Iowa Can Do Better than the Affiliate Tax: A Proposal for an Intermediary Tax

• Author: Travis Cavanaugh
• Position: J.D. Candidate, The University of Iowa College of Law, 2012; B.B.A., The University of Iowa Tippie College of Business, 2007
• Pages: 567-588

567

Iowa Can Do Better than the Affiliate Tax:

A Proposal for an Intermediary Tax

Travis Cavanaugh

ABSTRACT: New York was the first state to implement the affiliate tax,

also commonly referred to as the “Amazon tax” due to its primary purpose of

imposing sales-tax liability on Amazon.com. The tax requires many online

retailers to collect sales tax on all sales of merchandise to residents of the

taxing state if the retailer hires in-state residents to advertise its goods and

such advertisements result in $10,000 or more in revenue for the retailer.

Recently, other states have begun implementing the New York affiliate tax.

However, in all of these states, except New York, Amazon has responded by

cancelling its affiliate advertising program within the state in order to avoid

the corresponding tax liability. This Note proposes a different tax, an

intermediary tax, which like the affiliate tax imputes the requisite “physical

presence” and “substantial nexus” to retailers with substantial contractual

relationships with residents of the state. The contracts used to impute such a

presence are not based on the advertising and other contracts used for the

affiliate tax, but rather on the retailers’ contracts to provide in-state

residents with a forum to sell their goods. This proposed tax is more

advantageous than the affiliate tax because, among other reasons, it is more

difficult for retailers, like Amazon, to avoid the tax.

I. INTRODUCTION ...................................................................................... 569

II. CURRENT STANDARD FOR DETERMINING WHEN STATES CAN

REQUIRE THE COLLECTION OF SALES TAX FROM OUT-OF-STATE

RETAILERS .............................................................................................. 572

A. SCRIPTO, INC. V. CARSON ............................................................... 572

B. NATIONAL BELLAS HESS, INC. V. DEPARTMENT OF REVENUE OF

ILLINOIS ......................................................................................... 573

C. QUILL CORP. V. NORTH DAKOTA ................................................... 573

 J.D. Candidate, The University of Iowa College of Law, 2012; B.B.A., The University of

Iowa Tippie College of Business, 2007. I would like to thank my family, friends, and the editors

and student writers of Volumes 96 and 97 of the Iowa Law Review for their support and

feedback on this Note.

568 IOWA LAW REVIEW [Vol. 97:567

III. NEW YORK’S AFFILIATE TAX................................................................... 575

IV. PROBLEMS WITH THE AFFILIATE TAX ..................................................... 577

A. IMPUTING SUBSTANTIAL NEXUS ........................................................ 577

B. ADVERTISING CONTRACTS WITH NON-EXCLUSIVE INDEPENDENT

CONTRACTORS ARE THE SOLE BASIS OF TAX LIABILITY ...................... 579

C. AMAZON AND OTHER RETAILERS CAN STILL AVOID THE TAX ............. 580

V. PROPOSAL FOR THE INTERMEDIARY TAX ................................................ 581

A. DEFINING AN INTERMEDIARY ............................................................. 582

B. A REBUTTABLE PRESUMPTION THAT THE SUBSTANTIAL-NEXUS

REQUIREMENT IS MET ...................................................................... 583

VI. ADVANTAGES OF THE INTERMEDIARY TAX ............................................. 583

A. A STRONGER SUBSTANTIAL NEXUS IS ESTABLISHED ........................... 583

B. RETAILERS’ ABILITY TO AVOID COLLECTING THE TAX IS REDUCED..... 585

C. THE NUMBER OF RETAILERS REQUIRED TO COLLECT SALES TAX IS

EXPANDED ....................................................................................... 585

D. THE CONTRACTUAL RELATIONSHIPS USED TO IMPOSE THE

COLLECTION OF SALES TAX ARE MORE DIRECTLY RELATED TO THE

ACTIVITY PRODUCING THE TAX ........................................................ 586

VII. POTENTIAL CHALLENGES TO THE INTERMEDIARY TAX .......................... 587

VIII. CONCLUSION ......................................................................................... 588