As technology continues to change, so does the moving target as to what exactly gives a company nexus within a particular jurisdiction. Since the Amazon litigation in New York, states have realized that they have significant latitude as to what they can get away with by way of aggressive nexus statutes. Effective September 1, 2015, Washington is the latest to jump on the nexus bandwagon. Through the recent legislation, Washington will trap more unsuspecting businesses within its state taxing purview.
In case you are unaware, “nexus” is just fancy way of saying connection or link. If a company has sufficient 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. Back in the 90’s states were going too far and businesses began to push back. In 1992, Quill v. North Dakota was decided, in which a taxpayer defeated a state on a nexus challenge. Quill 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. Since then, many states like New York enacted click through nexus laws and although the Supreme Court has not yet got involved, state courts have upheld the decisions.
Effective September 1, 2015, Washington enacted a similar law to New York’s “click-through” legislation. Under the new law, if a business 1) enters into an agreement with a Washington resident and pays a commissions for referrals, and 2) grosses more than $10,000 in sales during the year, then the company is presumed to have nexus. If nexus is presumed then the business can show it doesn’t have nexus by showing that the person with the agreement is prohibited from referring customers to the business and the sales rep has agreed with the agreement.
This law should come as no surprise as states continue to move in on the online retailer. While one can challenge that nexus is truly created under the constitution, the likely outcome will be similar to New York. Hopefully someone does challenge this law and it gets all the way up to the Supreme Court and the Court does what it has threatened to do – actually hear the case. Until then, or until some action by Congress, we can only predict more states to jump onto the click through nexus bandwagon.
For the unsuspecting retailer, nexus can be a looming problem from a state tax perspective. Even worse, if a company was is not registered in a state, 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