• Arkansas Governor Signs Amazon Bill into Law; Similar Bills Still Pending in Other States
  • April 13, 2011 | Author: Adam B. Thimmesch
  • Law Firm: Faegre Baker Daniels - Minneapolis Office
  • On April 1, Arkansas joined Illinois, New York, North Carolina, and Rhode Island in enacting an "Amazon" provision that is aimed at requiring certain out-of-state retailers to collect local sales tax based upon their relationships with in-state parties.  Arkansas Senate Bill 738 includes many provisions that will be familiar to those who have been following the similar actions taken by other states in recent years.  The bill also includes provisions that attribute nexus with the state to out-of-state sellers based upon the actions of "affiliated persons" within the state.  All of these provisions are aimed at requiring out-of-state vendors and service providers to collect the state's sales or use tax on transactions with customers in Arkansas.

    Arkansas Follows the New York Model for "Affiliate" Nexus

    Like the prior laws in Illinois, New York, North Carolina, and Rhode Island, the new Arkansas law creates a presumption that certain out-of-state vendors or service providers are engaged in business in the state if they enter into agreements with one or more residents in the state pursuant to which the resident(s), for a commission or other consideration, directly or indirectly refer potential purchasers to the seller.  The reference can be done via a link on an Internet website or otherwise.  The presumption applies only if the cumulative gross receipts received by the seller from sales to purchasers in Arkansas who are referred by the in-state parties exceed $10,000 during the preceding twelve months, including the twelve months preceding the enactment of the new law.

    The Arkansas law also follows the New York model (and rejects the Illinois legislature's twist on that model) by allowing the presumption of nexus to be rebutted by submitting proof that the in-state affiliates did not engage in any activity within Arkansas that was "significantly associated with the seller's ability to establish or maintain the seller's market in the state during the preceding twelve (12) months."  Proof sufficient to meet the state's burden can include written statements from all of the out-of-state party's in-state affiliates stating that they did not engage in any solicitation in the state on behalf of the seller during the preceding year.  Those statements must be obtained in good faith.

    The Arkansas presumption-rebuttal provision echoes U.S. Supreme Court precedent that requires such activities by in-state agents before their nexus with the state can be attributed to an out-of-state actor.  That provision also directly reflects the analysis offered by the New York Appellate Division in upholding the facial constitutionality of New York's similar law last year.  The Arkansas law thus appears to be formed to maximize its ability to withstand constitutional challenge.

    One unique aspect of the Arkansas law is that it technically applies only if the out-of-state party does not have an "affiliated person" in the state.  An affiliated person is any person that is a member of the same controlled group of corporations as the seller or any other entity that would be a member of that group if it were organized as a corporation.  Therefore, out-of-state vendors or service providers who do have an affiliated person in the state, and who do not trigger Arkansas' new attributional-nexus provisions related to such persons, appear to be insulated from this new rule.

    Arkansas Law also Attributes Nexus Based upon Related In-State Entities

    The Arkansas law does not simply follow the Amazon model of ascribing nexus to remote vendors who enter into referral-based contracts with in-state parties.  The statute also adopts a series of attributional-nexus provisions based upon the activities of affiliated persons in the state.  Under those provisions, an out-of-state seller will be presumed to be engaged in business in the state (and hence subject to state sales and use tax reporting) if an affiliated person (as defined above) is subject to the sales and use tax jurisdiction of the state and one of the following conditions is met:

    • The seller and the affiliated person sell a similar line of products under the same, or similar, business name;
    • The affiliated person uses its in-state employees or in-state facilities to advertise, promote, or facilitate sales by the seller to consumers;
    • The affiliated person maintains an office, distribution facility, warehouse, or storage place, or similar place of business to facilitate the delivery of property or services sold by the seller to the seller's business;
    • The affiliated person uses trademarks, service marks, or trade names in the state that are the same or substantially similar to those used by the seller; or
    • The affiliated person delivers, installs, assembles, or performs maintenance service for the seller's purchasers in the state.

    These presumptions can be rebutted if the out-of-state seller establishes that the affiliated person's activities in the state are not significantly associated with the seller's ability to establish or maintain a market in the state for the seller's sales.  Again, this provision is intended to ensure that the application of the law complies with U.S. Supreme Court precedent specifying when a state can attribute the nexus of an in-state party to one who is out of the state.

    Further State Action is Expected

    The provisions passed by Arkansas and Illinois this year reflect the heightened attention that the Amazon-style provisions are receiving during this legislative session.  Similar bills are currently pending in many states, including Arizona, California, Connecticut, Hawaii, Massachusetts, Minnesota, Mississippi, Texas, and Vermont.  Taxpayers that use related parties or contract affiliates to facilitate the sale of merchandise or services in remote markets should carefully follow these developments to ensure that they can evaluate any potential exposure to sales and use tax collection duties.