California’s new nexus rule for Internet marketers–does it really close any loophole?

By September 12, 2011 Legislative, Retail, Tax Audit

On June 28th, 2011, California Governor Jerry Brown signed into law a budget bill that expands the state’s nexus creating activities to out-of-state retailers based on the presence of in-state Internet affiliates and (in some situations) certain commonly owned companies.  There is no surprise that this bill was aimed squarely at Amazon.com.  The state is not subtle at all in its attempt to force Amazon to collect California sales tax on shipments made to California residence.  Under this bill, the goal is to create an agency relationship between the California based retail associates and Amazon.

The Bill adds a provision that changes the definition of the term “retailer” to include anyone who pays a commission to a California based “person” for any-type of referral of potential purchasers through the use of an Internet Link or an Internet Web site.   There are some de minimis provisions that would exclude small out-of-state businesses.   However, unlike some other states, the new nexus standard does not apply unless (1) the fee for the advertising is a commission or otherwise based on sales and (2) the in-state person also “directly or indirectly solicits potential customers in Californai through use of flyers, newsletters, telephone calls, e-mail, blogs, microblogs, etc.”  As such, in Internet affiliate in California that merely advertising for an out-of-state retailer does not create nexus, even if the payment for the advertising is commission based. 

Given this unique 2 prong test, I wonder how much additional revenue California expects to get from Amazon (or anyone else).  From my understanding, all of the advertising between the out-of-state retailers and the in-state is done via the Internet and does not involve any of the other types of promotional efforts outlined in the Bill. 

Ned Lenhart
President
Interstate Tax Strategies

California nexus standards