A guide to click-through nexus
- Sales and Use Tax
- June 30, 2016 | Scott Peterson
If you’re a business, understanding sales tax nexus — the relationship between your business and a tax jurisdiction that triggers a sales tax collection obligation — is crucial. “Click-through nexus,” or affiliate nexus, can be tricky, but it’s important for small businesses to know where and how this kind of nexus can be created.
The click-through nexus back story
Until June 2018, sales tax nexus in the United States was based on physical presence. In 1992, the Supreme Court of the United States ruled in Quill Corp. v. North Dakota that a business can only be required to collect sales tax for a state if it has a physical presence in the state.
To increase sales tax collections despite this physical presence restriction, many states broadened their definitions of physical presence to include click-through, or affiliate, nexus. An out-of-state business establishes click-through nexus in a state when an in-state business receives a commission for referring a certain amount of sales to the out-of-state seller, as through a website link (“clicking through”).
New York was the first state to create a click-through nexus law, in 2008. Since then, approximately 20 states have adopted click-through nexus (see list below).
How South Dakota v. Wayfair, Inc. could impact click-through nexus laws
On June 21, 2018, the Supreme Court overruled Quill’s physical presence requirement in South Dakota v. Wayfair, Inc. South Dakota had challenged the physical presence rule, arguing that an out-of-state business could establish nexus through “economic and virtual contacts” with a state (economic nexus), not merely physical presence. The court agreed.
The Wayfair opinion made only a passing reference to click-through nexus; nonetheless, it could eventually have a significant impact on state click-through nexus laws. States have long had trouble enforcing click-through nexus because it’s hard for tax authorities to determine which remote businesses have an affiliate program. Enforcement should be easier now that states have the authority to tax remote sales.
However, in Wayfair, the Supreme Court praised South Dakota for providing safe harbor for small sellers: South Dakota’s law provides an exception for businesses with less than $100,000 in gross sales or fewer than 200 transactions in South Dakota in the previous or current calendar year. While the Supreme Court didn’t create a bright-line test requiring a similar small-seller exception, the fact that it called out South Dakota’s threshold is significant.
Most state click-through nexus laws are substantially lower than the $100,000 sales/200 transactions threshold adopted by South Dakota. It remains to be seen whether these laws will be challenged for not providing a larger small-seller exception. Connecticut has already increased its threshold since the Wayfair decision.
Whatever happens tomorrow, it’s imperative for businesses to know how click-through nexus can affect them today.
If you’re a small business using click-through marketing or affiliate programs to drive sales, you need to know:
- Which states have laws that can create nexus for you through affiliate referrals
- What the minimum sales thresholds are for the click-through nexus states
- Where your referrals originate, so you can see if any click-through nexus laws apply to those transactions
Click-through nexus states
The following states have click-through nexus laws on the books (listed with the sales thresholds that must be met before the law kicks in):
- Arkansas: More than $10,000 during the preceding 12 months
- California: More than $10,000 in sales under “click-through” arrangements and more than $1 million in total annual in-state sales
- Connecticut: More than $250,000 and 200 retail sales in Connecticut during the preceding 12-month period (previously $2,000 with no transaction threshold)
- Georgia: More than $50,000 in the preceding 12 months
- Idaho: More than $10,000 during the preceding 12 months
- Illinois: More than $10,000 during the preceding four quarterly periods
- Kansas: More than $10,000 during the preceding 12 months
- Louisiana: More than $50,000 during the preceding 12 months
- Maine: More than $10,000 during the preceding year
- Michigan: More than $10,000 during the immediately preceding 12 months and annual sales in the state of more than $50,000
- Minnesota: More than $10,000 in the 12-month period ending on the last day of the most recent calendar quarter before the current calendar quarter
- Missouri: More than $10,000 in the preceding 12 months
- Nevada: More than $10,000 during the preceding four quarterly periods
- New Jersey: More than $10,000 in the preceding four quarterly periods
- New York: More than $10,000 during the preceding four quarterly periods
- North Carolina: More than $10,000 during the preceding four quarterly periods
- Ohio: More than $10,000 during the preceding 12 months
- Pennsylvania: No threshold
- Rhode Island: More than $5,000 during the four preceding quarterly periods
- Tennessee: More than $10,000 during the preceding 12 months
- Vermont: More than $10,000 in the preceding tax year
- Washington: More than $10,000 in the preceding calendar year
Click-through nexus is sometimes called the “Amazon tax” because of Amazon’s predominance in the ecommerce space. However, it can affect small businesses, too. And unlike the online giants, small businesses don’t usually have the resources or deep pockets needed to handle the back taxes, penalties, and interest that can result from noncompliance with click-through nexus laws.
One way of the best ways to keep up with click-through nexus is sales tax automation. Avalara AvaTax offers a simple solution for sales tax compliance. It integrates seamlessly with the most common accounting and ecommerce platforms and uses up-to-date sales tax rules, rates, and boundaries, facilitating sales tax compliance in every state. Learn more.