Aside from the Marketplace Fairness Act of 2013, click through and affiliate nexus have dominated the sales tax billboards in 2013. For the uninformed, click-through or affiliate nexus is another hook in which the state can attempt to force a company to charge and collect sales and use tax in a state. Although many people believe that sales tax is not due on items bought on the Internet, consumers are required to remit use tax if they buy a product tax free and use it in a state with a sales tax.
The concept of nexus began in 1977 in Complete Auto v. Brady. In that case the court laid out a 4 part test to determine if a law was constitutional from a commerce clause perspective. One part of the test looked to whether the transaction being taxed had “nexus” or a connection with a state. In 1992 Quill v. North Dakota came along and the Supreme Court explained what “nexus” meant. In Quill, an office supply company sent catalogs into North Dakota to solicit sales and had no other property in that state. The United States Supreme Court said that a taxpayer has nexus with a state if it has some physical presence in that state. The common example is having an agent or property in the state. It held that sending catalogs into a state did not create nexus.
Since 1992, commerce has changed dramatically with the Internet. Ironically, the Supreme Court still has not taken a sales tax case since the mail order catalog era in Quill. How do these principles apply in the Internet era? Does using or having a server in a state create nexus? Where is a website “physically present?” One can quickly see the problems with a physical presence test with many items being sold online.
In the mid 2000’s many states began adopting click-through or affiliate nexus statutes. Also known as “Amazon laws” or incorrectly referred to as a new internet tax, many states drafted laws that base a company’s nexus on its relationship with a related entity, or “affiliate.” New York was the typical example and it created a law that said if a taxpayer sells more than $10,000 of tangible personal property through another person/entity and that other person is a resident of New York, then the taxpayer has to collect and remit tax to New York. The constitutionality of this law went to New York’s highest court and was upheld in March 2013.
On May 10, 2013, Missouri decided it wanted a piece of the action. Specifically, it was reported that Missouri proposed a click-through/affiliate nexus law similar to New York. Missouri’s proposed law creates a presumption that a taxpayer is a “vendor” if the taxpayer enters into an agreement with a resident of Missouri to sell items through the resident and such a relationship results in more than $10,000 of sales during a 12-month period. Like many similar affiliate nexus laws, the Missouri proposal included a provision for a rebuttable presumption to refute the nexus contention. However, in practice, the rebuttable presumption is very difficult to overcome.
A myriad of problems is created by this type of law. For starters and from a constitutional perspective, how do I even have physical presence in that state under Quill? Equally as troubling is how the website to which the state is attributing nexus is physically present anywhere. How far can this go? Another interesting argument is whether a state even has Due Process nexus over the company, however, that argument will be saved for a subsequent article.
From a practical perspective consider the following example. A Florida sales and use tax attorney like myself decides to sell tangible personal property on the Internet. In order to promote sales, I offer that if you post my website on your website, including your Facebook, twitter, instagram, etc, I will pay you a fee for every click generated and even give you a percentage of whatever is sold. Consider a Missouri resident likes what I am selling and puts a link on their website. I may not even know where that person is located, but assume they are in Missouri. My products are mildly popular and I sell over $10,000 during the year. In Missouri’s view I am now required to register as a dealer and collect and remit tax in those states. Going a step further, it is now my costly responsibility to determine if my product is taxable in Missouri. The administrative burden can get expensive in a hurry and put a marginally profitable entity out of business.
Unfortunately, many states are winning this issue at the state level and it is going to take Congressional action or the Supreme Court to intervene to overturn laws that just do not seem fair. With a low threshold of $10,000, states are effectively shifting the tax collection burden from themselves, with huge amounts of resources, to private businesses. Many of these businesses are small and will be put out of business. In my view the states should substantially raise the burden so that this only applies to companies with the resources to support a necessary tax department. I encourage taxpayers to fight this issue in their state if a similar law is enacted. Perhaps after enough fighting Congress or the Supreme Court will get the picture and take a stance.
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