Clicks and Tax: The New Nexus 

Out of state doesn’t mean out of bounds for online businesses.

By Abraham Itani, CPA On Jul 29, 2015

A year ago, New Jersey became the 14th state in the nation to enact Click-Through Nexus legislation. Long before Google’s flagship cell phone ‘Nexus’, Nexus was a feared word that shook boardrooms and courts halls. 

According to Black’s Law Dictionary, the definition of Nexus is: “A point of casual intersection, link, relation, connection.” Through the years, the definition of Nexus has evolved to reflect the changes in how business is conducted and taxed with respect to inter and intrastate(s) sales and presence.

From the early definitions of the Interstate Income Act (PL 86-272) to the decisions of Wisconsin v. Wrigley, Quill v. North Dakota and Amazon v. New York court cases, taxing agencies and taxpayers have shaped the spectrum of business activities and defined Nexus for corporate income tax and for sales and use tax.

With the introduction of the Internet and e-commerce, a new information highway was ushered in that altered the way people buy and sell. Between the lack of physical presence, utilization of third-party shipping services, selling almost everything on the Internet and the Congressional protection highlighted by the Internet Tax Freedom Act, states saw their sales tax revenue stream dwindling.

In 2008, New York stepped up to the plate and threw the first ball towards Amazon, and it was hit. On appeal, the law was upheld by the New York Supreme Court affirming the lower court decision that Amazon was incorrect in questioning the constitutionality of the law. From then on, the flood gates opened. Currently, there are more than two dozen states that have the Click-Through Nexus law on their books, with some variances. Most states have a threshold of $5,000 or $10,000 of sales into the state via a conduit like Amazon or eBay, for example, before those businesses are subject to the Click-Through Nexus provision. The threshold amount is determined by looking back at the most recent four quarters, ending in the most recent. If an out-of-state business meets that amount in sales, it has triggered the Click-Through Nexus and exceeds the point of casual encounter with the state.

Most states allow a rebuttal in this presumption, which means a business can submit proof that it had the product or the advertisement running in the state, with no sales taking place, hence it did not engage in any solicitation in the state. This prevents triggering the Click-Through Nexus under the Commerce Clause of the US Constitution. Connecticut is the only state within the two dozen that does not allow rebutting.

Be it brick and mortar or e-commerce, the endless saga of Nexus and taxability will always hunt taxpayers and taxing agencies alike. It is up to the courts to define a new bright line test for the new forms of commerce.

About the Author: Abraham Itani, CPA, is the head of Itani Accounting and Tax Services LLC in Little Falls.

 

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