This is the third in a series of articles written for MICPA members examining the far-reaching impact of the Supreme Court’s decision in South Dakota v. Wayfair, Inc.
The Commerce Clause imposes limits on a state’s authority to impose a tax if that tax will burden interstate commerce. For a state to impose a sales tax, a business must have a “substantial nexus” with the taxing state, as established in Complete Auto Transit, Inc. v. Brady.
In the past, “substantial nexus” meant that a business must have a physical presence within a state. However, in its June 21, 2018 opinion, South Dakota v. Wayfair, Inc., the United States Supreme Court held that businesses without a physical presence in a particular state may be subject to sales tax as a result of making sales into that state.
Specifically, the Supreme Court held that South Dakota’s statute, which allowed for the state to impose sales tax on a business that accumulated at least $100,000 of revenue in the state or engaged in at least 200 transactions, satisfied the Complete Auto “substantial nexus” requirement, regardless of whether that business has any actual physical presence within the state. For the Court in Wayfair, a business that engages in at least 200 transactions or accumulates at least $100,000 of sales revenue within the state has clearly “availed itself of the substantial privilege of carrying on business in South Dakota.”
This, however, begs the question: what about states that require businesses to remit sales tax based on a “click-through nexus” statute? Do these statutes also satisfy the substantial nexus requirement of Complete Auto?
Many states have adopted statutes that establish sales tax jurisdiction for out-of-state sellers. These statutes may rely on economic nexus, affiliate nexus or a combination of both.
Economic nexus generally requires a set number of sales or a set amount of revenue within the state. Economic nexus does not require physical presence. Affiliate nexus generally requires that the out-of-state seller has “affiliated” partners working within the state that have sufficient nexus to require the retailer to collect and remit sales tax. A common type of affiliate nexus is click-through nexus.
A click-through nexus statute expands the definition of “nexus” to include any out-of-state seller who enters into an agreement with a resident of the state under which the resident directly or indirectly refers potential customers to the out-of-state seller (a “Referral Agreement”).
Functionally, a click-through nexus statute presumes a physical presence when an out-of-state retailer uses an in-state independent contractor, regardless of whether the contractor maintains an in-state market. Typically, for out-of-state retailers to reach this presumption, they must meet certain economic thresholds over designated time periods.
Under a click-through nexus statute then, out-of-state sellers that meet these thresholds are presumed to have nexus with the state. Out-of-state sellers may then rebut that presumption by providing evidence proving that they are not working under a Referral Agreement.
Currently, 22 states have enacted legislation that, in some way, allows for click-through nexus as a way for states to establish nexus with businesses without an actual physical presence in the state.[i] Those statutes generally take the following forms:
- States that have enacted click-through nexus that exempt businesses with less than $10,000 of annual sales revenue in the state under a referral agreement. These states include Arkansas, Illinois, Kansas, Louisiana, Maine, and Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Tennessee, Vermont, and Washington.
- States that have enacted click-through nexus that exempt businesses with less than $50,000 of annual sales revenue in the state under a referral agreement. These states include Colorado and Georgia.
- States that have enacted click-through nexus that exempt businesses with less than $10,000 of annual sales revenue in the state under a referral agreement while also exempting businesses that do not also meet other economic thresholds. For example, California exempts businesses with less than $1 million of annual national sales while Michigan exempts businesses that do not exceed annual sales of $50,000 within the state.
- States that have enacted click-through nexus that exempts business with lesser amounts of annual sales revenue. Connecticut has enacted click-through nexus that exempts businesses with less than $2,000 of annual sales revenue in the state under a referral agreement and Rhode Island has enacted click-through nexus that exempts businesses with less than $5,000 of annual sales revenue in the state under a referral agreement.
- One state, Pennsylvania, has enacted click-through nexus that has no threshold of annual sales revenue in the state under a referral agreement.
It is readily apparent that nearly all of these statutes feature lower economic thresholds than the South Dakota statute that the Supreme Court approved in Wayfair. If making $100,000 of sales in a state “clearly” results in a business purposefully availing itself to a state’s laws, does $10,000 of sales have the same result?
Some states, such as Tennessee and Vermont have enacted economic nexus statutes as well as click-through statutes.[ii] It remains to be seen whether other states will amend their click-through nexus standards in favor of the simpler economic thresholds that the Supreme Court approved in Wayfair, or whether those states will take other legislative action.
In Wayfair, the Court noted that statutes such as click-through nexus are likely to “embroil courts in technical and arbitrary disputes about what counts as physical presence.” The Court mentions that other principles in Commerce Clause doctrine have not yet been litigated and did not need to be resolved at the time of the Wayfair decision.
However, the Court did discuss how South Dakota’s economic nexus statute has several features designed to prevent discrimination and undue burdens on interstate commerce. These features include safe harbors for limited business, lack of retroactive sales tax and adoption of the Streamlined Sales and Use Tax Agreement. These factors may be relevant in determining whether or not click-through nexus counts as “substantial availment” and if click-through nexus would violate the Commerce Clause doctrine.
Either way, businesses will need to consider these statutes in light of the Wayfair Court’s groundbreaking ruling.