State & local sales tax affiliate nexus: Where you pay might depend on where your customers click

Written on May 23, 2016

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By Bob Woolley, CPA

One of the most notable trends in state and local taxation is the enactment of state laws that push the envelope on longstanding court rulings limiting any state’s authority to tax businesses and consumers located in another state. Recent efforts by states (including Ohio as of July 1, 2015) to expand the application of affiliate nexus principles into the realm of “click-through nexus”—a means of collecting sales taxes from internet-based retailers selling into their states—provide an excellent illustration of this tactic.

States use affiliate nexus to impose sales tax collection obligations on internet and mail-order businesses that are related to another business with brick-and-mortar stores within their jurisdiction. For example, the ability to return an online purchase at a local store owned by a sister company is often deemed to be a significant enough enticement that it’s integral to the sales process, so the store’s sales tax obligation extends to the affiliated online operation.

Click-through nexus is a specific type of affiliate nexus designed to expand the reach of a state’s sales tax. This nexus applies when an internet retailer with no other nexus to a state compensates an in-state business, related or unrelated, for sales originating from a website ad hosted by the in-state business. When a resident of the host’s state clicks on the retailer’s ad and accesses the retailer’s site from the website of the in-state business, most of these laws create a rebuttable presumption that the nexus attaches to any sale shipped into that state by the internet retailer. Most of the laws make an exception if the sales generated by the click-through are less than a threshold amount (in Ohio, it’s $10,000 during the preceding 12 months).

The rebuttable presumption
States tend to set the bar pretty high when it comes to rebutting the presumption. To overcome the presumption, states commonly require evidence of a written agreement between the seller and the in-state business prohibiting the in-state host from engaging in any solicitation within the state on behalf of the seller.

The rebuttable presumption standard is significant because it shifts a state revenue department’s traditional burden of proving nexus. This presumption requires the seller to disprove nexus by demonstrating that the in-state business is not assisting with the seller’s establishment or maintenance of a market in the state.

The trend is likely to continue
More than a dozen states, including Ohio, Michigan, and Illinois, have enacted some form of click-through nexus law. Many of the states that don’t have click-through nexus laws are considering enacting them. In a time where states are looking for additional revenue but legislators are reluctant to impose new taxes on their constituents, a proposal like click-through nexus tends to win considerable support. It extends collection of an existing tax to businesses located in other states, so it raises money without any significant impact on existing in-state businesses.

Click-through nexus laws have been challenged in some state courts with differing results. The U.S. Supreme Court has yet to consider the specific issue of click-through nexus. Congress is considering legislation on the issue that would include a nationwide threshold of $1 million in U.S. remote sales every year. Until some action is taken at the federal level to create a consistent standard, it seems likely that more states will enact similar laws.

What does this mean for Ohio businesses?
Ohio’s enactment of a click-through nexus law will have minimal impact on Ohio-based businesses, as it creates a collection and reporting obligation on businesses outside of the state. However, if your business is paying for web-based advertising in other states, it’s important to know if any of those states have click-through nexus rules that would require collection and remittance of sales tax by a seller.

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