the end of nexus

7/30/2019 The End of Nexus

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THE END OF NEXUS

Nexus she said with a long pause as she settled intothe chair across from the private detective. I thought I

had a handle on it, but Im just not so sure anymore.

She was just another out-of-state business owner tall andremote, a real cool customer. She sold furniture out of a New York

storefront, and smaller housewares online. With her warehouse and

distribution center in Ohio, a traveling sales force out of Colorado,

and most of her customers on the West Coast, she was in a real sales

tax compliance bind. And she knew it.

He knew all about nexus that simple word with the troubled past.

How since the early 90s, out-of-state sellers, including multi-state

online retailers, only had to collect sales tax within a state if

they demonstrated a significant physical presence like a warehouse

or distribution center.

He knew it was a game of cat and mouse.

Out-of-state businesses trying to sidestep sales tax collection

obligations, and states trying to enforce a broader definition of

nexus to capture more sales tax revenue. How states had passed so-

called Amazon laws to require more online retailers to collect

sales tax, and that Amazon had finally agreed to start collecting

sales tax for the first time in states like New York and California

and Pennsylvania with other states in hot pursuit.

He also knew that businesses often get caught in the nexus

compliance net. They are the ones hung out to dry left holding

the bag when the auditor comes knocking and fines them for not

collecting sales tax correctly.

The questions just keep piling up, she said, almost despondently.

Do Amazon laws apply to me? And what about click-through and

affiliate nexus? I need to get to the bottom of this.

The detective gave her a long steely look before answering.

After all, hed seen it all before. Most states need more

money, see? he explained, And it looks like Internet

sales tax is the way theyre going to get it.

Pay attention and Ill give you the skinny, he said.

Heres how it works.

All fun aside,we know these are

serious issues. So, now, just the facts, maam.


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Amazon Laws

Since the early 90s, states havent required multi-state

online retailers to collect sales tax, unless they had asigni cant physical presence within that state. 1 Generallyspeaking, this signi cant physical presence includedthings like having a warehouse, store, o ce, sales orceor other demonstrably direct connections with a state.

Years o legal battles between multi-state onlineretailers like Amazon and states like Cali ornia hinged onwhether these retailers had enough o a connection totrigger a nexus obligation.

Meanwhile, many states enacted Amazon laws torequire more multi-state online retailers to collect salestax or the rst time. These laws expanded de nitionso nexus to include online-speci c relationships such asa liate and web advertising.

Multi-state online retailers, catalog retailers, andbusinesses that make signi cant sales over the phonemust also keep track o proposals at the ederal levelthat would allow all states to change nexus. The days otax- ree online shopping may be over, but the debates

rage on.

Amazon laws vary rom state to state and typicallycontain one or more o the ollowing elements. 2,3

1. A liate & Related Entity Nexus2. Click-Through Nexus3. Consumer Use Noti cation

By incorporating a liate and click-through language

within the statutes, Amazon laws efectively remove thetraditional nexus loopholewherein a company withouta signi cant physical presence is not obligated to collectsales tax.

A liate and Related Entity Nexus

One strategy states use to capture more sales taxrevenue is to de ne the kinds o a liate or subsidiaryrelationships that trigger nexus or out-o -statecompanies.

A liate nexus describes a type o relationship betweenan out-o -state seller and its in-state a liate that triggersa nexus obligation. An a liate is usually considered anentity within a state with activities directly bene ttingan out-o -state seller. Many state laws designate whatkinds o a liate relationships trigger sales tax collectionobligations on remote sellers, so tracking each state is agood idea.

Arkansas. * Out-o -state-retailers must collectsales tax i an a liate delivers installs, assembles,or per orms maintenance services or the sellerspurchasers within the state.

California. * Out-o -state retailers must collect salestax i they are related in any way to any entity locatedin the state. This includes entities that conductbusiness on the out-o -state sellers behal , as wellas entities that use a similar patent or the sametrademark. Cali ornia considers a liate nexus to applyeven i the related business operations are utterly

The bottom line is that statutes are changing at the state andfederal level to require more out-of-state retailers to collectsales tax. And its not just the online retailers or mail ordercompanies that will feel the pinch. Any businesses that sellacross state lines need to be paying close attention.


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California. Cali ornias click-through nexus law is

similar to New Yorks. A liated companies thatadvertise on websites hosted in Cali ornia mighttrigger nexus. In 2012, Cali ornia hired 100 new stateauditors, lawyers, and specialists to en orce its click-through nexus.

Connecticut. Online retailers that use a liates toadvertise within the state, that result in direct sales toan out-o -state ecommerce portal, are required tocollect sales tax rom customers.

Some states that are currently proposing broadernexus provisions that will likely go into e ect in2013:

Michigan. Currently considering an Amazon Law thatis likely to include click-through nexus language.

Utah. Recently narrowly approved a bill requiringonline retailers to collect and remit Utah sales tax, asbrick-and-mortar retailers do.

Vermont. Will institute click-through nexus a ter vemore states adopt similar legislation. 4

Consumer Use Notifcation

Some Amazon laws also include a consumer use taxnoti cation component, which requires vendors tonoti y consumers o their use tax obligations and/or toreport in-state sales to revenue authorities.

Consumer use tax is a tax paid by the consumer ontangible items, or which they were not required to paysales tax by out-o -state retailers. Technically speaking,there is no such thing as tax- ree online shopping.Its just that rather than pay sales tax at the time opurchase, consumers are required to submit consumer

use tax at a later date to the state. Theyre efectivelypaying tax on the use o the product.

Consumer use tax is intended to ofset sales tax revenuenot collected by multi-state businesses. Very ewconsumers ever actually pay consumer use tax, but thatis likely going to change soon.

While most states dont yet require online retailers to

separate rom the retail operation in another state.

Georgia. * Out-o -state-retailers that make morethan $50,000 in annual gross receipts rom a liatere errals must collect Georgia sales tax.

North Carolina. Out-o -state retailers that make morethan $10,000 in annual gross receipts rom a liatere errals must collect North Carolina sales tax.

Oklahoma. In 2010, the Oklahoma legislatureenacted laws to increase the amount o taxescollected on items purchased by Oklahoma residentsrom out-o -state Internet retailers.

Rhode Island. * Out-o -state retailers that make morethan $10,000 per year in gross receipts rom a liatere errals must collect Rhode Island sales tax.

Pennsylvania. Out-o -state nexus includesstoring property, having employees who travel toPennsylvania on business, or having a contractualrelationship with any entity located in Pennsylvaniawhose website has a link that encourages purchasersto place orders.

Texas. Battles between Texas and Amazonculminated an agreement with the Lone Star State,under which it began collecting sales tax in Texas onJuly 1, 2012.

Click-Through Nexus

Click-through nexus is another method states employ tocapture more sales tax revenue. It is speci cally aimed atmulti-state retailers that use web advertisingwhen thatin-state web advertisement clicks through to a remoteecommerce portal in order to complete a sale. Morestates have adopted a liate laws than click-through

laws, but many are now considering click-through nexuslegislation.

States with click-through nexus include:

New York. ** The rst state to establish click-through nexus. Under the New York legislation, webadvertisements that promote in-state sales triggernexus. The law was recently upheld by the New YorkCourt o Appeals.


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to collect sales tax rom remote sellers, i they sign

the Streamlined Sales Tax Agreement (SST) or i theyimplement a number o sales tax administrationsimpli cations. The Streamlined Sales Tax Agreement(SST), currently signed by 22 states, works to simpli y

and create uni ormity in sales tax administration rules.

States adhering to the Streamlined Sales Tax Agreementollow guidelines intended to ease the burden o salestax collection and remittance or multi-state businesses.These guidelines include:

Uni orm de nitions within tax laws. Rate simpli cation. Uni orm-sourcing rules. Simpli ed exemption administration.

I ederal legislation passes as proposed, SST stateswould have the authority to collect remote sales tax180 days a ter passage. Non-Streamline states wouldget that authority 6 months rom the day its enacted.Some states will be ready immediately, while it will takeseveral years or other states to comply with ederalrequirements. Retailers need to be ready, but shouldcare ully monitor which states have authority so theycan start collecting when required. 5

send out use tax reminders to customers who dont pay

sales tax, some do.

Oklahoma. Out-o -state retailers that do not collectsales and use taxand that made more than $10,000in gross receipts in Oklahoma the previous year, mustnoti y Oklahoma purchasers that use tax is due onnonexempt items.

Tennessee. For the second year in a row, Amazonhas sent a riendly email reminder to its customers inTennessee, reminding them to pay use tax on theirpurchases.

Kentucky. The legislature has enacted HB 440, abill that requires out-o -state retailers to provideKentucky customers with a use tax noti cation.

The marketplace airness bill currently be ore Congresswould expand state authority beyond click-through,a liate, or general Amazon laws. I it becomes law, theMarketplace Fairness Act o 2013 would allow states thatadhere to sales tax simpli cation rules to require multi-state online retailers to collect sales tax.

In other words, the nexus net is growing larger.

Marketplace Fairness 2013

According to many media outlets, states that let multi-state online retailers out o collecting sales tax romcustomers, give those retailers an advantage over brick-and-mortar stores. Cries o un airness have resulted in ahost o bills, notably this years Marketplace Fairness Acto 2013, which passed the Senate in early May, 2013 by avote o 69 to 27.

I the bill is eventually signed into law by the president,it would give states the authority to require remoteretailers, such as online sellers, to collect sales tax.The bill would apply only to remote retailers who haveannual remote sales in excess o $1 million (though thisthreshold is likely to change in the nal legislation).

The bill as written would give states the authority

Full member

Associate member - ex to full

Advisory - not conforming

Non-sales tax

Project states - not advisory

Non-participating

Figure 1: States by Membership Status (source: SST)


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Its the end of nexus as we know it, the

detective concluded, wrapping up the involved

tale. Whether its affiliate and click-

through nexus, or consumer use notification

requirements or even through passage of a

blanket federal law, its very likely that

multi-state sellers will soon have to collect

sales tax.

Those are the facts, maam. Its up to you

what you do with them. He paused, looking at

her over the top of his glasses. You may or

may not be ready for this. But Ill guarantee

you one thing: The state auditors will be on

this like white on rice.

CONCLUSION


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Founded in 2004, Avalara pioneered a service-based plat orm or sales tax and compliance automationand has been recognized or years as one o Americas astest growing technology frms. The companyscloud solutions help thousands o customers stay ocused on their core businesses by providingautomated end to end compliance services including sales and use tax calculation, exemption certifcatemanagement, fling and remittance, and a broad array o related services.

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the end of nexus

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