Sales Tax Slice: Death by a Thousand Cuts to a Tax-Free Internet?

If your business uses an “affiliate” based in another state to garner online sales, must you collect sales or use tax there?

Some states use “affiliate” or “click-through” nexus laws to require certain remote retailers to collect tax. The effect of having it requires out-of-state retailers who receive a threshold amount of referrals from in-state websites to collect sales tax.

New York’s “Amazon law” blazed the trail for requiring this kind of sales tax collection a few years ago. The state presumes out-of-state sellers that paid New York residents for sales made through the New York “associates’” websites have nexus with New York and can be taxed. The law recently passed constitutional muster in the state’s high court, based on the idea that solicitation of business through in-state marketers creates an in-state physical presence when it produces revenue for the retailer. Still, states are left to their own devices for now to figure out what online activities do and do not establish nexus.

States following New York’s lead include Connecticut and Georgia, which have specifically passed laws establishing affiliate nexus for remote online vendors who exceed an annual threshold of annual sales attributable to in-state associates. Meanwhile, other states believe affiliate nexus provisions are already included in their tax scheme even though they have not passed laws specifically on point.

Bloomberg BNA’s “2013 Survey of State Tax Departments,” asks each of the states if they enforce an affiliate nexus policy. Some states, like Arkansas and 20 others, say they would find nexus based on a company’s commission-for-sales agreement with an online affiliate when the company’s sales through the affiliate to in-state residents exceed $10,000. Eighteen states say they would find nexus in similar situations where the company’s sales through the affiliate to in-state residents was less than $10,000.

But that leaves two problems. Brick-and-mortar retailers must always collect sales tax. Meanwhile, online retailers face an inconsistent patchwork of laws among states. Congress has taken up the issue in the Marketplace Fairness Act (S. 743), which has a strong chance of passing the U.S. Senate this week.

The bill would allow states to take certain steps to simplify their sales tax laws to require remote retailers to collect tax, with a safe harbor for small sellers whose gross receipts total $1 million or less. However, the bill explicitly states that it would have no effect on nexus creation between a person and a state.

 By Rebecca Helmes