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May 21, 2020

Click-through nexus legislation creates a rebuttable presumption of nexus when a seller makes sales of tangible personal property, specified digital products or services via a commissioned independent contractor who directly or indirectly refers potential customers, by a link on an Internet website or otherwise, to the seller. In most states, there is a dollar amount that must be met in order to achieve the substantial nexus standard referenced in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Rebuttable standards and dollar thresholds vary by state.

In 2008, New York enacted Tax Law §1101(b)(8)(vi), popularly referred to as the “Amazon law.” For the first time, a state attempted to require an internet retailer to collect and remit sales taxes based on the idea of click through nexus since the Supreme Court’s 1992 decision in Quill where physical presence was required to establish constitutional nexus. The Amazon law created a rebuttable presumption that an out-of-state online retailer has nexus with New York if the seller enters into an agreement with a New York resident to refer customers to the online retailer’s website for a commission (e.g., via a link on the resident’s website). The connection between the remote seller and the presumed solicitation activities of the New York resident created a physical presence nexus that required the registration and collection of New York sales or use tax.

In spite of Quill, a number of states have already passed legislation to subject out-of-state taxpayers, in particular internet retailers, to sales and use tax nexus—and the list is growing. Currently, states including Arkansas, California, Colorado, Connecticut, Florida, Georgia, Kansas, Michigan, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, and Vermont all have click through nexus provisions. At least five other states are considered legislation to enact click through provisions. 

Most recently, Tennessee Governor Bill Haslam’s proposed Revenue Modernization Act passed the House. The legislation requires out-of-state online retailers to collect sales and use tax from Tennessee customers if the online retailer pays an in-state party a fee or commission to route customers to the online retailer’s website. Other states, including Hawaii, South Carolina, Indiana, and Utah, appear to be emboldened to enact click-through nexus legislation during their current legislative sessions. These states are proposing legislation similar to the New York law that will adopt a rebuttable presumption that out-of-state retailers have nexus in the taxing state.

The federal government has long considered granting states the right to impose a sales tax collection requirement on out-of-state vendors selling into the state, either through the internet, by phone, or by mail-order. The Marketplace Fairness Act of 2013 (“MFA”), approved by the Senate two years ago and currently being reworked by the House, would grant that right to states with simplified sales tax. For a variety of political reasons, national legislation concerning state tax technical issues has been unsuccessful over the years. As the states grow tired of waiting for federal lawmakers to act, many are implementing (or already have implemented) their own provisions including click through nexus policies.

Click-through nexus is not a panacea to increase tax revenue and/or “level the playing field.” States including Rhode Island, Illinois, North Carolina and New Jersey have not seen the positive impact they expected. There are several reasons for the underperformance including:

  1. A lack of compliance and the difficultly to police potential out of state retailers.
  2. Effective strategic and tax planning by some e-tailers have limited the increased compliance and thus revenue. Some e-tailers have eliminated their affiliate programs to render click-through nexus rules moot, or have restructured their marketing, advertising and supply chain practices to limit nexus.  

All taxpayers should periodically review their business relationships with third parties to determine the impact to their sales and use tax registration and filing requirements. Any questions regarding registration and filing requirements or the internet sales tax should be directed to your state and local tax professional.

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Gary Bingel

Gary Bingel, Partner-in-Charge of the National State and Local Tax Group, with expertise focuses on state and local income taxation, and sales and use tax consulting. He has significant experience serving clients in the manufacturing, retail, pharmaceutical, biotechnology, technology and service industries.

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