May 31, 2011, 5:31 PM

Next for Nexus?

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Independent subsidiaries?

Amazon operates its distribution centers through what it calls independent subsidiaries—a designation some states accept as exempting the No. 1 online retailer from nexus.

But when Texas and South Carolina took legislative steps recently to remove that subsidiary exemption, Amazon was quick to bail out of plans to expand its distribution operations in those states. Instead, it's expanding facilities in states like Tennessee that are more supportive of its sales tax-free existence. "We're looking at expanding our commitment to Tennessee because the state is committed to Amazon," says Dave Clark, Amazon's vice president of North America operations.

Paul Misener, the retailer's vice president of global public policy, says Amazon will continue to look for the most favorable states for locating its distribution facilities. Not counting Tennessee, Texas and South Carolina, Amazon already operates such facilities in eight states.

Still, even Amazon hasn't been consistent in how it deals with nexus issues regarding distribution facilities. In three of the states where it operates distribution centers—its home state of Washington, Kansas and Kentucky—it collects sales tax on sales to in-state residents.

It's natural, of course, for Amazon to collect sales tax in Washington, where its Seattle headquarters create a clear physical presence. But the big retailer hasn't said why it operates distribution centers in Kansas and Kentucky, where it also must collect sales tax—though it could be because these centrally located states are simply too important to serving a nationwide fulfillment and delivery system.

After Amazon first announced it would build distribution facilities in Kansas more than a decade ago, the state enacted a law to clarify that those facilities would require Amazon to collect sales tax in the state. Amazon did not object and went ahead with the Kansas facilities, recalls Peterson.

Affiliate moves

States and retailers are also in a flux over affiliate tax laws. When states have moved in the past year to tie nexus to retailers' in-state affiliate web sites, Amazon, Inc. and other retailers have cut their ties with affiliates in those states. As a result, some of the affiliates have moved their operations to other states.

VigLink, an affiliate services company that helps to connect about 12,500 online retailers in the U.S. and around the world with thousands of affiliates, recently moved its Chicago sales offices to nearby Indiana after a new Illinois affiliate law threatened to kill nearly a third of its business, says founder and CEO Oliver Roup. "A number of large retailers told us, 'If you do business in Illinois, we don't want to do business with your affiliates,'" Roup says, adding: "About 30% of our revenue would be hit."

Although some retail chains—including Barnes & Noble Inc. and Wal-Mart Stores Inc.—have publicly offered to pick up the affiliate relationships dropped by Amazon and other retailers, Roup says it's still important for him to operate in a state where nexus isn't an issue. "Uncertainty is the enemy of investment in innovation," says Roup, whose company provides software that automatically manages how its affiliate clients receive commissions on buyers they pass on to retailers through web site links.

The sharp response by e-retailers may lead some states to rethink their laws linking affiliates to nexus. Among the seven states with such laws today—New York, North Carolina, Rhode Island, Illinois, Arkansas, Connecticut and Vermont—there are efforts to repeal such laws in North Carolina and Rhode Island, says Rebecca Madigan, executive director of the Performance Marketing Association, a trade group for affiliate marketers.

The Vermont law won't go into effect unless 15 other states adopt it first, an outcome Madigan figures is unlikely. And the New York law, the first to tie sales tax collection to affiliates, is being challenged in court by Amazon. Although Amazon lost its initial appeal of a lower court ruling that backed the law, the case is still pending further action.

Playing the nexus card

Long term, some experts say either nexus rules or new federal legislation will close in on Amazon and other retailers. "I think Amazon will eventually have to collect sales tax throughout the U.S., but whether it will be because of state or federal law we can't tell," says Schibley of CCH. "We now have at least 15 states with some kind of 'Amazon tax' bill, and sooner or later Amazon may feel it's not worth taking the line it's taking."

Others, including VigLink's Roup, say some states are willing to trade taxes for jobs. "There will always be states that pitch themselves as offering low-tax, low regulatory burdens, for supporting jobs and investment," he says.

In the meantime, retailers, affiliates and state officials will have to closely follow the action to determine how they should play their next nexus card.

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