Printable versionSend by emailPDF version
May 1, 2012

2012-Issue 18—For many years, names like Amazon and eBay have dominated the debate about sales tax collection from online retailers. These online behemoths directly compete with brick-and-mortar retailers, have billions of dollars in annual revenues and have experienced consistent annual growth. Online business-to-consumer (B2C) retailers are the easiest illustrations of the perceived inequities between brick-and-mortar retailers and their online competitors. While tax professionals can debate the legitimacy of Quill v. North Dakota in the modern world of e-commerce, instant downloads and free shipping, policymakers can easily understand the competitive disadvantage sales tax collection creates for brick-and-mortar B2C retailers.

The movement to require online retailers, known as remote sellers in the sales tax world, to collect sales tax gained momentum in 2011. The number of states enacting click-through nexus laws continues to rise, and there are now three federal bills aimed at requiring the collection of sales tax by remote sellers. Amazon has gone from litigating New York's click-through nexus law to supporting the Marketplace Fairness Act in just a few short years. This recent acquiescence by the largest online retailer may indicate that the online B2C retail industry is preparing itself for the possibility of mandatory sales tax collection.

If the amount of participation by business-to-business (B2B) retailers at congressional hearings is an indicator, many B2B retailers have not been proactive about this issue — even though a 2011 study conducted by the U.S. Census Bureau showed that 91 percent of online sales are actually B2B transactions.[1] The taxability of B2B transactions differs from that of B2C sales because business inputs often qualify for exemptions, and businesses are much more likely to self-report use tax. As a result, the 91 percent of online sales classified as B2B transactions represents less lost state sales tax revenue than the 9 percent of B2C online retail sales. A recent Maryland study suggests that only 11 to 15 percent of forgone sales tax revenue from remote sales is because of B2B sales of tangible personal property.[2]

Still, even though online B2C sales represent the majority of the lost sales tax revenue, online B2B sales generate hundreds of millions of dollars of potentially uncollected sales tax. As a result, it is easy to see that click-through nexus and federal sales tax collection laws will affect B2B retailers.

Click-through Nexus

New York enacted the first click-through nexus law in April 2008. Arkansas, Connecticut, Illinois, North Carolina, Pennsylvania, Rhode Island and Vermont have all followed suit, and the seemingly never-ending introduction of click-through nexus bills in other states is an indication that the click-through nexus movement is far from over.

Click-through nexus laws require an out-of-state retailer to collect and remit sales tax if the following three-pronged test is met:

  1. An in-state business directly or indirectly refers business to an out-of-state retailer through a website link;
  2. The out-of-state retailer compensates the in-state business for referrals; and
  3. The out-of-state retailer makes more than a de minimis amount of sales into the state.

Many online retailers consider these click-through nexus laws and the new form of attributional nexus that they create a direct assault on the Constitution and a contradiction of U.S. Supreme Court jurisprudence; however, the state taxing authorities and brick-and-mortar retailers see click-through nexus as a mechanism for fair and equitable enforcement of the sales tax law. No matter which side of the debate someone takes, there is one important common thread between all the existing click-through nexus laws: an out-of-state company must be affiliated with an in-state business. Click-through nexus affects a specific business model, and is not as far-reaching as the proposed federal legislation discussed below.

Proposed Federal Legislation

Main Street Fairness Act of 2011 

For more than 12 years, the Streamlined Sales Tax Project has promoted sales and use tax simplification and administrative uniformity in an attempt to encourage Congress to enact the Main Street Fairness Act. The Act would bring the Streamlined vision to fruition by allowing any state that is in compliance with the Streamlined Sales and Use Tax Agreement (SSUTA) to require remote sellers that do not qualify for the small seller exception to collect tax on in-state sales. While many feel that the Streamlined efforts are too involved and complex, credit should be given to the project for striving for simplification, uniformity and fairness. The good news for online retailers is that only 24 of the states that impose a sales tax have agreed to the 199-page SSUTA, so the remaining 22 states would not immediately benefit from the Main Street Fairness Act.

Marketplace Equity Act — Introduced October 13, 2011

The Marketplace Equity Act was an unexpected development in the movement to collect sales tax from remote sellers. The Marketplace Equity Act completely forgoes the bureaucracy and rules that Streamlined has worked to develop. Instead, the Marketplace Equity Act requires a minimal amount of simplification that is limited to requiring one state and local return and imposition regime, a small seller exception of $1,000,000 in U.S. sales and $100,000 in state-specific sales, and three tax rate options. Under the Marketplace Equity Act, an out-of-state seller can charge tax based on 1) one blended state rate, 2) the highest state rate or 3) destination-based rating effectuated by a state database. Considering that most states already have one state-level return and that a tax rate database requires only a small investment by a state, the Marketplace Equity Act requires very few concessions from the states and would create a mechanism for most states to collect sales tax from remote sellers after making only negligible changes to their sales tax regimes. 

Marketplace Fairness Act — Introduced November 9, 2011

Supporters of Streamlined would not be outdone, so the Marketplace Fairness Act is the light version of the Main Street Fairness Act. It reflects a combination of the ample deliberation of the SSUTA and the brevity of the Marketplace Equity Act. The Marketplace Fairness Act presents two avenues to the states: 1) SSUTA conformity or 2) minimum simplification requirements. Another key difference between the Marketplace Fairness Act and its predecessor, the Main Street Fairness Act, is that it explicitly applies to both remote sellers and consolidated providers. The addition of the term "consolidated providers" brings online companies that view themselves as facilitators of e-commerce rather than e-commerce retailers into the purview of this legislation. Like the Marketplace Equity Act, the minimum simplification option in the Marketplace Fairness Act grants the states the authority to require sales tax collection from remote sellers in exchange for modest sales tax administration simplifications.

B2B Remote Sellers

Most B2B remote sellers peddle tangible personal property just like their B2C brethren. Also, a large portion of B2B remote sellers of tangible personal property are wholesalers that are not required to charge sales tax. For the portion of B2B remote sellers that make taxable retail sales, the tax decisions can be far more complex than those faced by online or brick-and-mortar B2C retailers.

Take, for example, the wide variety of B2B remote sellers in the software-as-a-service (SaaS), application service provider (ASP), platform-as-a-service (PaaS), data processing services and information services sectors. Many B2B retailers that sell services and products that are highly enabled by technology that is easily delivered remotely consider themselves sellers of services and do not attribute any value to the information technology that effectuates their businesses. Even if a B2B retailer in the aforementioned sectors is willing to acknowledge that a portion of its services or products may be taxable, determining the taxability and sourcing of these types of services and products is a difficult task, considering the fact that many states have not specifically addressed the myriad of emerging delivery methods and service combinations.

To determine the taxability of these types of services, a B2B retailer must perform a true object analysis that should review the level of access its customers have to taxable software, hardware, data processing and information services, and then compare the value of that access to the overall value of its products. After a thorough true object analysis has been performed, B2B retailers must analyze contract terms and invoice presentation to ensure that products are presented fairly from a tax perspective. Additionally, B2B retailers must consider the state-specific laws of the 46 states that impose a sales tax. Hawaii, South Dakota and New Mexico tax just about every service, but New Mexico only taxes services performed in the state. Connecticut taxes computer services, but there are different rate structures depending on how the service is classified. Texas, New York, New Jersey, Ohio and Washington are all states that impose a sales tax on a variety of computer-related services, and the litigation and ruling requests related to sales tax impositions in these states show that taxpayers have struggled and continue to struggle with the taxation of computer-related services.

Alvarez & Marsal Taxand Says:

B2C remote sellers have been proactively involved with the movement to require remote sellers to collect sales tax because it is their business activities that have drawn the ire of in-state businesses and policymakers. We cannot assume that decisive federal action on state sales tax law is imminent because of the long list of unsuccessful proposed federal bills related to state tax. But if the momentum seen in 2011, which was highlighted by the support of the largest player in the debate (Amazon), leads to a federal bill on sales tax collection by remote sellers, sales tax collections on tangible personal property and digital goods sold by online B2C retailers will be largely addressed.

States will then be able to focus their never-ending efforts to generate more tax revenue on B2B retailers. While the constraints created by the SSUTA may impede the less uniform states from quickly benefiting from the Main Street Fairness Act, the basic requirements of the Marketplace Equity Act and the Marketplace Fairness Act would allow many states that have shied away from sales tax simplification to require remote sellers to collect sales tax. That means that B2B remote sellers may have to collect sales tax in the states that favor continually broadening the reach of sales tax impositions to include services and technology that are either hard to classify for tax purposes or simply not statutorily enumerated. While the pains of B2C remote sellers will be considerable, the mandatory collection of sales tax by B2B remote sellers may require a much more in-depth analysis of both business operations and tax law.


[1] U.S. Census Bureau, E-Stats, May 2011.

[2] Comptroller of Maryland, Maryland Remote Sales Tax Loss Study, 2011.


Mark McCormick
Managing Director, Atlanta
+1 404 260 4081

Scott Jackson, Senior Director, contributed to this article.

For More Information

James Bartek,
Managing Director, New York
+1 212 763 9870

Craig Beaty,
Managing Director, Houston
+1 713 221 3933

Benjamin Diaz,
Managing Director, Miami
+1 305 704 6650 

John Easterday,
Managing Director, Chicago
+1 312 288 4015

Anthony Fuller,
Managing Director, San Francisco
+1 415 490 2256

Brian Pedersen,
Managing Director, Seattle
+1 206 664 8911

Kelly Peele,
Managing Director, Seattle
+1 503 442 3625

Matthew Polli,
Managing Director, Atlanta
+1 404 260 4078

Donald Roveto III,
Managing Director, New York
+1 212 763 9632

Carolyn Campbell Shantz,
Managing Director, Houston
+1 713 221 3919


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 US., 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