Click-through Nexus: Coming Soon to a State Near You
- Sales Tax
- January 3, 2016 | Laura McCamy
The increasing prominence of online retailing is good news for you, if you're an ecommerce seller, but bad news for budget-challenged states that are watching their sales-tax revenue dwindle.
Enter click-through nexus: A new way for states to capture some of that lost sales-tax revenue. It can also be a recipe for sales-tax compliance headaches for online retailers.
To understand click-through nexus, we have to start with Quill Corp v. North Dakota, a 1992 US Supreme Court decision that created the definition of sales tax nexus we use now. The court ruled that, to have nexus, a company needed a substantial presence in the state, such as a physical location or an employee.
For example, if you sell cat toys online from your workshop in North Dakota, and you send a catnip mouse to a customer in North Carolina, you would not need to charge and remit sales tax to North Carolina unless you had a warehouse or a satellite location in the state. You also wouldn't charge North Dakota sales tax, since the customer was not in your state. So, no sales tax on that transaction.
The Unused Tax
In theory, states don't lose out when online sales don’t involve sales tax because the customer is responsible for the state tax due on the transaction. When customers pay directly, it's called a use tax rather than a sales tax.
Use taxes may be the most underpaid tax in the US. Do you remember the last time you paid a use tax? Probably not -- if you're like most people, you have most likely never paid use taxes on the items you buy over the Internet without paying sales tax.
The task of going after millions of consumers for the bits of tax they owe on their purchases is a losing proposition, and the states know it, though some are getting tougher about use-tax reporting. So state governments are trying to find different ways to capture some of the sales taxes they have lost to online sales. Here's where click-through nexus comes into play.
Clicking Toward Nexus
Click-through nexus happens when you generate sales leads through affiliates. For example, you might sell collectible silverware from your base in Wisconsin. A Michigan-based blog for collectors of rare tableware links to your site, and you give the blogger a commission on sales that originated on his site. Bingo -- you have click-through nexus in Michigan.
New York was the first state to adopt click-through nexus, way back in 2008. Since then, at least 20 states have jumped on the bandwagon, and others have laws in the works. Some states treat vendors as if they have click-through nexus, even though there is no law on the books. The list of states is ever-changing, so it’s a good idea to check on the sales tax rules for states where you have sales through affiliates.
The good news is that most states have a sales threshold for click-through nexus, so a few sales from an affiliate site may not trigger the need to register and remit sales taxes in that state. In the example above, the Wisconsin seller would have to have click-through revenue of at least $10,000 in Michigan and total annual sales of $50,000 or more to Michigan residents before he needed to register and collect sales tax on his Michigan sales.
In California, the threshold is $10,000 in sales referred by the affiliate to California and more than $1 million in sales in the state during the previous 12-month period. Many states, but not all, use $10,000 in click-through sales as a trigger for nexus, so it’s a good idea to keep on top of the click-through nexus regulations in states where you have affiliates.
The Rebuttable Presumption
Many state click-through nexus laws include what is called a rebuttable presumption. This means that, if you get clicks through to your site from a website located in that state, it is assumed that you have nexus. You can rebut this, however, by offering proof that you don’t have an affiliate relationship or pay commission to anyone in that state.
Some states take a harder line. Connecticut doesn’t have a rebuttable presumption in its click-through nexus law; if you get sales referrals from a Connecticut resident, either via the Internet or other means, get in line for sales tax nexus. The state has a low threshold, as well. Just $2,000 in sales from a Connecticut affiliate in the preceding four quarters triggers nexus in the state.
Staying One Step Ahead of Click-through Nexus
Several states enacted click-through nexus laws that went into effect in October 2015, and additional states may enact similar laws soon. The worst thing you can do as an online retailer is stick your head in the sand and hope that no one ever catches up with your click-through sales tax obligations.
To avoid being hit with a big bill for back sales taxes, plus penalties and interest, find out the physical locations of your affiliates and track your affiliate sales by state. Stay abreast of the latest click-through nexus laws and regulations in the states where your affiliate relationships could trigger click-through nexus.
Sales tax software, such as Avalara TrustFile, can help simplify the task of staying in compliance with the constantly evolving realm of state sales taxes.