Economic nexus trumps affiliate nexus
Affiliate and click-through nexus laws and policies are increasingly popular in states seeking to capture sales tax revenue from out-of-state sellers. Traditionally, a state cannot impose a tax obligation on a business unless it has a substantial physical presence in the state, such as a brick-and-mortar store or employees. Yet states are increasingly challenging that precedent as sales by remote internet retailers have exploded and sales tax revenue has plummeted.
The physical presence requirement was upheld in the 1992 Supreme Court decision Quill Corp. v. North Dakota, which predated the first online store. Quill is now considered to be outdated by numerous state and federal lawmakers, and at least one U.S. Supreme Court Justice. Nonetheless, unless and until it is reversed, or a solution emerges from Congress, states must abide by it.
However, there are ways to work around Quill. State affiliate and click-through nexus laws assert that remote vendors establish a connection to states through in-state affiliates and links on websites. And these connections, they maintain, are substantial enough to merit taxation.
More than two dozen states now have affiliate and/or click-through nexus policies in place, most recently Louisiana, Washington, and Vermont. Sales tax revenue in these states has indeed increased due to these policies, but they are not as foolproof as states would like them to be.
The Achilles heel of affiliate nexus legislation is Amazon’s willingness to sever relationships with affiliates, thereby severing the affiliate nexus and the company’s obligation to collect and remit tax. The online behemoth does not currently allow residents of Arkansas, Louisiana, Maine, Missouri, Rhode Island, or Vermont to participate in its affiliate program (affiliate operating agreements automatically terminate on the date residency is established in one of these states) because of the states’ affiliate laws and because Amazon considers complying with those laws to be more troublesome than beneficial (it would be inconceivable for Amazon to limit its market in the big four: California, Texas, Florida and New York).
Enter economic nexus
Since affiliate and click-through nexus laws are inadequate, a handful of states are now challenging Quill from a different angle: economic nexus. Alabama, Oklahoma, and South Dakota have all created policies or laws that impose sales and use tax on certain vendors with a substantial economic presence in the state. South Dakota’s law provides a number of reasons why this is necessary, including:
- “The inability to effectively collect sales or use tax from remote sellers … is seriously eroding the sales tax base of this state.”
- “Despite the fact that a use tax is owed[on these transactions], many remote sellers actively market sales as tax free or no sales transactions.”
- “The structural advantages of remote sellers, including the absence of point-of-sale tax collection, along with the general growth of online retail, make clear that further erosion of this state’s sales tax base is likely in the near future.”
Economic nexus is also under consideration in Rhode Island and Tennessee, where proposed Rule 1320-06-01-.129 would require all dealers meeting the economic threshold to register with the DOR by January 1, 2017. Vermont is taking a slightly different tactic, expanding the definition of vendor and imposing penalties for failing to notify Vermont purchasers of their use tax obligations. Increasingly, states see killing Quill as the only way to secure a stable source of sales tax revenue.
Economic nexus policies may succeed where affiliate and click-through nexus policies have failed. The Alabama and South Dakota policies have already triggered lawsuits that the states hope will eventually be heard by the Supreme Court, and there is reason to believe the South Dakota suit may be “fast-tracked for U.S. Supreme Court review.”
Resistance is futile
The time to Kill Quill may be ripe. According to a new survey by Bizrate Insights, sales tax is not as top-of-mind for consumers as it used to be. Back in 2011 and 2013, 37% of shoppers surveyed said sales tax was “an important factor in their purchase decisions.” This month, that number has dropped to 29%. Bizrate chalks this up to the fact that a growing number of internet retailers now collect sales tax — Amazon in 28 states — and more consumers “are accepting the reality and considering additional factors as they choose where to shop.” Indeed, 39% of shoppers say sales tax is “not something they consider.”
Other evidence suggests this is true. Back in 2014, an Ohio State University study indicated that Amazon’s sales fell in five states after it began collecting sales tax. However, when Slice Intelligence conducted a similar study this year, it found that Amazon’s sales in Colorado and South Carolina did not drop after its products became subject to sales tax.
Still, the anti-online sales tax movement is alive and well. It’s backed by the 9% of shoppers who say sales tax is “always important,” and a number of powerful lawmakers like Bob Goodlatte (R-VA), the Chairman of the House Judiciary Committee. To bring teeth to their stance, Wisconsin Representative Jim Sensenbrenner (R-Wis) has introduced the No Regulation Without Representation Act of 2016 (H.R. 5893), which would codify the physical presence requirement upheld in Quill.
Under the measure, a state could not impose a sales, use or similar tax obligation on a business that does not have a de minimis physical presence in the state. Businesses could not be made to collect tax based on referral agreements with in-state persons who receive commissions for referring customers to the seller, or online advertisements that are not exclusively directed towards, or soliciting, in-state customers. Learn more.
Sales tax compliance will become much more complex for retailers if Quill is eventually overturned or federal lawmakers agree to grant states the authority to tax remote sales. Fortunately, Avalara AvaTax provides a reliable alternative to manual processes while integrating seamlessly with most all accounting systems. Learn more.
photo credit: P1040563 via photopin (license)
Stay up to date
Sign up for our free newsletter and stay up to date with the latest tax news.