Current trends in sales and use tax: click-through nexus and information-reporting requirements.

• Author: Kwiatek, Harlan J.

UNDER U.S. CONSTITUTIONAL PRINCIPLES, a taxing jurisdiction cannot require a retailer to collect and remit state and local sales and use taxes unless the retailer has a physical presence in the jurisdiction. (1) When a retailer has more than a de minimis physical presence in a state, it usually has nexus with the state and must collect and remit that state's sales and use taxes. Having a physical presence does not necessarily mean that the retailer operates a retail establishment in the state or has employees always present in the state. It simply means that the retailer, its employees, or its property are physically present in the taxing jurisdiction in furtherance of some business-related purpose, even if the in-state presence is infrequent and sporadic. If an agent, affiliate, or representative performs services in a state that allows the out-of-state retailer to establish and maintain a marketplace in the state, the physical presence of the agent, representative, or affiliate is often attributed to the retailer, thus creating nexus for the retailer. (2) This phenomenon is called affiliate or attributional nexus.

With the advent of e-commerce, cross-border sales have increased substantially. It is estimated that by 2012 over $12 billion in sales taxes will go uncollected annually on e-commerce sales because of the physical presence standard. (3) Affiliate nexus principles enable states to assert jurisdiction over out-of-state retailers that would not otherwise be required to collect and remit sales tax due to their lack of a physical presence. Not surprisingly, given the current budget shortfalls most states are facing, they have become increasingly aggressive in asserting affiliate nexus.

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New York: The Birthplace of Click-Through Nexus

In New York, a vendor of tangible personal property is required to collect sales tax. (4) The term "vendor" includes a person who solicits business "by employees, independent contractors, agents, or other representatives ... and by reason thereof makes sales to persons within the state of tangible personal property." (5)

In 2008, New York's tax law was amended to provide that a seller will be presumed to be soliciting business through an independent contractor or other representative if the seller enters into an agreement with a New York resident, directly or indirectly, through a link on an internet website or otherwise, to refer potential customers to the seller in exchange for consideration. The presumption applies only if the seller has cumulative gross receipts in excess of $10,000 from sales to New York customers resulting from such agreements during the preceding four quarterly periods. The seller can rebut the presumption by demonstrating that the in-state resident with whom it has entered into an agreement did not engage in any solicitation activities on behalf of the seller that would satisfy the nexus requirements of the U.S. Constitution during the time period in question. (6)

Amazon.com

The first retailer to challenge the constitutionality of these new provisions was Amazon.com (Amazon). (7) Amazon has a program whereby "associates" maintain links to Amazon's website on their own websites in return for a percentage of the sales proceeds generated through the link. Amazon has hundreds of thousands of associates, some of which have New York addresses. Amazon generates more than $10,000 per year in sales to New York customers through its associates program. Accordingly, the revised law appeared to create a sales and use tax collection responsibility for Amazon. Amazon filed a lawsuit alleging that the 2008 amendment was unconstitutional under the Commerce Clause--both facially and as applied to Amazon--as well as the Due Process and Equal Protection clauses. In response, the New York Department of Taxation &amp...