Nexus, also known as “sufficient presence” in a state, is a definition that continues to shift as business practices change. Historically, sales tax nexus has been fairly straightforward – states would only require a company to collect and remit sales taxes if the company had a physical presence within the state. Physical presence could be a retail location in the state, company-owned trucks delivering the product to the consumer in the state, or even inventory stored within the state. However, in recent years, we have seen states moving away from this physical presence requirement for sales tax nexus, and instead implementing what is known as “click-through nexus” legislation.
Click-through nexus is a way for jurisdictions to impose sales taxes on sales made by out-of-state e-commerce sellers to in-state consumers. When an out-of-state seller has a “click-through” advertising agreement with a company within the state, click-through nexus should be a concern for the seller. The easiest way to understand click-through nexus is with an example.
Retailer is an online seller with physical presence in Missouri but in no other state. Retailer lists its products on Ebay, effectively allowing Ebay to advertise its products to customers all over the country. When Retailer makes a sale through Ebay, it pays Ebay a small fee for the privilege of using its website to promote the sale. This generates an affiliate relationship between Retailer and Ebay. If Ebay has nexus in the state where the customer is located, this action has created click-through nexus, a form of “affiliate nexus,” in that state for Retailer. Retailer would be expected to collect and remit sales taxes to the state where the customer is located, and the customer would be liable for paying those taxes.
This situation is not the only way a company can generate click-through nexus. Another way is in the following scenario: if you engage with a company to promote your products on their website via a webpage banner or a redirect link, and the company has nexus in the state where the consumer is located, you would have click-through nexus with that state when a sale is completed.
These two examples above are very common ones. Paying a commission to a company whose website hosts or advertises one of your products effectively generates an affiliate relationship between you and the company. If that company has nexus in the state where the customer is located, click-through nexus has been generated.
New York was the first state to pass click-through nexus legislation, and it did so in 2008. In the eight years since, more than a third of the other states, including Missouri, have implemented similar legislation of their own and more are doing so each year. Each state’s laws differ slightly, but the main difference between the states’ legislation is the sale limit at which the e-commerce seller is presumed to have nexus. In Kansas, for example, $10,000 of click-through sales must be made in a 12-month period before click-through nexus is generated. Missouri also has the $10,000 sales threshold, but of course that applies to sellers outside the Show-Me State; Missouri-based sellers already have nexus in the state and are required to collect the state sales tax.
The end consumer is technically liable for remitting use taxes if the seller doesn’t charge sales tax. However, if your company is legally required to collect and remit sales taxes but fails to do so, it becomes your company’s responsibility to either collect those back taxes from your consumers or pay the tax directly yourselves.
Often, you might not have access to the information necessary to determine whether your affiliate has nexus in another state, making it impossible to determine if you have nexus in that state by affiliation. You should consult your tax advisor to discuss the next steps. You might be required to collect and remit sales tax, register to do business with the state, and register for a sales tax license from the appropriate jurisdiction.
If you would like to discuss the sales tax filing obligations your company might have as a result of click-through nexus, please contact your WK advisor at (573) 442-6171 or (573) 635-6196.