While economic nexus stole the nexus crown from physical presence, other nexus types are still in play even as the great nexodus unravels in state legislative houses. Businesses, in seeking to get their hands around economic nexus and strategizing to minimize tax liabilities and responsibilities, should take a step back to look at the forest of sales and use tax changes that continues to grow by the day. A survey of the full sales tax landscape reveals that while economic nexus is king, a groundswell of change is occurring with nexus types of click-through nexus and affiliate nexus as well as notice and reporting requirements for remote sellers. States have readily jumped on the economic nexus bandwagon to greater tax revenue while at the same time dropping more complicated and expensive nexus categories. However, in usual fashion, the states have muddied the water as new laws are enacted and then changed and changed again to meet practical needs and Constitutional requirements. With the continuing uncertainty of change, one state, which repealed older nexus types, quickly reversed course and re-enacted legislation for affiliate and click-through nexus. Changes will undoubtedly continue to roll out at a quickened pace as ideas for supposed simplification percolate in the minds of legislatures, but this uncertainty can be managed with a basic understanding of the trends that are unfolding in great nexodus.

The New Sales Tax Landscape


Firstly, all the changes with nexus do not take place in a vacuum of empty space. As ideas spread to promote one policy or another, they can take on a life of their own as they build their own momentum through early successes. Likewise, these ideas for change are not created in isolation but rather are influenced by older laws and the lessons learned from them as is seen in the similarities of economic nexus and marketplace facilitation with various aspects of affiliate and click-through nexus. Now, these ideas of a new and improved regime for sales and use tax are taking shape as: trends develop from the ideas of economic nexus, some states consciously follow neighboring or similarly situated states, groups of states trying to solve the same problem independently or even working together to find a solution; this latter scenario is playing out with the successes of the Streamline Sales and Use Tax Agreement (SSUTA). Secondly, identifying trends early and accurately allow businesses an early warning indicator of what to expect next. Trends not only show states what isn’t working but also show businesses what pitfalls to avoid.


The predominant trend of the great nexodus is an attempt at tax simplification by replacing pre-Wayfair nexus types with economic nexus legislation. Beginning in 2019, several states abandoned affiliate and click-through nexus as well as notice and reporting requirements for remote sellers. These nexus regimes were onerous not only for businesses but also for state taxing authorities. Economic nexus provides an opportunity to throw out nexus types that are redundant, complicated, and expensive. The trend to eliminate antiquated nexus types will likely continue in the coming years. However, the removal of these types has proven to be complicated as was seen with Illinois, which repealed affiliate and click-through nexus types only to quickly reverse course and re-enact legislation for these nexus types. Nonetheless, the trend remains clear that creative yet complicated and legally questionable types of nexus such as affiliate nexus, click-through nexus, and notice and reporting requirements are being axed one state at a time in favor of simplification, a goal of both state governments and businesses.


Click-through (Amazon) Nexus


Click-through nexus is currently in effect in 20 states including Connecticut, Georgia, Idaho, Illinois (repealed and then re-enacted), Iowa, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, Tennessee, Utah, Vermont, and West Virginia; the six states that have repealed it are: Arkansas, California, Colorado, Kansas, Ohio, and Washington. Click-through nexus is established when an in-state marketing affiliate contract with a remote seller for referrals.


Some years ago, Amazon implemented an associate’s program where it engaged New York residents to advertise its website on the associate’s website with a direct-access link in exchange for a referral fee. Click-through nexus began in 2008 in New York when the state legislature made it clear that their click-through nexus legislation was aimed at online retailers; thus, the nickname “Amazon nexus.”  The state legislated that nexus attaches when a remote retailer enters into a contractual arrangement (commonly called a “Referral Agreement”) with New York residents who place a hyperlink on their websites that links to the retailer’s website. Through such contracting, the out-of-state retailer pays a commission or fee for any completed sales generated by such “click-through.”


Click-through nexus does not include advertising or banner ads, which pay for every click on the ad; rather, this type of nexus is based upon actual sales which are generated from such click-through. Click-through legislation usually sets a threshold amount for sales that are generated by the in-state referral agent before nexus becomes effective; the threshold is typically $10,000.


Click-through nexus was originally implemented to increase revenue from sales tax collection despite the nexus restrictions of physical presence in a pre-Wayfair world. Now, economic nexus and marketplace facilitation laws appear as a more straightforward and appealing approach for states levying a sales and use tax.


Affiliate Nexus


Affiliate nexus is fully detailed and in effect in 25 states: Alabama, Connecticut, District of Columbia, Georgia, Idaho,  Illinois (repealed and reenacted), Iowa, Louisiana, Maine, Michigan, Minnesota, Missouri, Nevada, New Jersey, New York, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia; it has been repealed in five states: Arkansas, California, Colorado, Kansas, and Ohio.

As states attempted to stretch physical presence nexus to its limit, businesses sought to limit their tax exposure by establishing subsidiary and affiliate corporations. This approach of isolating nexus-creating activities in a separate entity raised the question of whether the nexus-creating activities of the affiliate could be imputed to the sales entity and nonetheless create a tax collection responsibility. Affiliate nexus is not solely based on the mere fact of common ownership of both the sales entity and the affiliate although it is a substantial factor; a fact intensive inquiry considers additional factors including: the same or similar line of products being sold under the same or similar name, the in-state affiliate is used to promote, generate, or fulfill sales, and other activities related to sales generation and fulfillment such as delivery, customer service, and maintaining a physical presence on behalf of the out-of-state entity.

Typically, affiliate nexus is examined through the lens of agency relationship doctrine (affiliate is effectively being controlled by the out-of-state entity) or the alter ego theory (both entities are practically one and the same). However, most states with affiliate nexus set minimum thresholds before nexus becomes effective. Like click-through nexus, the trend here is to strongly focus on economic nexus while trimming older nexus type from the books.

Notice and Reporting Requirements for Remote Sellers


Notice and reporting requirements for remote sellers are in effect in 12 states including Alabama, Colorado, Connecticut, Iowa, Louisiana, Michigan, Nevada, New Jersey, Oklahoma, South Dakota, Tennessee, and Vermont; it has been repealed in six states including Arkansas, Georgia, Kentucky, Pennsylvania, Rhode Island, and Washington.


Notice and reporting requirements require the remote or online seller to report their sales transactions to the state’s tax authority and then notify their in-state customers of their annual purchases total and the accompanying legal obligation to pay use tax on that amount. States saw these requirements as a way around the legal limits of physical presence that were established by the U.S. Supreme Court. States enacted this type of legislation knowing that most businesses would find it difficult and expensive to comply with these requirements in the hope they would then voluntarily register with the state taxing authority for collection of sales and use tax. This assumption turned out to be true as many companies did choose to register for and collect sales tax rather than impose the burdensome requirement of notice and reporting laws for remote sellers. With the advent of economic nexus, states have a broader and more effective reach for sales and use tax which no longer relies upon such creative and perhaps legally dubious nexus regimes.


No Place to Hide: Economic Nexus Spreads from Coast-To-Coast

Economic nexus is an appealing, bright line rule, which is replacing more narrowly tailored rules for nexus; these other nexus regimes were simply too tedious for both businesses and tax authorities alike. Currently, every state which collects sales tax (other than Florida and Missouri) have enacted economic nexus legislation following Wayfair, and the remaining two might follow suit by the end of 2021. These changes were a long time coming and visible on the horizon for those watching trends. While state tax authorities like to march to their own drum, they are still influenced greatly by the actions of the U.S. Supreme and the totality of all U.S. states taken as a whole. This forces businesses of all sizes from Amazon and Walmart to local brick and mortar shops to navigate a maze of tax compliance that is by no means set in stone. New tax obligations for remote sellers is the new norm. Now is the time for businesses to analyze the situation to re-determine tax liabilities and amend strategies as more states can reach them through economic nexus like never before.

Tips for the Taxpayer

First, a business needs to conduct a thorough analysis of nexus creating activities versus the activities of the business. Being proactive and well-organized in documenting the activities of your business including type and quantity of goods, services or digital products that are being sold and how and to where sales are made. Any post-sale services and storage of inventory are quite important to document such as sellers using Amazon’s FBA Services. This information must be accurate, consistently recorded in the same format, and should be as detailed as reasonably possible so that sales totals and transaction counts can be easily divided by state and even by county or local taxing jurisdiction as the case may require. The collection of these vital pieces of data should be accessible for review against applicable nexus types for sales and use tax whether it be the new ones of economic nexus and marketplace facilitation or the older types of affiliate and click-through nexus and notice and reporting requirements, which are slowing disappearing but will still have a noteworthy impact at least in the short-term. Detailed records and a thorough nexus review are a must for knowing in which states and when to register for sales and use tax.

While some businesses may opt to register in none and just wait it out, the risk of an audit becomes increasingly greater with time and continued sales. Other businesses may wish to take the other easy way out and to register in all 50 states or every state to which they deliver goods or services, but this road of seemingly good intentions will expose the business unnecessarily to additional types of taxes and requirements that may be lurking in the shadows. The most reasonable approach is to register in those states when required to do just as a business only pays in taxes what is due and nothing more; that should at least be the goal.

Once a business decides to register in the states where nexus has been found to exist, the registration process should be approached with caution. Many state registrations ask questions that may automatically trigger other taxes or even a full-scale audit; that is especially true when telling the state when the business first had nexus with the state. This one question alone can have immense consequences for the company. A wrong answer could easily incur a full audit with an assessment of tax, penalties and interest. Businesses should also be aware of amnesty programs and voluntary disclosure agreements to limit backward-looking tax liabilities. On the other hand, a business may have unknowingly overpaid taxes, which can be recovered by working with the state. However, whether it be a nexus review for appropriate state registrations, submitting a voluntary disclosure agreement or request for refund, or any other tax matter, acting now and being proactive is always better than waiting until an issue arises and saves significant amounts of time and money.