click through nexus rule
The Supreme Court has recently bolstered state efforts requiring remote vendors to collect sales tax. In a recent ruling, the court declined to review a case challenging New York State’s click through nexus rule. The New York law finds that a remote or Internet seller establishes physical presence when in-state retailers refer clients to the site through advertisements. This technique is called “click-through” or attributional nexus. Nexus is established because the in-state vendor’s presence is attributed to the remote vendor. For example, if a New York based company advertises a product and allows completion of the purchase via a link with Amazon, Amazon must collect sales tax on the purchase.
The denial of certiorari is at odds with previous opinions from the Supreme Court. Historically, the court has found that states lack the power to require vendors to collect tax unless the vendor has a “physical presence” in the state. Moreover, the court has narrowly interpreted the “physical presence” requirement, usually requiring a building or in-state personnel. The court’s interpretation was strict enough that Illinois the Supreme Court found that “click-through” nexus was unconstitutional. The Illinois court’s ruling focused on the lack of physical connection through a web link.
As a result, the court’s refusal to overturn New York’s law creates the opportunity for states to expand their collection efforts over at least some remote vendors. The New York win aids states in collecting tax from remote Internet vendors at a time when Internet sales are at an all time high. Without comprehensive legislation detailing the limits of state taxing powers, vendors may be subject to unpredicted tax collection requirements. Retailers may face increased tax risks as states increase enforcement efforts related to attributional nexus.
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