The Evolving and Expanding Reach of State Taxation Efforts


Recently there has been a significant amount of coverage about the expansion of state efforts to collect sales and use taxes from out-of-state vendors.  Several states, including Texas, Colorado, Connecticut, Arkansas, Illinois, Hawaii, Rhode Island, North Carolina, and New York have enacted laws commonly known as “Amazon Laws”—laws that subject online retailers who have no physical presence in these states to sales and/or use tax obligations as a result of the activities of their in-state affiliates.

Recently, California Governor Jerry Brown signed into law its own version of an Amazon law, known as California’s affiliate nexus law.  This law will require out-of-state retailers who: (1) engage in business in California through the use of affiliates; and (2) have cumulative sales of greater than $500,000 during a preceding 12-month period to collect and remit taxes on sales made within California.

California’s “Amazon Law”

California’s new affiliate nexus law broadens the definition of nexus by making the activities of the out-of-state company’s affiliates sufficient to establish that the out-of-state company is engaged in business in California. The law amends Section 6023 of the California Revenue and Taxation Code by expanding the definition of “retailer engaging in business in this state” to include any retailer entering into agreements under which a person in California, for a commission or other consideration, directly or indirectly, refers potential purchasers.  Referrals to the out-of-state company may be by an Internet-based link, an Internet Web site, or otherwise. The referring affiliate must have gross income from its referrals in excess of $10,000. The law includes into the new expanded definition of “retailer engaging in business in the state” retailers who are members of a commonly controlled group, and members of a combined reporting group who perform services in the state in connection with tangible property sold within the state by the out-of-state retailer.

Effective Date of California’s Amazon Law

The Board of Equalization has established that any retailer that falls under the new criteria of Section 6023 must collect and remit the sales tax as of July 1, 2011.

The law presumes that retailers will come within Section 6023 if:

  • Total cumulative sales from affiliate engagements in a preceding 12-month period is in excess of $10,000; or
  • The out-of-state retailer has cumulative sales of greater than $500,000 during a preceding 12-month period within California.

Retailers will also fall under Section 6023 if, through the in-state presence of a member of a commonly controlled group and a combined reporting group, they perform services in connection with tangible property sold by the retailer within California.

The California law includes a “rebuttable presumption” clause similar to one enacted by the New York in 2008.  The presumption of nexus can be rebutted if the retailer can establish that its in-state affiliates have not engaged in any active solicitation in the state, but rather have merely posted online advertisements on behalf of the retailer that link to the retailer’s website.

California has not issued guidelines on how to rebut this presumption.  However, in New York, retailers are required to enter into written agreements with their affiliates that the latter will not to do anything other than provide links on a website (e.g., no advertisements, endorsements, coupons, etc.), and must annually obtain signed Certificates of Compliance that the affiliate has not engaged in any solicitations on its website on behalf of the retailer.

Will the Law Survive Court Challenge?

It is likely that California’ Amazon Laws will  be challenged on constitutional grounds. In its 1992 decision in Quill v. North Dakota, the U.S. Supreme Court held that the dormant Commerce Clause barred a state from imposing a sales or use tax collection obligation on an out-of-state seller, unless the seller had a physical presence in the state. A challenge may be based on the argument that it creates a presumption of physical presence where no physical presence exists.

Clients and others concerned about California’s new affiliate nexus law may contact Charles H. Helein of the Firm 703-714-1301,,to discuss immediate and long-term implications for their affiliates and subsidiaries, whether they may qualify for exemption under the rebuttable presumption test provided under new Section 2063; and the status of other court challenges in other states that may impact on the future validity of California’s Amazon Laws.

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