Affiliate nexus: Where you pay may depend on where your customers click
In the pursuit of more revenue, states are pushing the envelope to redefine who they target as taxpayers. “Click-through nexus” is a new strategy that states are using to collect sales tax from Internet-based retailers selling into their states.
Generally, states aren’t allowed to impose sales tax on retailers with no physical presence in their states (stores or warehouses, for example). However, they are allowed to impose sales tax if an Internet retailer sells into a state in which they also have a brick-and-mortar presence. Think of buying mail-order clothing from JCPenney or Sears that have brick-and-mortar stores in every state as compared to pure Internet retailers that don’t charge sales tax. “Click-through nexus” is a blurring of these principles.
Click-through nexus applies when an Internet retailer with no physical presence in a state compensates an in-state business that does have a brick-and-mortar presence for sales originating from a website link hosted by the in-state business. It doesn’t matter if that in-state business is related or unrelated.
When a resident of that state clicks on the in-state business’s website link, most current laws would treat the sale as simply being shipped into that state by the out-of-state Internet retailer. As of the writing of this article, 18 states (including Illinois, Michigan, and Ohio) have enacted some form of legislation for click-through sales that are greater than a threshold amount (typically $10,000 or more annually).
These new laws presume that the out-of-state Internet retailer has nexus in the state unless written clauses exist in an agreement between the parties. These clauses must specifically prohibit the in-state business from engaging in any form of solicitation or other advocacy within the state on behalf of the Internet retailer. The new laws shift the traditional burden of proof from the state to required clauses in a written agreement.
As one would expect, these new click-through laws have been challenged in state courts with differing results. To resolve the differences in state court opinions, the U.S. Supreme Court may have to consider this issue. Alternatively, Congress is considering legislation that would include a nationwide threshold of $1 million in Internet sales annually.
Differing standards for nexus between states is not new, and it won’t disappear without some form of federal legislation or Supreme Court ruling. However, that doesn’t seem likely in the foreseeable future, so caveat venditor. (Let the seller beware.)