has its best chance yet of passing next year. This would mean that online retailers would be required to collect and remit sales tax from all customers (not only those in states where the retailer has a physical presence). So it makes sense for Amazon to jump the gun and commit to collecting sales tax in many states even before federal legislation is passed. The company may get some incentives out of it or at the very least some goodwill from states. They have bigger things in mind, anyway.


In any case, it is time for federal legislation that permits interstate sales tax collection. It levels the playing field for all retailers and generally seems like the “right” thing to do. But more importantly, it settles the debate. Despite the fact that “Amazon” laws are questionably constitutional, there would be federal legislation permitting states to require out-of-state retailers to collect sales tax even if the retailers do not have a physical presence in the state.


Still, it would be interesting for the U.S. Supreme Court to take on a case addressing the applicability of
Quill Corp. v. North Dakotato internet sales.   

Let’s look back to 2008 when New York enacted the first “Amazon” or vendor presumption law. In New York, N.Y. Tax Law sec. 101(b)(8) was amended to provide that persons making sales of property or services are "presumed to be soliciting business through an independent contractor or other representatives if the seller enters into an agreement with a resident of that state under which the resident" is paid a commission or other consideration for referring customers to the seller.


That definition essentially requires vendors that use an affiliate marketing program to collect sales tax. As most consumers are familiar, affiliate marketing is an Internet-based marketing tool that rewards "affiliates" -- individuals who maintain a link on their Web site -- for sending customers to the vendor's Web site.


The argument is that if a remote seller has an affiliate marketing program, a seller's in-state affiliates can satisfy
Quill's physical presence requirements and thus create sales tax nexus for the seller. That argument is based on the theory of attributional or affiliate nexus. The U.S. Supreme Court established in Scripto Inc. v. Carson and Tyler Pipe v. Washington Dep't of Revenue that if a retailer has in-state agents that sell on behalf of the retailer, the in-state agents may establish nexus on behalf of the out-of-state retailer.

But even though attributional nexus seems to be applicable to an affiliate marketing program, the e-commerce model was not contemplated when
Scripto and Tyler Pipe were handed down, and they differ significantly from the fact patterns in those cases. Also, the work of an affiliate is a far stretch from the work of a salesperson "actively engaged" on behalf of Scripto Inc. or independent contractors that were calling on customers and maintaining "long-established and valuable relationships" on behalf of Tyler Pipe. Most affiliates that participate in an affiliate marketing program do so only part time. Their work is also passive in nature. Affiliates do not call on customers, directly solicit orders, or establish long-term customer relationships.

That said, states were losing out on needed revenue by not being able to collect sales tax on all internet sales and online retailers were arguably advantaged by not having to collect sales tax on sales to certain customers. Federal legislation, if it is passed next year, will alleviate these issues.


But, I wonder, what is next?  Are are moving toward borderless nexus in the state and local tax world? Physical presence, long a standard for creating tax nexus, may soon be a concept for the history books.

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