Nexus, like it sounds, is a terrible disease from a sales tax perspective. Nexus is a fancy word meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its laws on the business and require it to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor) then it likely has nexus under the physical presence test in Quill.
Now, fast forward from the early 90’s in which the economy operated using mail order catalogs and these things I’ve read about called floppy disks to today’s economy that uses the Internet as its backbone. What if instead of an employee, independent contractor, or sales rep, a company compensates a resident of a state for sales made as a result of that resident’s website? Is that person’s presence in a state the same physical presence Quill was talking about?
In 2008, New York thought this would be a good idea and decided to be the guinea pig for click through nexus legislation. Also known as the “Amazon law,” due to its perceived targeting of Amazon, New York created a law that if a New York residents website generated over a certain number of sales in a 12 month period for a particular company, then there was a presumption that such company had nexus in New York. Amazon and Overstock took exception with this law, but ultimately lost at New York’s highest court. Unfortunately, the Supreme Court of the United States declined to hear the case.
Being that the law was deemed to be constitutional in New York and the Supreme Court of the United States declined to hear the case, many other states said why not and enacted similar click through nexus legislation. According to a 2014 article in Bloomberg BNA, 12 states have enacted click through legislation. They are:
- Arkansas (2011)
- California (2012)
- Connecticut (2011)
- Georgia (2012)
- Kansas (2013)
- Maine (2013)
- Minnesota (2013)
- Missouri (2013)
- New York (2008)
- North Carolina (2009)
- Pennsylvania (2012)
- Rhode Island (2009)
Once the list above hits 15, then Vermont will also jump on board. Illinois tried for a more aggressive click through law that was repealed in court. Also of note, Connecticut’s click through nexus law does not even offer a rebuttable presumption for the business.
In addition, there are 12 states and the District of Colombia that have click through nexus policies. Those states are Arizona, D.C., Hawaii, Iowa, Louisiana, Maryland, Nevada, New Mexico, North Dakota, South Dakota, Tennessee, and Utah.
For the unsuspecting online retailer that may already have issues with servers and inventory in states that they don’t know about, click through nexus can be a ticking time bomb from a state tax perspective. Suppose a business is located in Florida and in order to generate sales, it purchases a click through marketing campaign. Under the terms of its campaign a website can direct viewers to the Florida retailer and get paid on sales generated as a result of that click. The Florida company may have no clue as to where the website owner is located. Despite not knowing, a state tax agency in one of the 24 states listed above can come knocking for a huge past liability. Even worse, because the company was only registered in Florida, there is no statute of limitations to cut the liability to 3 or 4 years. This can be crippling for many small and medium online retailers. If this sounds like you, then it is likely time to get an experienced sales and use tax attorney involved.
Other recent “Sales Tax Nexus” posts by Jerry Donnini:
- Factor Presence Nexus Constitutional in Ohio: Other States to Follow?
- Is Alabama’s Economic Nexus Standard Another Attack on Quill?
- Does Nexus Trail a Company After Leaving a Jurisdiction?
- Nexus Update: Washington Enacts New Nexus Standards
- New Proposed Nexus Legislation – Not Very Helpful