What Triggers Click-Through Nexus for Online Sellers
- February 19, 2016 | Tim Parker
Online retailers beware. States are strapped for cash and they’ll go after any revenue source they can find. That includes wanting a piece of any sale you, and possibly your affiliates, make online. It’s called click-through nexus and it has everybody--retailers, customers, state and federal lawmakers, and even the Supreme Court--trying to make sense of how to collect taxes on sales that sometimes feel very indirect.
What is Click-Through Nexus?
We already have a great article on click-through nexus, but here’s a quick overview. Let’s say you sell your world-famous key lime pies direct from Key West, Florida, on your website, heavenlypies.com. You sell them all over the country--because they’re that good. You also have a network of food bloggers who sell your pies through an affiliate program where they get a portion of your sales. These affiliates are where things get, as they say in the pie business, sticky.
The landmark 1992 case Quill vs. North Dakota found that a seller must have a physical presence in the state to establish nexus. All states have laws that require online retailers to pay taxes if they have offices in the state or goods stored in a warehouse. But less than half have passed laws establishing nexus for a business that has affiliate marketers operating in the state. That’s click-through nexus.
To be clear, even if you have no physical presence in click-through nexus states, you have established nexus if you have affiliates operating there. In the case of some online retailers, their affiliate networks may be so vast that they don’t know where their affiliates reside. Unfortunately, that doesn’t relieve you from liability.
If you do fall under click-through nexus laws, things get even more complicated. Not only do you have to navigate the varying standards of what establishes nexus, you have to know which states recognize click-through nexus and what each state requires. You can see a current list of those states here.
A Confusing Hodge-Podge of Laws
Currently 19 states have click-through nexus laws, and the particulars of those laws are all over the map (so to speak). In California, if you have $10,000 of affiliate revenue or $1 million in total sales in a 12-month period, you have to pay state income taxes. In Rhode Island, if you have $5,000 in sales over the past consecutive four quarters, you’re on the hook for taxes. And in Pennsylvania, there is no income threshold. New York, one of the main battleground states for click-through nexus, has a $10,000 threshold.
The situation is so confusing and even Amazon, the largest online retailer in the United States, can’t figure it out. Amazon has famously stopped allowing affiliates in some states because of the complicated nature of click-through nexus laws. If you live in Arkansas, Colorado, Maine, Missouri, Rhode Island, or Vermont, you aren’t allowed to participate, according to Amazon’s affiliate agreement.
There’s no doubt that the laws are complicated, cumbersome, and time-consuming. Many have pressed federal lawmakers to establish a standard, but with collection of state sales taxes being subject to individual state law, that’s not likely to happen any time soon. For now, keep an eye on our state-by-state tax guides for help navigating the complicated landscape of click-through nexus.