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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Other recent “Sales Tax Nexus” posts by Jeff Meigs:
- Click-Through Nexus & The Law of Unintended Consequences
- Nexus: The Basis For All Sales Tax Discussions