California residents most likely have noticed that California sales tax has been charged by online retailers such as Amazon.com recently. After much debate and negotiation with the State of California on whether the state’s sales tax collection rules applied to Amazon’s business model, Amazon agreed to collect sales tax from California customers beginning in September 2012. California, New York and Texas were among the first states to assert “click through” and affiliate nexus arguments against online retailers. “Click Through” nexus refers to the act of using an affiliate or third party in the state to refer potential customers to an online retailer’s website by posting a direct link on the website of the affiliate or third party for a fee. Affiliate nexus generally refers to a broad range of activities performed on behalf of a retailer in a state by a related party or third party designed to increase the sales market in the state of the retailer.
2013 has seen an aggressive push by approximately thirteen states that have proposed legislation similar to California, New York and Texas asserting sales tax collection responsibility on online retailers who engage in “click through” or affiliate activities. In addition to the “click through” provisions described above, these activities by an affiliate or third party could create a sales tax collection obligation for an online retailer:
- The use of an affiliate or third party’s warehouse or storage facility to deliver property to customers in the state.
- The use of a trademark or trade name in the state similar to the online retailer’s trademark or trade name.
- Delivery, installation or performance of maintenance services for the online retailer’s customers in the state.
- Making of retail sales on behalf of the online retailer in the state.
- Any other activity that is designed to significantly associated with the online retailer’s ability to maintain a market in the state.
Online retailers making sales into states and not collecting sales tax under the presumption that they do not have a physical presence in the state should assess the impact of the “click through’ and affiliate nexus provisions to determine what impact these enacted and proposed law changes have on their business. As states aggressively look for ways to generate tax revenue, online retailers are slowly losing one of their main competitive advantages. We will keep you updated on the progress of these proposed legislative initiatives.
Akash Sehgal leads the firm’s state and local tax practice with a focus on multi-state income and franchise tax, sales and use tax and credits and incentives. He has over fifteen years of state and local tax experience with two Big 4 firms in Los Angeles and Seattle.