Minnesota's Affiliate Nexus Bill

In 1992, the United States Supreme Court, in Quill Corp v. North Dakota, that a business must have a physical presence in a state in order for a state to collect sales or use taxes for purchases made by in-state customers. The Court determined that compelling out-of-state businesses to collect sales taxes constituted an undue burden on interstate commerce.

However, as the presence of electronic commerce grows, this decision has limited the ability of states to compel large Internet retailers to collect and remit sales taxes. Many states are concerned that this limitation puts brick-and-mortar stores at a competitive disadvantage if their customers can buy products online tax-free. In addition, many states see taxing Internet sales as a way to expand their sales tax base. For these reasons, many states are considering ways to capture unrealized Internet sales tax revenue from companies like Amazon.

Minnesota is no exception. Under current law, affiliates of Minnesota businesses are required to collect and remit sales taxes on sales within Minnesota. According to Minnesota Revenue, “an entity is an affiliate of a Minnesota business if the related entity promotes the affiliate’s business or provides services to the out-of-state entity and the retailer and entity are related parties.” Representative Greg Davids (R−Preston), the House Tax Committee Chair, has introduced H.F. 1849, a bill that would define the term “solicitor” as “a person, whether an independent contractor or other representative, who directly or indirectly solicits business for the retailer” and include solicitors as affiliates of out-of-state retailers.

Known as the “affiliate nexus” bill, H.F. 1849 would require, for example, Amazon affiliates in Minnesota who sell $10,000 or more in a twelve-month period to collect and remit sales tax revenue to the state. Minnesota’s two largest retailers, Target and Best Buy, have advocated for the change. Based on the November 2011 forecast, and a similar bill enacted in Illinois, Minnesota Revenue estimates the affiliate nexus bill will generate $3.90M, $4.97M, and $5.71M in fiscal years 2013, 2014, and 2015, respectively. Governor Dayton has also included the affiliate nexus provision in his jobs bill.

Enacting the affiliate nexus bill will be a political challenge. Although Rep. Davids, a Republican, is carrying the bill in the House, H.F. 1849 does not have a Senate companion. The Star Tribune ran a story in last Sunday’s paper highlighting the internal divide among Minnesota legislators on expanding the sales tax, even if doing so potentially benefits local retailers. Six other states have already passed similar legislation. California will enact a similar law if no federal legislation is passed this year and Vermont will do the same if 15 other states enact similar legislation. In the meantime, Amazon has voluntarily agreed to pay an Internet sales tax in California and Indiana. Regardless of what Minnesota choses to do this session, the affiliate nexus will continue to be a prominent tax policy issue moving forward.

Billion Dollar Boondoggle — How Online Retailers Avoid Collecting Sales Tax and What Can Be Done About It

Next year, states will collectively lose out on approximately $11.4 billion in sales taxes on goods sold via the internet. That figure, published in a 2009 study by the University of Tennessee, should have most state lawmakers gnashing their teeth as they struggle to balance their state budgets. The inability of states to collect sales taxes on most internet sales stems from a 1992 Supreme Court case — Quill Corp. v. North Dakota — that requires a business to have a physical presence in a state in order for it to be required to collect sales taxes. With e-commerce making up a growing percentage of sales, states will continue to see a big hole in their sales tax receipts as internet transactions continue to rise.

Recognizing this situation, New York passed a law in 2008 (dubbed the Amazon Law) that compels companies who operate affiliate programs within its borders to collect sales taxes. Affiliates — such as newspapers, bloggers, and other companies with a web presence — receive commission for posting links on their websites that viewers click to access online retailers’ websites. If online retailers generate more than $10,000 in yearly sales through these affiliates, then the Amazon Law requires them to collect taxes on all of their sales, not just the $10,000 generated through the affiliates. So far, this law has resulted in tens of millions of sales tax revenue.

The benefits of such legislation don’t stop with sales tax revenue, either. As the prices for online products adjust to reflect the additional tax, local bricks-and-mortar enterprises enjoy a boost to their competitiveness. Goodbye, price advantage for Washington-based Amazon; hello, normal prices at Minnesota-based Majors and Quinn. Suddenly your prices seem . . . equal. Furthermore, because higher-income earners tend to comprise a higher proportion of online buyers, the regressiveness of the sales tax levels out a bit, as their newly generated sales tax revenue starts paying for many of the services provided by state and local government.