Clicking Through to Nexus? Sales Tax Nexus Lessons From 2013

By Lindsay McAfee, J.D., San Francisco

Editor: Mary Van Leuven, J.D., LL.M.

State & Local Taxes

For several years, states have been attempting to keep up with technological innovation and changing business models by enacting similarly creative sales tax nexus statutes. Currently, the law of the sales tax land is the standard set by the U.S. Supreme Court in Quill v. North Dakota , 504 U.S. 298 (1992) : For a state to impose its sales and use tax collection requirements on an out-of-state seller within the bounds of the Commerce Clause, that seller must have a substantial nexus with the state—which the Court reaffirmed is a "physical presence" that is more than a connection through the U.S. mail or a common carrier within the state.

The line in the sand was drawn—and states continued to inch toward it by redefining just whose physical presence prescribes nexus for whom. Changing nexus definitions affect sales and use tax compliance burdens for retailers and wholesalers alike. The broader the definition of sales tax nexus, the more likely it is that a business could have collection and remittance obligations through activities of its salespeople, agents, licensees, contractors, and other third parties acting on behalf of the business.

The latest inching toward the line has been with "click-through nexus" laws. These laws provide that an out-of-state seller is presumed to have nexus with the state if it pays a commission to an in-state person who, through an internet link or otherwise, refers customers to the out-of-state seller's website. The laws also require the referral to result in a sale and the remote seller's annual sales from those referrals to reach a certain dollar threshold. New York was the first state to enact such a law in 2008, and since then at least 12 states have followed suit. Many states have virtually identical statutory language and allow the nexus presumption to be rebutted by proving that the in-state persons do not actively solicit sales for the out-of-state retailer. However, in 2010, Illinois enacted a click-through nexus law with slightly different statutory wording—and without a rebuttable presumption. Given the already-tenuous constitutionality of the idea of click-through nexus, it is not surprising that constitutional challenges were raised almost immediately in both New York and Illinois.

In 2013, in the combined cases of LLC v. New York State Department of Taxation and Finance and, Inc. v. New York State Department of Taxation and Finance , 20 N.Y.3d 586 (2013), cert. denied, Nos. 13-259 and 13-252 (U.S. 12/2/13), the New York Court of Appeals—the state's highest court—held that the law violated neither the Commerce Clause nor the Due Process Clause of the U.S. Constitution. The court found that the click-through nexus law targeted physical solicitation activity by the in-state internet affiliates, therefore amounting to more than "mere advertising," which had been held not to constitute "substantial nexus." Additionally, the correlation between sales referrals and compensation, and the out-of-state seller's ability to rebut the nexus presumption, satisfied the Due Process Clause. Later in 2013, the U.S. Supreme Court declined to consider the Amazon and Overstock cases.

The Illinois click-through law went down a different path. In October 2013, the Illinois Supreme Court invalidated the state's click-through nexus statute in Performance Marketing Association v. Hamer , 375 Ill. Dec. 762 (2013) , a decision that sidestepped the Commerce Clause issue entirely and instead focused on federal preemption by the Internet Tax Freedom Act (ITFA), P.L. 105-277. ITFA is most famously known for prohibiting states from imposing "taxes on Internet access." But ITFA also prohibits states from imposing "multiple or discriminatory taxes on electronic commerce"—which includes both revenue-raising measures and provisions that oblige sellers to collect and remit any sales or use tax imposed on a buyer.

The Illinois Supreme Court reasoned that the click-through nexus statute, which applied to online performance marketing—or marketing and advertising programs in which merchants and affiliates are paid when an online sale is completed—but not to "offline" performance marketing, which are noninternet sales, constituted the imposition of a type of tax that was burdensome to electronic commerce. The argument, and decision, surprised many state tax spectators and has created more questions than the decision sought to answer.

Despite the confusion, Illinois's Performance Marketing Association decision could provide new grounds upon which to challenge states' click-through provisions. Given the U.S. Supreme Court's refusal to consider the Amazon/Overstock case, future constitutional challenges to similar click-through provisions are unlikely to be successful. However, the Illinois court gave up a chance to add to the national debate about the constitutionality of such laws when it declined to opine on the Commerce Clause challenges. Ruling on the statute's constitutionality would have given more context and breadth to arguments on all sides and perhaps given the U.S. Supreme Court a reason to accept another challenge to click-through laws.

Even in Illinois, avoiding the constitutional discussion begs the question: What happens when ITFA expires in November 2014 as planned and it is not extended? What happens if the Illinois Legislature amends the statute so that all performance marketers (not just those who conduct their business online) would be subject to the law? The statute would still cause as much heartburn for out-of-state retailers as it did before—but they would be back at square one, initiating challenges and working their way through the appeals system again.

The tenuous constitutional grounds w ere no obstacle to states seeking to enact new click-through laws in 2013. During 2013, four states enacted click-through provisions with substantially similar requirements, including similar sales thresholds and similar (but slightly different) rebuttable presumptions. And even with the dissonant news at the end of 2013 from New York, Illinois, and the U.S. Supreme Court, in 2014, legislatures in several states have introduced click-through nexus provisions, including Hawaii, Indiana, Michigan, South Carolina, and Tennessee. Sellers with performance-marketing business models would be wise to keep abreast of the creeping nexus standards for sales and use tax, as they can result in significant tax compliance requirements and administrative costs for taxpayers that may have no other operations in a state besides third-party activities they know little about.


Mary Van Leuven is senior manager, Washington National Tax, at KPMG LLP in Washington.

For additional information about these items, contact Ms. Van Leuven at 202-533-4750 or

Unless otherwise noted, contributors are members of or associated with KPMG LLP. The information contained in this item is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This item represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.

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