On 5/27/2015, HB No. 232 was introduced in the Ohio House. If passed, it would add Ohio to the growing number of states enacting "click-through" nexus provisions for sales tax.
As previously explained in a recent post by Sylvia Dion, click-through nexus is triggered when a resident of a state agrees to place a link to an online retailer's website for compensation. The compensation is typically based on either a percentage of sales generated through the link or an amount per number of clicks on the link itself.
Similar to other state click-through nexus provisions, Ohio has added a couple of provisions to attempt to make the legislation more palatable. First, the bill provides what is commonly termed a "small seller" exception. This exception provides if the gross sales referred to the retailer via the residents' website link does not exceed $10,000, nexus is not triggered. Second, the bill adds an exception to nexus if the resident does not conduct activities on behalf of the retailer that significantly assist the retailer in making a market in the state.
Click-through nexus provisions have their beginnings from two court cases; commonly referred to as “Scripto” and “Tyler Pipe”. These two court cases ruled a sales person who actively solicits in a state on behalf of a business does not need to be an employee of the business to create nexus for sales tax collection. A sales person who is an independent contractor of the business will create nexus and require the business to register and collect sales tax in the State. Click-through nexus provisions treat the resident as an independent sales person of the online retailer.
That’s all well and good; however there are troubling aspects of click-through nexus which make it difficult for me to support this legislation.
ACTIVE SOLICITATION vs. PASSIVE REFERRAL
The sales force in Scripto and Tyler Pipe were active participants in the sales process. They were active in making a market for their respective principal, and had a vested interest in selling the products they solicited; translating into higher commissions for them personally resulting in a higher standard of living for them and their families.
Contrast that with residents of click-through nexus states who are placing these links on their website for compensation; the purpose of which is most likely to help defray the cost of operating the site. Most of these residents have built a site for other reasons i.e. a blog or to make family connections easier. These links act in the capacity of a passive referral in that the residents have no vested interest in the business of the online retailer, and are really not all that concerned about the volume of sales referred to via their website. This is especially the case if the compensation is tied to the number of clicks on the link.
CONFUSION ON WHO TAXES THE SALE?
Click-through nexus assumes those who access a link from a resident’s website are themselves residents of the same state. The presumption here is that an Ohio resident who places a link to an online retailer on their website creates physical presence for the online retailer. Presumably then only customers who reside in Ohio will see that link, access the online retailer, and consummate an Ohio taxable sale. Worse yet, the theory that the link creates physical presence for the online retailer reasonable leads to an assertion the purchaser themselves also has physical presence in Ohio triggering a taxable presence in the State as a result of accessing the link. Again, this would lead to a conclusion the sale via this link has been consummated in Ohio permitting Ohio to tax.
There is absolutely no guarantee those who access the link and make a purchase are themselves residents of Ohio. Worse yet, under the presumption that any sale consummated via the link would be taxable in Ohio, a tortured result ensues. Let me demonstrate by way of example.
I am an Ohio resident. Assume this blog is set up on my own through my own website. I pay for website development and the service to place this website on a server whose physical location is unknown to me. For a fee based on number of clicks, I place a link to carmax.com where anyone can click the link on my website, browse their inventory and actually purchase a vehicle from their website. A reader from California finds my blog site, reads the content on my site, and likes what they read. They see the link to carmax.com, and being in the market for a car they click on the link. They find a vehicle on the site to their liking and engage in a purchase online. The final price of the vehicle is $12,000.
If the vehicle is delivered to the purchaser in California then by all accounts this should be a California sale. This happens because the California resident takes physical possession of the vehicle in California. However, Ohio could claim it has the first right to tax the sale because click-through nexus deems the purchaser to have come here in Ohio and make the purchase. Furthermore, gross proceeds from the sale exceed $10,000 (on one sole transaction). This would mean the purchaser has a California use tax obligation on the difference between the Ohio sales tax charged, and the California rate applicable to their residence.
What if the server that housed my website were physically located in Tennessee? Couldn’t Tennessee claim I and the California resident have physical presence in Tennessee, resulting in Tennessee having first right to tax the sale?
If Ohio were to opine that California would have the sole ability to tax the sale in my example under the transfer of title or possession or both provision in Ohio law, then why does caremax.com in my example need to register in Ohio in the first place?
The point here is one of confusion and the potential for unintended consequences. Sales tax law is very complex and internet commerce adds to that complexity. In my example, three different states have the potential to claim taxation of the purchase. That is problematic and places a heavy burden on purchasers as well as interstate commerce, which is not where that burden should rest.
This author will monitor developments on this bill and report back periodically on its’ progress.
Have a comment or question? Is there a topic you’d like to see discussed? Submit your question or comment below and we’ll be sure to get in touch!
Other recent “Ohio (OH)” posts by Guy Nevers, CPA, MT:
- Tax on Temporary Labor in Ohio; A Not So Temporary Headache!
- Ohio Sales Tax: Amazon Law Bill Introduced
- Ohio Sales Tax: County "Add-On" Rules & Tools
- Ohio Sales Tax: Exemptions Outside the Tax Code
- Ohio Sales Tax: Business Fixtures or Real Property? (3 Key Questions)