Printable versionSend by emailPDF version
April 9, 2013

2013-Issue 15—Just a few months into 2013, and roughly 13 states have already proposed new sales and use tax nexus legislation. Emboldened by their fellow states, the latest trend for states attempting to generate more tax revenue seems to be new legislative proposals adding affiliate and click-through nexus rules. These provisions look to impose new sales and use tax collection obligations on out-of-state companies by proposing broader sales tax nexus thresholds.

Various states have already adopted broader sales tax nexus standards known as click-through nexus and affiliate nexus. Alabama, Colorado, Illinois, Oklahoma, Texas, Utah, Virginia and Wisconsin have enacted affiliate nexus. New York, North Carolina, Connecticut, District of Columbia and Pennsylvania have click-through nexus. Arkansas, California, Georgia, Rhode Island, South Dakota and Vermont (effective after five more states adopt click-through nexus) have enacted both click-through and affiliate nexus standards.

For the past two decades, the U.S. Supreme Court has remained silent on the subject of state tax nexus in a presumptive nod toward congressional action. Three federal bills were proposed and failed in 2012 alone: the Main Street Fairness Act, the Marketplace Equity Act and the Marketplace Fairness Act. The Marketplace Fairness Act of 2013 was recently proposed with additional simplification provisions. Even with unprecedented momentum and all-time high optimism, the smart bet would still be on Congress's inability to pass any of these acts in the near future. Without congressional action, the current trend of increased state nexus legislation to broaden the tax base will likely continue.


Nexus Standard and Quill Case

Nexus is the connection between an entity and a state that determines whether that entity is subject to a state's tax. The sales tax nexus threshold can differ from state to state as interpretations vary, but the U.S. Supreme Court established the principal measure for sales tax nexus in 1992. In Quill Corp. v. North Dakota, 504 US 298 (1992), the Court found that the Commerce Clause requires physical presence that is more than de minimis before a state can impose a sales tax collection obligation on an out-of-state retailer.

Most of the proposed affiliate and click-through nexus provisions are intended to comport with Quill's substantial physical presence requirement, but that requirement is usually "rebuttably" presumed to be met through agents and affiliates that, the states argue, are acting as local solicitors. Amazon and Overstock, however, assert that links on a website are merely advertising to get customers to come to their sites and that calling an advertiser an agent or salesperson is absurd. Further, the actual solicitation occurs on the retailer's website, which is where the customers' purchasing decisions are made.    

Emergence of Click-Through Nexus

Click-through nexus (sometimes referred to as Amazon nexus thanks to the New York case) applies to sales and use tax and focuses on the relationship between out-of-state internet retailers and their in-state affiliates that help facilitate the sale of goods over the internet. It is rebuttably presumed that independent persons, or affiliates, who post a website link to an out-of-state business and receive some form of compensation are sufficient presence to establish nexus for the out-of-state business and require them to collect sales and use tax.

Enacted in 2008, New York's revised nexus standards under Tax Law Section 1101 provide that out-of-state online retailers are required to collect sales and use tax on sales to New York customers because of contracts between the retailer and New York residents/affiliates to solicit sales. Amazon and Overstock litigated and lost, but are still appealing. After the loss, several states quickly introduced similar click-through nexus legislation. In addition to click-through nexus, some states have added affiliate nexus language that establishes nexus when related parties in the state help a remote seller establish and maintain a market in the state.

Some proposed legislation identifies the use of an identical or substantially similar name, trademark or goodwill as sufficient to establish substantial nexus. The simple use of a similar name or trademark historically has not been sufficient to create agency nexus and thus could be vulnerable to a legal challenge.

Click-Through Nexus

Motivation for States

The State Taxation of Internet Transactions study, by the Congressional Research Service, highlights the monetary motivator for all the recent proposed nexus legislation. The study estimated that lost tax revenue for retail and wholesale transactions over the internet was approximately $11.4 billion in 2012. With sales and use tax making up about 30.8 percent of state and 11.6 percent of local governments' total tax revenue, the perceived lost tax revenue is significant. The Congressional Research Service estimated that in 2012, California would lose $1.9 billion; Texas, $870.4 million; and New York, $865.5 million.

Hurdles for Retailers 

As a result of the impracticability of collecting use tax from individual residents, states have instead focused on imposing a compliance and collection burden on online retailers. Any online retailer with nexus under the new thresholds would have to deal with tens to even thousands of new state and local tax jurisdictions demanding the remittance of sales and use tax. Requiring online retailers to withhold and remit sales tax on their vast customer base could prove a daunting burden because of various state and local tax rates, exemptions, treatment and filing obligations (for nationwide retailers, this could mean up to 9,600 unique state and local taxing jurisdictions).   

2013 Proposed Nexus Legislation 

The following states have proposed affiliate, click-through or other broad nexus provisions that would be effective in 2013 if enacted:

  • Florida (effective 7/1/2013)
  • Hawaii (effective 7/1/2013)
  • Indiana (effective 7/1/2013)
  • Kansas (effective 7/1/2013)
  • Maine (effective 2014)
  • Massachusetts
  • Michigan (effective 30 days after enactment)
  • Minnesota (effective 6/30/2013)
  • New Mexico (broad, effective 7/1/2013)
  • Oklahoma (effective immediately after enactment)
  • West Virginia (effective 6/1/2013)

Although just only recently proposed, Utah's click-through nexus bill has already failed. Of note, Utah already enacted an affiliate nexus standard in 2012. In addition, Mississippi's attempt to pass click-through and affiliate nexus provisions recently died in committee. 

Actual Revenue Impact for States

The effectiveness of click-through nexus in increasing the states' revenue coffers has been a mixed bag. Many states had been inspired by New York's pioneering in internet sales taxation and relative success. Although Amazon has agreed to collect sales tax on its sales to New York customers, Amazon and Overstock continue to litigate the click-through nexus rules in New York court and vow to appeal to the highest court. In addition, a significant number of merchants have terminated their affiliate programs in New York to avoid falling under the state's click-through nexus laws.

Most other states have not fared as well as New York. Connecticut Revenue Commissioner Kevin Sullivan told Tax Analysts:

"We have not seen any appreciable or demonstrable relationship between the legislation and entities collecting and remitting taxes that were not collecting and remitting taxes before..."

This is a sentiment reflected by the Rhode Island's head of the revenue-analysis office, who told Providence Business News that the new nexus laws actually reduced tax revenue following many retailers' decisions to end their state's affiliate programs. Any state with click-through nexus rules is sure to experience the same reaction, as retailers would rather end affiliate programs than establish nexus. The internet retailers' responses not only eliminated the tax expected to be generated with the new nexus standard, but also reduced the taxable income of in-state affiliates that relied on the affiliate program for income.

The Performance Marketing Association, a major opponent of click-through nexus, estimated that Illinois-based affiliates generated $744 million in advertising revenue in 2010. Assuming all or most online retailers end their affiliate programs, $22 million in annual state income taxes are at risk.

Some perceive that the retailers are simply trying to retain their advantage of not collecting sales tax. While this is an advantage, the sales and use tax collection burden for an online retailer is much greater than that for a local brick and mortar. Simply mailing a letter to in-state affiliates to end their contractual relationships is easy to do, and while the cost is the loss of some sales generation, the burden of implementing a sales and use tax system capable of administering each customer's jurisdiction's tax rate and rules correctly is much greater. Such a feat is administratively burdensome and costly, especially for smaller retailers. These burdens were the reason the Streamlined Sales Tax initiative was created in 2000. However, to date only 24 states have adopted its simplification measures.

Acknowledging the shortcomings of their new tax laws, some states insist their real intent is to pressure Congress into passing laws that would give states the power to collect tax from internet commerce.

Will Congress Act?
Having failed to pass any of the numerous bills proposed in prior years, this year's bill is the Marketplace Fairness Act of 2013. The bill looks to expand state sales and use tax authority, while requiring significant state sales and use tax simplifications. For example, the bill requires that each state have a single entity in charge of sales and use tax administration, a single auditor, a single return (for all state and local jurisdictions), free software for sales and use tax calculations and a list of taxable and nontaxable products and services, etc.

On March 22, the Senate passed an amendment to the 2014 Budget Resolution reflecting its support of federal law allowing states to collect sales tax on internet sales. Passing the amendment was seen as a symbolic gesture to demonstrate bipartisan support. However, the Marketplace Fairness Act is still up for discussion, and the senators are not bound by how they recently voted. The amendment includes an exemption for companies with annual sales of less than $1 million. Critics argue this threshold would be far too low and put small online retailers out of business.

Without any meaningful congressional guidance (unlikely for 2013), online retailers continue to keep a pulse on new state legislation and are ready to send out letters to their commissionaires to end their affiliate program the date a new click-through nexus law becomes effective. The business decision is typically an easy choice. The potential in forgone sales revenue is usually far smaller than the costs and burdens of the new sales tax administration.  

Alvarez & Marsal Taxand Says:
States' continuing urgency to balance their budgets has led them to focus on their slice of an estimated $11 billion of uncollected sales and use tax from online sales. Efforts to expand state nexus rules and increase collections appear to be backfiring more often than not; however, revenue administrators are standing on principal. Some hope that by creating turbulence in the nexus landscape, Congress will be pressured into enacting laws addressing the issue.

Until then, states and online retailers will continue their game of cat and mouse. States will seek to tax internet retailers. Internet retailers will end in-state affiliate programs and motivate affiliates to consider moving or operating in a state without click-through nexus rules. However, the affiliate's list of options may be shrinking as more and more states consider adding click-through nexus. 

As provided in Treasury Department Circular 230, this publication is not intended or written by Alvarez & Marsal Taxand, LLC, (or any Taxand member firm) to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer.   

The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.

About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customized tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the U.S., and serves the U.K. from its base in London.

Alvarez & Marsal Taxand is a founder of Taxand, the world's largest independent tax organization, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.

To learn more, visit or