As more of our marketplace goes virtual, and as we purchase fewer “hard items” for things like reading, entertainment, software (think e-readers, i-tunes, and SaaS models), thereby further shrinking the tax base, cash-strapped states continue in their clever attempts to raise revenue. One tactic that has been expanding into more states over the years is something called “click-through” nexus and its companion “affiliate nexus”. The idea behind these laws challenges the traditional thinking about what it means to have physical presence in a state, and makes it easier for states to require companies to collect sales tax on sales to customers within the state. More states are enacting these types of statutes, partially as a stop gap measure to fill the hole left both by the changing marketplace and by Congress’s inability to pass a comprehensive sales tax reform bill such as the proposed Marketplace Fairness Act.
How does a typical “click through” law work? Essentially, an out of state company (headquartered, for instance, in Washington) enlists independent contractors located within a state (say California) to add links to their websites, linking back to the out of state company’s website. In the above example, the WA company pays a commission or other compensation to the CA resident for including the link on their page. Under most “click through” laws, the California agent relationship now gives the WA company nexus in California and requires the WA company to collect and remit California’s sales tax on sales made to California customers. New Jersey just became the latest state to adopt click-through nexus legislation. California, Connecticut, North Carolina, Pennsylvania and New York are just a few of the dozen or so states with similar laws. Similar to other states, the New Jersey provision makes it a seller’s duty to collect and remit sales tax for specific items like tangible personal property or certain digital products when a company uses a commissioned independent contractor or other representative who is physically located in the state to refer a customer to the business.
Why Click-Through Nexus Matters
The concern here is the switch away from the long-held view of substantial physical presence. In the click-through nexus model, an independent contractor that has very little (or no) real contact with a company beyond an icon on their website can create nexus. As such, a business can have no other presence in a state except for a loose collection of representatives and would still be required to collect sales tax. Is that really fair? We’re starting to see this type of legislation growing nationwide as states grapple with the issue of an overall expanded sales tax. In the absence of a national standard it’s no surprise that states like New Jersey are taking matters into their own hands. But we also wonder, will this trend cease if Congress steps forward and passes the revised Marketplace Fairness Act? Only time will tell!
Photo Courtesy: Tax Credits via Flickr