August 12, 2013
State “Click-Through” Nexus - More Sales Tax Collections for States?
By Will Boiman, Supervisor, Tax & Business
Similar to the way advancements in modern technology are changing the way we conduct business, they are also changing the way in which many state governments declare tax responsibilities. These registration and collection responsibilities are commonly referred to as "nexus," and usually vary by tax type, industry, and state. However, determining where to register and file returns is becoming increasingly problematic as state and local tax jurisdictions are continuously changing and updating the landscape of what actually constitutes "nexus" which would require a company to comply with a particular states' tax rules.
"Click-through" nexus is likely the most controversial of the new state approaches to require companies to collect sales tax in a state. In previous years, the concept of nexus established in United States Supreme Court case of Quill v. North Dakota (1992) was generally the law of the land in determining when a state may impose sales tax collection responsibilities. In this case, the Supreme Court determined that a business had to be physically present in a state before that state could require the business to collect and remit sales tax. However, many states have argued that taxes should be applied the same for sales to customers whether made on the street, in a store, or online. This has led to many states legislating new ways of applying the “physical presence” standard established in Quill to businesses who conduct their activities remotely, electronically or through an affiliate. These new rules are commonly referred to as “Amazon.com" rules or Click-Through nexus, appropriately named after the website.
Click-Through nexus applies to sales and use tax and focuses on the relationship between out-of-state internet retailers and their in-state affiliates that help facilitate the sale of goods over the internet. Nexus for sales tax purposes is presumed in cases where independent persons, or affiliates, who post a website link to an out-of-state business and receive some form of compensation from the out-of-state seller will create sufficient physical presence to establish nexus for the out-of-state business and require them to collect sales and use tax. Furthermore, in 2008, the state of New York began requiring out-of-state online retailers to collect sales and use tax on sales to New York customers because of contracts between the retailer and New York residents/affiliates to solicit sales.
New York’s revision to the nexus standards has resulted in increasing efforts by other states to force internet retailers to collect sales tax from customers in states where the sellers seem to have no physical presence. It has also resulted in many states passing legislation to revise their definitions of “vendor,” “doing business,” or “maintaining a place of business" in order to redefine their nexus standards to include remote sellers. To date, the list of states now charging an “Amazon tax” has grown, and now includes Arizona, California, Kansas, Kentucky, New York, North Dakota, Pennsylvania, Texas, and Washington. Other states are also due to be added to this list imminently. However, a recent Florida legislation that would have amended the definition of “mail order sale” to add click-through and affiliate nexus provisions died in the House Appropriations Committee. Therefore, as of now, there are no new adjustments to the Florida nexus laws related to this matter.
In conclusion, the click-through nexus laws vary among each state, with very little conformity. Therefore, it is almost impossible to predict how states laws will be updated or amended in years or even months to come. For these reasons, it is imperative that businesses, consumers, and tax professionals stay educated and informed on a state-by-state basis. Additionally, all businesses who utilize these third-party or affiliate website agreements to sell their products should periodically review their business relationships with those parties to determine the impact to their sales and use tax registration and filing requirements on a state by state basis. Staying informed of the constantly changing nexus laws will assist in preventing an unexpected state sales tax assessment.
Please feel free to contact your Marcum tax professional with any questions on this evolving issue.