As you may know by now, the Performance Marketing Alliance filed an "amicus" motion in September to help challenge New York’s nexus tax law as a friend of the court. Our intent is to support Amazon’s and Overstock’s lawsuits which seek to strike down a tax law passed last year that discriminates against affiliate marketers and has had a devastating effect on the livelihoods of thousands of Americans.
The issue at stake is a law that claims that affiliates establish physical presence for out-of-state merchants — what is called "nexus." Merchants with nexus in the state are required to collect sales taxes from their New York consumers. The unfortunate result is that over 200 merchants terminated their relationships with New York affiliates to avoid the costly burden of collecting sales tax.
Amazon’s claim is that this law — N.Y. Tax Law § 1101 — is unconstitutional under the Commerce Clause of the U.S. Constitution. The PMA filed its brief to provide arguments from the perspective of affiliate marketers. Our hope is that our perspective will provide additional evidence that this law is seriously flawed.
Our argument has four main positions:
Issue No. 1 — The law is unconstitutional.
We support Amazon’s contention that the law is unconstitutional because affiliates can’t fairly be classified as a "physical presence" in the state.
Affiliates provide a form of Internet-based advertising akin to traditional print ads distributed by catalog retailers. Posting an ad for a merchant does not qualify the affiliate’s locale as a physical presence for that merchant.
Affiliates sell no products, collect no payments from buyers and make no deliveries. They have no further involvement in the sales and marketing process beyond a posted advertisement.
Issue No. 2 — The law threatens the livelihood of business owners.
The statute has decimated the income of thousands of affiliates in New York as retailers such as Overstock.com have terminated all affiliate agreements to avoid imposition of use tax collection responsibilities. We believe over 200 merchants terminated their affiliate programs as well.
Issue No. 3 — The law could stifle interstate e-commerce.
Retailers often have thousands of affiliates spread across the country. The New York statute has the potential to strangle interstate e-commerce with complex and varied regulation. The reality is that the residence of the affiliate or the merchant has no relevance whatsoever to the consumer experience or the effectiveness of the advertising.
Issue No. 4 — The law has the potential to curb the availability of free information on the Internet.
Revenue generated from performance marketing has allowed thousands of small businesses and individuals to build and grow Web sites that facilitate the more rapid diffusion of free information to the public. Thousands of affiliate websites provide valuable content for thousands of visitors every day. Lacking performance marketing revenue, many will fail.
What’s next?
The state of New York required oral arguments to be heard before the end of October. The PMA hopes these appeals, along with our amicus brief and its logical arguments, will provide a reasonable case to the court to determine this law is indeed unconstitutional and should be reversed.
For more information on this complex issue, as well as other states that are considering similar legislation, visit PerformanceMarketingAlliance.com.