The Changing Face of Sales Tax Nexus

Figuring out if you have nexus in a state and need to collect and remit sales tax used to be somewhat clear. While the definition of nexus has never been uniform across all 50 states, two primary definitions of nexus were generally agreed upon (before the historic South Dakota v. Wayfair decision):

• “Maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.”
• “Having a representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retailer or its subsidiary on a temporary or permanent basis.”

But things started to get a bit more challenging once buying and selling on the internet became more prevalent. States began passing new nexus legislation to account for out-of-state sellers making sales into their state. These new nexus concepts include click-through, affiliate, economic and marketplace nexus. Below, I’ll give you a primer on these four concepts that currently comprise the changing face of sales tax nexus. Note that some states have also enforced reporting requirements for remote sellers making sales into their states.

1. Click-Through Nexus

Click-through nexus legislation can vary by state but typically has a few specific attributes. If an out of state seller retailer or service provider contracts with an individual (or company) located in-state who directly or indirectly refers potential customers to the retailer through a web link or other mechanism for a commission or other consideration upon sale, the retailer is considered to maintain a place of business in that state. With click-through nexus, a sales threshold typically applies: the cumulative gross sales by the retailer to customers in-state referred through this type of agreement during the preceding four quarterly periods must exceed a certain amount in order for the retailer to qualify and be considered to have nexus in the state.

2. Affiliate Nexus

Affiliate nexus is created when an affiliated person of the out of state retailer with a physical presence, or employees or agents in state, has sufficient nexus in a state to require the retailer to collect and remit sales and use taxes on taxable retail sales in that state. Typical attributes of affiliate nexus legislation include: the retailer holds a substantial interest in, or is owned by, an in-state retailer and the retailer sells the same or a substantially similar line of products under the same or a similar business name, or the in-state facility/employee is used to advertise, promote, or facilitate sales to an in-state consumer. It may not always require common ownership. It may include activities related to sales, delivery, service and maintaining a place of business in the state on behalf of the out of state business to benefit the out of state business’ customers.

3. Economic Nexus

Under economic nexus legislation, if an out-of-state seller exceeds a specified economic threshold in the state, then the seller has nexus in the state and must collect and remit sales tax in that state. The economic threshold may be based on a set amount of sales made in the state, gross income in the state, payroll in the state, or other thresholds.

4. Marketplace Nexus

Marketplace nexus legislation is another recent development. This concept requires online marketplace providers to collect tax on behalf of all sellers operating through their systems.

For more helpful information about nexus, download the Sales Tax Institute’s FREE whitepaper: Nexus After Wayfair – What You Need to Know. This free whitepaper contains valuable information that can help you to determine your nexus exposure and understand how to minimize the impact of nexus. Click here to view our regularly updated Remote Seller Nexus Chart which lists the states that have enacted each type of legislation covered above.

The Multistate Tax Commission (MTC) had negotiated a special deal for online sellers that may have sales and income tax obligations from previous unpaid taxes in 25 different states. The MTC put together a special amnesty initiative program for online sellers that ran from August 17, 2017 to November 1, 2017. The program is now over. If you didn’t take advantage of the program but realize you need to evaluate your activities, you should consider our Wayfair Risk Analysis consultation. For more details or to purchase the Wayfair Risk Analysis, click here.

This blog post is also published on Linked In: https://www.linkedin.com/pulse/changing-face-sales-tax-nexus-diane-yetter