Sales & Use Tax – a Q and A – affiliates and the Amazon Law

Q: What is an affiliate?

A:  In a business context, there are two general definitions. The first and one that for the present discussion I am not going to be as concerned with is a company that is related to another company, oftentimes as a subsidiary or “sister” company.

For this discussion, we will be more concerned about the second as it is common in the online marketing world. In this context, affiliate has more often been used to denote a business arrangement between two companies in which one (the affiliate) is paid a cut of a sale by the seller in exchange for putting advertisements or links for a product on his or her website. (Two companies with large affiliate programs are amazon.com and overstock.com)

Q: I have heard something about a court case involving Amazon.com and Overstock.com and the State of New York. What is that about?

A: In 2008, the state of New York in an attempt to bolster sales tax collections, primarily from out of state companies like Amazon and Overstock, by essentially doing an “end run” around the Commerce Clause of the US Constitution (which gives the U. S. Congress sole power to regulate interstate commerce and prohibits certain state actions, such as applying duties (taxes), that interfere with trade among the states),  by instituting a law that says that if a company has affiliates that put a link on a website to the seller’s website and that link generates more than $10,000 in sales for the seller during the four previous calendar quarters ending February, May, August and November that a “substantial nexus” is created and therefore the seller must register and collect.

This is believed by many (including this author) to be in violation of the Commerce Clause and the US Supreme Court decision Quill Corp. v. North Dakota, where Quill, a mail order seller of office supplies and equipment had no employees or offices in the state and shipped using the US Postal Service and common carrier, had only a few floppy disks of a licensed software program in the state so customers could check inventory and order essentially “online”. Something the US Supreme Court called “insignificant or non-existent“. The state of North Dakota attempted to impose a use tax collection responsibility on Quill, which was deemed unconstitutional by the court. The court in Quill said that a state cannot require this collection unless it has “substantial nexus” with the taxing state which Quill did not have.

The Amazon LLC and Overstock.com, Inc. v. Dept of Taxation cases are still in the court system with the law having been upheld by the New York Appellate Court, and could ultimately end up in front of the U.S. Supreme Court. In recent similar cases, the court has chosen not to hear those cases. In recent months, several other states have instituted similar laws. In all states that have, both companies have discontinued their affiliate programs.

Share your thoughts on this topic with me.

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About Brad Merrill

Brad W. Merrill is the Principal at Brad W. Merrill Accounting and Tax Services. He specializes in Sales & Use taxes and accounting for small businesses. He has a B.S. in Accounting from the David Eccles School of Business at the University of Utah.
This entry was posted in Sales & Use Taxes, Uncategorized. Bookmark the permalink.

2 Responses to Sales & Use Tax – a Q and A – affiliates and the Amazon Law

  1. Jed Doetsch says:

    Your site is very informative. I wait for the posts about new topics.

  2. Ed Endicott says:

    I’m wondering how states (like Colorado) are getting around Federal Law privacy rules on this issue. The Electronic Records Act – 18 U.S.C. §2703 provides that customer information can’t be disclosed without an administrative subpoena. Colorado’s “Amazon” law creates an information reporting requirement that the company conducting sales and not charging tax must send a customer list at year’s end to the jurisdiction. This certainly violates Federal law in that an administrative subpoena or warrant has not been issued for the information. In my part of the country, the Federal court has issued an injunction against the law and we should hear soon on a Federal ruling.

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