Annette Nellen
Creating More Sales Tax Collectors

How the enactment of so-called "Amazon" or "affiliate nexus" laws may provide states with more sales tax collectors.

July 14, 2011
by Annette Nellen, CPA, Esq.

In the first half of 2011, five states enacted laws that modify the definition of retailer for sales-tax purposes in the hopes of making certain remote retailers become tax collectors in their states. These laws, for the most part, follow legislation enacted in New York in April 2008. This article explains the premise and rationale of these laws, key differences among enacting states, the effectiveness, alternative approaches and tax-policy issues.


Some vendors offer compensation to individuals and organizations if they have a link to the vendor's website and someone clicks on it. Generally, the website owner is compensated if a sale is made. Compensation may be based on the volume of clicks or a commission based on the sales generated from the clicks. Typically under these arrangements, the website owner is not an employee or agent of the vendor and has no information on who clicked the link or what purchases, if any, were made.

New York Takes the Lead

In April 2008, New York enacted legislation creating a rebuttable presumption that certain remote vendors with a particular connection to New York residents, and are retailers are required to register and collect sales tax from New York customers. Collection is required of vendors that have agreements with New York residents whereby residents are compensated for referring customers to the vendor, whether by a website link or otherwise. The rule applies to vendors that generated over $10,000 of New York sales in the four prior sales tax quarters from the referrals. The vendor can rebut the presumption by showing that the residents (affiliates) do not solicit sales for the vendor (see Grabbing Remote Vendors).


States pursue affiliate nexus laws to improve collection of sales and use tax. The sales tax nexus standard established by the U.S. Supreme Court is physical presence (Quill, 504 US 298 (1992)). A remote (non-present) vendor is not required to collect sales tax. However, customers are required to self-assess and pay use tax. States would prefer to collect the sales tax from thousands of vendors rather than millions of customers. Thus, finding ways to require remote vendors to collect is favored.

The presumption in an affiliate nexus law is that a resident is soliciting sales and the relationship between the vendor and resident is sufficient to create substantial nexus. The dollar threshold (such as over $10,000 of sales in 12 months via in-state residents) helps to ensure that the connection is not a slightest presence (no nexus).

States also support affiliate nexus to help bring equity in sales tax collection among vendors with in-state customers. As the trial court noted in Amazon v. NY State Dept of Taxation and Finance, 2009 NY Slip Op 29007, the law "obligates out-of-state sellers to shoulder their fair-share of the tax-collection burden when using New Yorkers to earn profit from other New Yorkers."

Affiliate nexus laws are also viewed as modernizing the law in light of how today's technology enables Internet vendors to create markets. California Board of Equalization member Betty Yee described California's affiliate law as an "update ... in light of new technology by removing out-dated provisions" (News Release (PDF), June 30, 2011).


View a summary of the affiliate laws passed in eight states from 2008 through June 2011, listed in the order of enactment. The laws are similar to what New York originally enacted in April 2008; significant differences are noted in the chart with additional details and links to the legislation in Exhibit A.

States enacting affiliate nexus provisions projected significant revenue gains. California estimated that full compliance with the new law would generate an additional $317 million of sales tax for FY 2012 — 2013 (Analysis AB 153, April 12, 2011) (this represents revenue to be collected from vendors that customers would otherwise have been paying as use tax).

However, it is unlikely that any of the states, other than New York, realized or will realize an appreciable increase in tax collections. This is because in the eight states, two large Internet vendors — Amazon and Overstock, canceled their in-state affiliate arrangements (Amazon did not cancel in New York though). Other vendors may have done the same. The Performance Marketing Association (PMA) estimates that about 200 remote vendors canceled their contracts with New York residents.

Cancellation of such contracts not only means that the affiliate nexus law won't apply, but also that state income revenues will drop due to the reduced income of the affiliates. The PMA estimates that prior to enactment of affiliate nexus legislation in Illinois, the approximate 9,000 affiliates there paid about $22 million in state-income tax (PMA Press Release, June 1, 2011).

The new laws have also resulted in litigation. Both Amazon and Overstock filed lawsuits in New York challenging the constitutionality of the provision. Others have also filed suits (for example, the PMA filed a complaint (PDF) (June 1, 2011) in Illinois).

Finally, the affiliate nexus laws only potentially reach remote vendors with affiliate arrangements. Thus, states continue to face use-tax collection challenges for sales by other remote vendors.

Alternative Approaches

Some states, including California and Illinois, have implemented other legislative approaches to improve sales-tax collection on sales by Internet vendors. These include broader affiliate approaches that generally provide that a remote vendor has collection obligations if related to an in-state company that has a similar product line, name or trademark or that performs services for customers.

A few states, including Colorado, South Dakota and Vermont, enacted notice laws that require the remote vendor to provide information about the use tax to buyers. Colorado also required large, remote vendors to issue information returns to customers and the state. In January 2011, a preliminary injunction was granted to the Direct Marketing (DMA) Association that challenged the constitutionality of the Colorado law (District Court decision (PDF), January 26, 2011).

Over 20 states have joined the Streamlined Sales and Use Tax Project (SSUTA) to have uniform sales-tax laws in the hopes that Congress will allow them to collect sales tax from remote vendors.

Tax Policy Considerations

What is the right answer for improving collection of sales-and-use tax in the Internet era? Are the affiliates soliciting sales as required by constitutional interpretations (see Quill, supra and Tyler Pipe, 483 US 232 (1987)? How is equity to be achieved for all buyers and vendors given the variety of ways that taxable items are marketed and sold?

Opponents of the affiliate nexus approach argue that affiliates provide advertising services rather than solicit sales. They observe that the Internet allows for new advertising approaches whereby instead of an advertiser paying in advance for uncertain results (such as with a television commercial), advertisers can have website ads posted at little cost and then only pay website owners based on the effectiveness of the ads as measured by the number of clicks or the sales ultimately made.

Commission-based arrangements raise questions though as to what the payment is for. If the website owner can get customers to purchase by first clicking on their link, they generate money. But is that soliciting or just an uncommon payment for advertising services? Unlike traditional solicitation, the website owners do not know what was purchased and do not handle orders, money or returns (see Drafting and Interpretation and the Odd State of the Law Produced).

Can technology improve sales tax collection? Probably. The SSUTA project offers software solutions to vendors to aid in sales-tax collection. Technology also enables state sales tax to be charged simultaneously with all purchases of taxable items, with the revenue going immediately to the state. Filing obligations of all parties would be greatly reduced.

These are significant issues given the continued growth of Internet sales. The affiliate nexus litigation in the states and possible action by Congress will eventually provide guidance.


With states in need of revenues, better collection of a tax already on their books is desirable. Trying to make more Internet vendors sales-tax collectors seems to be a preferred approach. Yet, as evidenced by the results in the eight states that have enacted the so-called "Amazon"/affiliate-nexus laws, challenges exist. It is likely though that more states will enact such provisions, encouraged by state-favorable litigation results in New York (with litigation continuing there) and desires of "main street" retailers for a level playing field.

In the meantime, states are likely well-served by pursuing collection solutions via Congress and its commerce clause authority (such as H.R. 5660 (111th Congress)), as well as continuing to educate consumers about their use-tax obligations.

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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She chairs the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.