Trends in sales and use tax for remote sellers.

• Author: Yesnowitz, Jamie C.

Click-through or affiliate nexus legislation has become a popular way for states to require certain remote sellers (i.e., internet vendors) to collect sales or use tax on their sales to in-state residents. Click-through nexus legislation typically establishes nexus or a presumption of nexus where a remote seller pays a commission to an in-state resident for referrals that result in a certain threshold of sales to in-state customers. Affiliate nexus legislation typically establishes nexus or a presumption of it where the remote seller's in-state affiliate performs certain activities that benefit the remote seller

The rationale behind such legislation is that internet vendors should not have a competitive advantage over brick-and-mortar stores. While the customer is legally obligated to self-assess the appropriate use tax due on an internet transaction, in reality, the customer is often unaware of this obligation, and its enforcement is inconsistent and relatively rare. State tax authorities find it impractical to devote their personnel to individual audits, and attempts to audit individual consumers' use tax compliance face privacy concerns. Therefore, states are concerned, especially in light of their budget crises, that they are not receiving the proper amount of tax due on sales to their residents.

Since 2008, following New York's lead, the following states have enacted or implemented click-through nexus rules: Arkansas, California, Connecticut, Georgia, Illinois, North Carolina, Pennsylvania, Rhode Island, and Vermont. For Vermont, the legislation goes into effect if and when 15 or more other states have enacted similar legislation.

The states that have enacted affiliate nexus legislation or implemented affiliate nexus rules are Arkansas, California, Colorado, Georgia, Illinois, New York, Oklahoma, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, and Virginia (effective Sept. 1, 2013).

While the trend to enact click-through or affiliate nexus legislation continues, it is unclear whether remote seller collection requirements violate the Due Process and Commerce Clauses of the U.S. Constitution. Based on long-standing constitutional law, a state cannot overextend its reach by taxing sellers that have very little or no connection to the state aside from making sales to residents there. Moreover, in Colorado and Illinois, courts have found constitutional violations in remote seller nexus legislation (Direct Marketing As.s'n v. Huber, No. 10-cv-01546-REB-CBS (D. Colo. 3/30/12); Performance Marketing Ass'n, Inc. v. Hamer, No. 2011 CH 26333 (Ill. Cir. Ct. Cook Cty. 5/7/12)).

But the fact remains that constitutional law and legal precedent do not directly address the changing retail landscape. Furthermore, the U.S. Supreme Court has held that only Congress has authority to regulate interstate commerce under the Commerce Clause (Gibbons v. Ogden, 22 U.S. (9 Wheat.) 1 (1824)). As a result, retailers and states alike are awaiting congressional action to settle the issue.

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