[Note: This post by attorney Brian Mahany originally appeared in the National Law Review. It is repreinted here with permission from the the NLR.]
Nexus means “connection, tie or link.” Since the 1992 U.S. Supreme Court decision in Quill v. North Dakota, nexus has been a very hot topic in sales tax law. The Quill case says that the mere physical presence in a state is enough to allow a state to impose its sales tax laws.
Since Quill was decided, there have been a number of court cases examining what constitutes “presence” and the limits of the law. Some states passed very specific laws after Quill while others simply said that their sales tax authority was as broad as whatever the Constitution might allow.
Having a warehouse, an employee, a contractor or even inventory is enough to create sales tax nexus. Some states ruled that just having a firm retreat or having an employee attend a convention was enough “presence” to confer jurisdiction. Many of these states backed down after realizing their convention and tourism business would suffer.
By the 1990’s our economy had moved well beyond a traditional “bricks and sticks”, Main Street retail commerce model. States wanted to tax mail order commerce and Quill and its progeny helped.
Obviously since 1992, we have now moved into yet another phase of our retail economy, e-Commerce. Enter Amazon and the New York State Court of Appeals (the state’s highest court).
In 2008, New York passed a “click through” nexus law. The law simply stated that if a company generates a certain number of sales with N.Y. within a year, the company is presumed to have nexus. (The law is often called the Amazon law since it targets online businesses such as amazon.com).
Amazon and others challenged the law but lost at the N.Y. Court of Appeals. The U.S. Supreme Court declined to hear the case leaving open the ability of other states to pursue similar click through nexus laws.
Michigan is the newest state to join the ranks, having approved its new nexus law on January 15th. Under the Michigan legislation, if a business generates sales or revenues from a Michigan resident’s clicking through website, that business has sales tax nexus meaning they are responsible for collecting and remitting sales tax for all sales to Michigan. The legislation exempts casual click through sales if the total annual revenues is less than $10,000.
Like most states, the Michigan statute also includes an affiliate nexus provision meaning that if one entity has nexus then all affiliates also have nexus.
States lose billions of dollars in sales tax revenues each year because of e-Commerce. Unless Congress elects to pass national sales tax legislation or attempts to preempt the state’s from further Internet nexus legislation, businesses are stuck with a mish mash of nexus legislation from each of the 50 states. The consistent theme, however, is that most states are doing almost everything in their power to squeeze every last penny from cross border sales.
As Maine’s former state revenue commissioner, we have closely followed sales tax nexus legislation for many years. Often there is quite a tug between Main Street retailers and big box stores (who want a level playing field) versus the e-Commerce vendors.
Don’t look for any inconsistency in the immediate future.