Yesterday, on behalf of an affiliate, I emailed the Rhode Island Sales Tax Revenue department. I was seeking clarification on how the presumption of nexus could be rebutted by a merchant.  I used the example of a resident who owns a website that includes links to out of state merchants. I made it clear that the resident owning the website does not solicit in Rhode Island, they merely get natural traffic and made it clear that the bulk of sales generated through links on this site were to non Rhode Island residents.

The response I received  today was that the existence of sales generated by Rhode Island residents to other Rhode Island residents mean there was solicitation, you cannot rebut the presumption.

… an e-commerce retailer that uses persons to act as its representatives in the state to solicit sales or to make and maintain a market in return for commissions, referral fees or other types of compensation is considered to be soliciting business within this state …

It seems that, at this time  at least, you cannot rebut the presumption of nexus in Rhode Island if you have “affiliates” or outsourced program managers that reside in Rhode Island.

Remember that the second condition that must be met to establish a nexus is the sales threshold of $5,000

• The cumulative gross receipts from sales by the seller to customers in Rhode Island as a result of referrals to the seller by all of the seller’s resident representatives under the type of contract or agreement described above total more than $5,000 during the preceding four quarterly sales tax periods. (Sales tax quarterly periods end on the last day of March, June, September and December.

Of course, I am not a lawyer and you should consult a sales and use tax attorney for advice and guidance. I am merely sharing what I have learned.

Affiliates/publishers in Rhode Island will need to seek out merchants who collect and remit the sales tax. Rebuilding your business takes time but it is possible.  There are lots of merchants who will or do collect the tax. Maybe it’s even time for your favorite Rhode Island brick and mortar store to add an affiliate program – refer them to your favorite network!

The House of Representatives did not override the Governor’s veto of SB1678; SB1678 included amendments to bring Hawaii into conformity with the streamlined sales tax agreement. This means the Governors veto stands. It can also be confirmed that there was no override of the Governor’s veto of HB1405. Thank you to the Honorable Carol Fukunaga for confirming this information.

While Internet marketers in Hawaii may breathe a temporary sigh of relief as they look forward to being reinstated by Amazon and other merchants, our long term problems are not solved. We still face these same challenges in other states and, next year will probably see an escalation in actions in all states with a sales and use (or excise) tax. The simple reason is that technology has changed the way we shop. As such, whether we like it or not, sales tax laws will change.

The Streamlines Sales Tax Project is a step in the right direction but it is not ideal. It still presents challenges for both merchants and states. In addition because it has not been adopted by all states, it is not a complete solution.  The adaptation of the SSTA is complicated and it takes years for a state to make all the necessary changes. Large states such as New York have additional challenges and they do not see it as practical. It has also not been accepted on a Federal level.

What is needed is Federal action; either tax or don’t tax Internet sales. The mixed standards do not level the playing field. New York and Rhode Island Internet marketers are at a distinct disadvantage as our states have instituted ‘modern’ nexus laws. Whether the playing field between online  stores and brick and mortar stores has been leveled remains to be seen. When advertisers/affiliates are removed from programs in NY and RI in order for a merchant to remove a nexus it seems to me the field is not leveled.

Although small in physical size, Rhode Island now has, and will continue to have a tremendous impact on everyone in the Internet marketing industry. The Rhode Island Internet tax has taken effect, joining New York which passed similar legislation last year. By redefining the definition of retailer, they are taking a firm and tough stance. While the Governors in Hawaii, Minnesota and California backed down for a variety of reasons, Rhode Island is leading the way for other states. While the number of affiliates affected may be small in number, the repercussions will be felt by everyone in the affiliate industry. Judging by my emails this morning the actions of Rhode Island is a big wake up call for many.

Rhode Island was a critical State. While we were lucky in other states and received what will be at best a temporary reprieve with last minute actions by Governors, Rhode Island will mark the turning point. Last year we tried to stress that Internet tax legislation will steam roll, every state legislator and Governor had their eyes on NY; some were quiet but all were watching. In January, with Amazon and Overstock losing their initial court actions we saw several states put more energy into legislation. Rumors in almost every state with a sales and use tax point to possible legislation. Rhode Island will be a large part of the story.

Last year, the NY Internet tax took effect on June 1. As reported here and as part of the testimony presented in committee meetings on Hawaii, Connecticut and other states, NY collected $42-46 million from thirty or so out of state merchants during the last part of 2008. This year, the first full year of NY Internet sales tax, the anticipation is for $62 million. Whether or not you believe the figures almost doesn’t matter, this is the testimony being provided to legislative committees around the US.  This in itself fills many politicians with glee. It’s a way to help plug holes in budgets. Since they can say “it’s not a new tax because consumers owe it anyway, it’s just the method of collecting that is changing”,  legislators can remain on record as opposing new taxes. Legislators that support bills to redefine or modernize the definition of retailer will be seen as supporting the small brick and mortar stores in their state. Of course the impact on the “silent” small business person (that’s us!) are not considered to a significant degree.

Up until this year, many considered Internet sales tax as a NY issue, a NY problem. Internet sales tax was just NY being NY, the big tough bully state picking on out of state merchants. Losing several thousand affiliates wasn’t a big deal. Besides, everyone was watching the court action thinking “that will save us”. Well, court action did not save us and though being appealed, any resolution is probably years away.

It is no longer just a big bully state like NY that is seeking to impose the tax. Now it’s a little state with a big voice standing up to larger than life merchants saying collect the tax!

So far this year we missed Internet sales tax in Minnesota and California by the skin of our teeth. (Keeping a close eye on California as legislation is again pending in it’s fourth version.) Hawaii was very close too, with the Governor vetoing on the day the law was to take effect. (Still watching to be sure legislators don’t override the veto). 

North Carolina has Internet sales tax in it’s pending budget.  Opinions vary, but passage appears likely. Many other states have considered or are considering new nexus laws – Maryland, Connecticut, Tennessee,  Texas, Illinois…  With all of this pending or proposed legislation Rhode Island will have huge impact. It is not just one state any more, it is two, maybe soon it will be three or more. Next year expect many more to follow in the steps of Rhode Island.

I have long said that NY was just the beginning and that it would steam roll. Each successive state passing legislation gives incredible power to the new movement. It’s an exponential increase. Rhode Island seems to have been a loud wake up call for many. Seems like while it was possible to ignore the big state of New York, Rhode Island is impossible to ignore.

Now, more than ever we need to be proactive. Now more than ever, affiliates need to prepare. Merchants too, will need to exercise sound judgement as they decide their own course of action.