What eCommerce Sellers Need To Know About Click-Through Nexus
As nationwide policies like the Marketplace Fairness Act get caught up in legislative branches, states continue to pass new laws that significantly diminish the physical presence requirement for sales tax purposes. One of the most contentious examples of these laws is the “click-through” nexus laws adopted in New York and soon thereafter many other states.
In today’s market, it is commonplace for companies to use the Internet for sales, customer service, communication, and delivery. Sales appeals made via email, online newsletters, banner advertisements, and “click-through” links are common and aid in channeling prospective customers from one site to the next. Additionally, everyone uses social networking sites, blogs, and other online forums as a means to reach new customers and maintain existing customer relationships. How do these forms of communication factor into whether nexus* is established or not?
* As a quick reminder “nexus” is an obligation to collect and remit sales tax in a given locality.
The simple (and most desirable) answer would be that they do not change the nexus rules in any way. The golden rule of nexus has always required some form of physical presence. Advertising on a website is no different than other protected forms of advertising, such as television or radio advertising, or in national magazines or newspapers. Thus, the traditional rules of nexus should apply to Internet-based forms of advertising as well.
The U.S. Supreme Court has consistently determined that communication through interstate commerce, including forms of advertising, direct mail, and mail order catalogs, does not create nexus for sales and use tax purposes, only if the out-of-state vendor has no physical presence in the state. This rule should not diminish when the form of interstate communication is over the Internet, rather than through the mail, by phone or through common carriers.
“Click-Through” Nexus Laws & New York
One activity in particular — website linking or “click through” arrangements — has been seen as a potential loophole to establish nexus for eCommerce retailers despite the lack of physical presence usually required.
In 2008, New York passed a law, which required eCommerce retailers to collect and remit sales taxes on their sales in the state if they have any “click through” advertising agreements with people in the state. Under this type of arrangement, a third party is paid a commission to display a link on their website that allows individuals to click through to the seller’s website. The New York law provided that an out-of-state eCommerce seller is presumed to have nexus in New York if the seller:
1. Enters into such a click-through arrangement;
2. Pays commissions or fees for such referrals; and
3. The total gross receipts from sales made as a result of all such arrangements is at least $10,000 during the preceding year.
The law is based on the concept of agency or third-party nexus. It is clear from the language that a remote seller “shall be presumed to be soliciting business through an independent contractor or other representative” as a result of entering into a click-through agreement with any New York resident.
The Department’s rationale for this sort of law is that the individual that displays a link on their website in some way qualifies as a “representative” or “agent”. They consider this to be sufficient enough to create nexus under traditional third-party nexus rules.
The underlying message of third-party nexus is that when using in-state representatives a market is being established and maintained within that state, and that is sometimes sufficient enough to be considered physical presence.
For purposes of New York’s law (or any sort of click-through law), given the lack of geographical boundaries of websites, it is hard to believe that a simple link is intended to target one state’s consumers more than another and may do nothing to “establish and maintain” a market in that state. Intended audiences of blogs, much like this one, are not based on geographical boundaries. Of course, sometimes they may appeal to one geographical group more than another depending on their offerings but rarely are they limited to such regions.
Following New York’s enactment of their click-through nexus law, other states have followed with identical or similar rulings. Twenty-five states + D.C., now have laws or a pronouncement of some kind implementing “click-through” nexus. They are:
- District of Columbia
- New Mexico
- North Carolina
- North & South Dakota
- Rhode Island
When Vermont adopted their statute, it required that the law did not take effect until similar legislation passed in 15 other states. Since that threshold has been met the collection of taxes due to “click-through” will begin in 2016.
While these states’ statutes claim to allow taxpayers to rebut the presumption that they are physically present in the state due to click-through arrangements, Connecticut and Illinois attempted to enact statutes that made the presumption irrefutable. The Illinois Supreme Court reviewed their statute after being struck down by a lower court and found it to be unconstitutional.
Click-through laws are highly contentious, but many states are still reviewing for possible implementation in addition to the states listed above that already have them in place. As the MFA, or possible alternatives to the MFA, and legislation such as Permanent Internet Tax Freedom Act come under review, click-through laws have the potential to be discredited or become further strengthened. In the meantime, as an eCommerce retailer it is critical to be aware of the states that have implemented these types of laws. Nexus is established much easier, as a result, and you must navigate compliance diligently.
Have some more questions? Let us know! We’re happy to help, and we love talking taxes.