Over the past 18 months, I have been asked to define the term nexus more so than at any other point in my 20-year career. There have been two main drivers for these questions. The first driver is the introduction of Amazon’s FBA (“Fulfillment by Amazon”) service, which creates nexus for businesses in states where Amazon stores inventory; we will discuss this in more detail in the near future. The second driver is the rapid growth of click-through nexus’ legislation and policy, which we will address below.
Nexus 101: In general, retailers are required to register and remit sales tax in any jurisdiction where they have nexus. Nexus is established as having property, employees or actively transacting business within a jurisdiction. As the internet has evolved to become a larger avenue for sales, online retailers have been able to avoid registering and remitting sales tax because they do not establish nexus in the historical sense. To reverse the loss of sales tax revenue, states are expanding with their definition of nexus.
Since 2008, many states have considered and enacted laws to tax remote sellers. New York was first to propose a “click-through nexus” law that has popularly been referred to as “Amazon law” (since the intent is to target large online retailers like Amazon). The law targets online retailers who solicit business by entering into agreements with persons domiciled in New York State who refer customers to online websites. The state now considers displaying a link on a website for consideration to be sufficient for a business to qualify as an agent, therefore, giving them a physical presence and requiring them to register and remit sales tax. According to NYCRR 526.7(b), consideration includes “monetary consideration, exchange, barter, the rendering of any service, or any agreement therefor. Monetary consideration includes the assumption of liabilities, fees, rentals, royalties or any other charges that a purchaser, lessee or licensee is required to pay.”
States that have followed suit in some form include Arkansas, California, Connecticut, Georgia, Kansas, Maine, Michigan, Minnesota, Missouri, New Jersey, North Carolina, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington. Most of these states have a threshold for gross receipt sales made through residents of the state in the prior four quarters and offer rebuttable presumptions. Pennsylvania, unlike most states, does not have a threshold for sales that are made into the state and therefore, it is safe to assume that if there is click-through nexus, sales tax must be collected and remitted.
The law recently enacted by Illinois was set to replace the law that was struck down by the Illinois Supreme Court in 2011 for violating the Internet Tax Freedom Act (“ITFA”). The new law aims to be fairer by including additional types of referrals including sources such as print and broadcast. The original was believed to discriminate against internet commerce. The new law requires an out-of-state retailer to register and remit sales tax if they realize at least $10,000 in gross receipts sales to customers referred from Illinois affiliates.
On January 15, 2015, Michigan passed a “click-through nexus” law. Like most states, a seller is presumed to be doing business in the state if the seller enters into an agreement with a resident of that state for a commission or some other type of consideration. The conditions are that over $10,000 in sales are made through residents with this type of agreement and over $50,000 in cumulative gross receipts to all purchasers in Michigan.
Connecticut enacted a law on May 4, 2011, that required out-of-state retailers to collect sales and use tax on purchases made from referrals from in-state affiliates. They have since passed new laws revoking this and instead are focusing on “economic nexus.” Currently, if an out of state retailer is making gross receipt sales in excess of $500,000 from Connecticut sources then they are required to register with the secretary of state, and once they are registered, they are required to collect and remit sales tax. However, if you register with the Secretary of State before reaching the $500,000 threshold, you automatically have nexus in the state and would be required to collect and remit sales tax.
Florida has not enacted any such laws yet. They had discussed amending the statutes to include internet sales, but the provision failed to pass.
Texas does not have laws specifically for “click-through nexus”, but they are broad in their definition of a “retailer engaged in business in the state.” They do this to include out of state sellers with relationships with residents in the state which an out-of-state retailer uses for advertising purposes. Tex. Tax Code Ann. § 151.107(b) states, “The agency relationship recognized by this subsection is for the sole purpose of providing a presence in this state for the imposition of a tax on out-of-state advertisers or sellers.” The terms solicitation and advertising are used by many states and can be a little confusing. Typically, states use “solicitation” to describe any agreement set in place where a commission or some consideration is exchanged. If no agreement is in place and the presence in the state appears to be promotional, then it would be characterized as advertising.
Most states, including Michigan and Nevada, offer a rebuttable presumption for out-of-state retailers which can be used to prove that the residents of the state with whom the seller has an agreement with did not conduct activities that establish or maintain a market in a state. An example of “establishing or maintaining a market in the state” would be if a Washington resident purchased a machine from an Idaho business and an employee of the Idaho business installed the machine at the Washington resident’s house. Even though the sale may not give the Idaho business nexus in Washington, the installation would.
The following example may help to clarify matters. Imagine you have a cosmetics business based in Florida. You do not have any employees, trucks or physical location in Tennessee and, therefore, no physical nexus within the state. However, if you (1) enter into an agreement with a person located in Tennessee where a link to your website can be found on theirs and (2) you make gross receipt sales in excess of $10,000 (either through this person or any other with which you have a similar agreement) then you would have nexus in Tennessee. The presumption of sales tax in Tennessee can be rebutted if the person with whom the out-of-state retailer does business does not conduct any activities in Tennessee that would substantially contribute to the dealer’s ability to establish and maintain a market in Tennessee during the prior 12 months.
What’s next for click-through nexus is a continued “lowering of the bar” in regards to what creates nexus and an expansion of states that will adopt laws or policies regarding nexus. Finally, let’s not forget Uncle Sam. 2016 is setting up to be another year where Washington looks to push the Marketplace Fairness Act through Congress. Depending on the final form of this legislation, there may not be a need to have click-through policies in the near future.