In today’s economy, with its frequent changes in technology and consumer sophistication, states are increasingly following in each other’s footsteps by adopting click-through nexus laws, commonly referred to as Amazon laws, regarding Internet purchases and associated tax. CPAs need to be familiar with this concept and be able to advise businesses as to how this kind of nexus can be created and the effects it can have.
When online purchasing started to become significant, the concept of nexus started to shift from physical presence to affiliate relationships, which has resulted in the click-through nexus concept. Click-through nexus laws generally provide that an out-of-state retailer with no physical presence in the state will be deemed to have sales/use tax nexus if the retailer has an in-state affiliate and certain other requirements are met. In this context, nexus is created through an agreement with a person or business located in the state that refers or directs sales to the out-of-state online retailer’s business for a commission or other consideration. In other words, if an in-state business directs a customer via links or a website to make a purchase of tangible personal property or services from the out-of-state online business, this is considered to result in click-through nexus.
The 1992 United States Supreme Court decision in Quill Corp. v. North Dakota (504 US 298), is key to understanding why click-through nexus is a novel concept. Pursuant to Quill, businesses are only required to collect sales tax in a state if they have a physical presence in that state. Quill Corp. was a mail order office supply retailer selling its products through catalogs (this was in the days before online retail); it did not have a physical presence in North Dakota. The state notified Quill that it owed sales/use tax from North Dakota residents who purchased products through Quill’s catalogue. Quill responded that it did not have a physical presence in North Dakota and did not have to collect state tax on sales made to customers in the state. The Supreme Court agreed with Quill’s position and based its holding on the Commerce Clause of the U.S. Constitution, which provides that a state cannot require an out-of-state retailer to collect sales/use tax unless the retailer has a “substantial” nexus with the taxing state; that is, a physical presence.
Adoption of Click-Through Nexus
As purchases over the Internet expanded and states needed to find ways to replace the revenue that was being lost, the nexus rules began to be redefined. In 2008, New York became the first state to adopt a click-through nexus law. This new law provided that a seller is presumed to be a vendor if it entered into an agreement with a resident of New York and the resident refers customers to the vendor’s website. The referrals may be made through a link, a website, or other digital means. The law also required that the cumulative gross receipts from sales in New York be in excess of $10,000 during the preceding four quarterly periods. One positive aspect of the New York law was that the presumption set forth in the statute is “rebuttable” and can be challenged in court if the out-of-state seller can provide proof that the resident with whom the seller had an agreement did not engage in any “solicitation” on the seller’s behalf.
In adopting the click-through nexus statute, the New York legislature made it clear that the law was targeting large online retailers; hence the nickname “Amazon law.” Amazon.com had implemented an associate’s program where it engaged New York residents to advertise its website on the associate’s website with a direct-access link in exchange for a referral fee. After the click-through nexus law was passed, Amazon and Overstock.com Inc. filed complaints with the New York Supreme Court challenging the constitutionality of the new provision. The case was eventually heard by the New York Court of Appeals, which rejected the constitutional challenges and held that the click-through nexus provision did not violate the Commerce Clause or the Due Process Clause of the U.S. Constitution. The U.S. Supreme Court declined to hear an appeal. Due to these new laws, Amazon has ceased its associates program in several states.
Since 2008, a number of states have adopted click-through nexus statutes, including Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Louisiana, Maine, Michigan, Minnesota, Missouri, North Carolina, Ohio, Pennsylvania, Rhode Island, Tennessee, Vermont, and Washington. Although the statutes in these states tend to be similar to New York, the specific requirements may vary, and each statute should be reviewed to determine whether a business has nexus for sales/use tax purposes. From the point of view of the states, such statutes are necessary to replace significant lost tax revenue because of the volume of sales over the Internet, as well as to improve the collection of sales and use tax. Click-through (as well as affiliate) nexus laws are perceived to modernize the law for today’s technology, which enables Internet vendors to create markets and make sales from anywhere. E-commerce makes it much easier for vendors to operate in one state and have customers in every state. Thus, for states to collect sales tax from a remote vendor, they must either 1) convince the vendor to voluntarily do so or 2) find a legal way to force the vendor to collect state sales tax.
Who Will Be Affected?
There is a possibility that some businesses are selling into a state with a click-through nexus law and are not aware of it, or that they are part of programs where they unknowingly spend money on click-through marketing. If an in-state customer uses the links provided by in-state residents to purchase taxable goods or services from such a client and the residents are paid a commission, that business may be required to collect sales tax. It is essential for advisors to be prepared for the issue if it arises and keep alert—even for those states where click-through nexus has not yet been enacted into law or taken full effect.
Because it appears that click-through nexus will be a part of online shopping for the foreseeable future, the best way to handle these issues is to keep abreast of the changes and prepare for more states to enact their own nexus rules. Indeed, mitigation strategies exist if a business is now required under a click-through nexus provision to collect tax but has not been collecting it to date (e.g., voluntary disclosure agreements) which can reduce the potential risk and exposures that a CPA’s clients may face.
Given the current fiscal issues impacting many states alongside the increase in e-commerce activities, it is likely that more states will expand their sales tax laws to include a click-through nexus. CPAs need to continue to monitor these laws and advise their clients accordingly.