For years, online retailers, such as and, have been exempt from collecting sales taxes in states where they have no physical presence. The exemption stems from the 1992 Supreme Court decision in Quill v. North Dakota which held that states could not require out-of-state retailers to collect sales tax unless the retailer has a “substantial nexus with the taxing state,” such as a retail store, warehouse or distribution center.

Despite the Quill precedent, many states struggling to find additional revenue sources to stay afloat in the recent economic downturn have turned to the e-commerce sales taxes as a potential solution to solve their financial woes.

Last week, Arkansas became the fifth state, joining New York, North Carolina, Rhode Island and Illinois, to enact a state law requiring internet retailers to collect sales tax if they do business with in-state affiliates. Other states, such as California, Connecticut, Massachusetts and Minnesota are also considering similar bills. The Arkansas legislation has prompted companies such as to end all ties with its marketing affiliates in the state. In a bold statement, Patrick Byrne, CEO for declared, “We will cut marketing ties in any state passing laws making out-of-state retailers collect sales tax simply for having marketing affiliates in those states.”

The Arkansas legislation expands the definition of “physical presence” to include companies doing business or marketing with companies within a state that have set up commission-based marketing programs that redirect or refer customers to an online retailer through their website. Similar legislation, sometimes referred to as “Affiliate Nexus” bills, have been popping up all over the country. Opponents of such bills argue that the imposition of taxes on online retailers violates the Commerce Clause of the Constitution and puts an undue burden on businesses with no stores or employees in the state.

The International Council of Shopping Centers, a leading retail industry group, and major retailers, such as Best Buy, Target, and Walmart, support Affiliate Nexus laws arguing that sales-tax exemptions for online retailers gives these retailers an unfair price advantage, ranging from 4-8%, over the traditional brick-and-mortar retailers and that the proposed reforms will level the playing field for all retailers.

For more on the debate, go to:

Pro Nexus Tax:

Anti Nexus Tax: