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Click-Through Nexus & The Law of Unintended Consequences

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Various states have passed click-through nexus rules in an attempt to require otherwise out-of-state retailers to collect and remit sales tax from their in-state customers.

Click-through nexus occurs when an in-state business solicits an Internet sale on behalf of an out-of-state business in exchange for some type of compensation or commission.  The states’ reasoning is that the sale would not have been possible without the effort of the in-state business soliciting on behalf of the out-of-state business.  The sales tax nexus of the in-state business transfers to the out-of-state business via the click-through.

As an example, an e-tailer wants to sell their home décor items so they engage an online magazine that focuses on home decorating.  This online magazine has a physical presence in New York while the e-tailer is based in California.  The online magazine places ads for the e-tailer in their online magazine with a link to the e-tailer’s website.  When the reader clicks through the ad and makes a purchase with the e-tailer, the online magazine receives a commission.  This relationship between the e-tailer and the online magazine creates click-through nexus.  As a result, the e-tailer now has a presence in New York and is required to collect and remit New York sales tax not only on this one particular transaction, but all transactions in New York.

On the surface, click-through nexus seems to close a widening gap between sales tax collected at traditional retail purchases and purchases made online.  However, there are problems with click-through nexus.

States including Rhode Island, Illinois, and North Carolina have not seen the positive impact they expected.  The reason is two-fold: (1) Some e-tailers have eliminated their affiliate programs.  As a result, the click-through nexus rules do not apply and the e-tailer has no connection with the state and therefore no requirement to collect or remit sales tax; and (2) When the affiliate programs are dropped by the e-tailer, the revenue associated with commissions from the e-tailers has dropped accordingly thus reducing income and the amount of income tax paid by the in-state businesses.  This is a good example of the law of unintended consequences.

While click-through nexus has not been the panacea that states hoped for, it has elevated the conversation and brought awareness to a topic that will certainly be addressed in the coming years.

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Comments

4 Responses to Click-Through Nexus & The Law of Unintended Consequences

  • Posted by Michael on January 7, 2013 11:39pm:

    Dave,
    Unfortunately, I think I know the answer to my own question, but I wanted to get a second opinion. I have a client that runs a networking business, very similiar to a BMI. They have chapters in several states. In each Chapter there is a facilitator who runs the meetings, seeks out new members, etc. All the administrative activities are done out of state including billing. There is no physical product to sell. Does this create Nexus? Thanks, Michael

    • Posted by Author photo of Jeff MeigsJeff Meigs on January 8, 2013 1:47am:

      Michael, While we would want more information before making a formal determination, it does sound like your client is creating nexus for sales and use tax purposes in each state in which a chapter or facilitator is based. Notwithstanding, if the activities of the business do not include the purchase or sale of taxable products or services, then there may not be a need to register for sales and use tax purposes. Please feel free to call me at (678-397-1533) if you would like to discuss your client’s circumstances in more detail or if you have any additional questions. Thanks. Jeff

  • Posted by Dave on November 2, 2012 1:35am:

    Thanks for posting and helping shed some light on this topic. Many if not most companies in this position are blissfully unaware of this - until its too late.

    • Posted by Author photo of Jeff MeigsJeff Meigs on November 2, 2012 6:28am:

      Thanks for the comment Dave. There's a lot of confusion surrounding when e-tailers need to collect sales tax. Some of the pending Federal legislation introduces another set of dynamics for a business to keep their eye on.

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