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she said with a long pause as she settled into the chair across from the private detective. I thought I had a handle on it, but Im just not so sure anymore. She was just another out-of-state business owner tall and remote, a real cool customer. She sold furniture out of a New York storefront, and smaller housewares online. With her warehouse and distribution center in Ohio, a traveling sales force out of Colorado, and most of her customers on the West Coast, she was in a real sales tax compliance bind. And she knew it. He knew all about nexus that simple word with the troubled past. How since the early 90s, out-of-state sellers, including multi-state online retailers, only had to collect sales tax within a state if they demonstrated a significant physical presence like a warehouse or distribution center. He knew it was a game of cat and mouse. Out-of-state businesses trying to sidestep sales tax collection obligations, and states trying to enforce a broader definition of nexus to capture more sales tax revenue. How states had passed socalled Amazon laws to require more online retailers to collect sales tax, and that Amazon had finally agreed to start collecting sales tax for the first time in states like New York and California and Pennsylvania with other states in hot pursuit. He also knew that businesses often get caught in the nexus compliance net. They are the ones hung out to dry left holding the bag when the auditor comes knocking and fines them for not collecting sales tax correctly. The questions just keep piling up, she said, almost despondently. Do Amazon laws apply to me? And what about click-through and affiliate nexus? I need to get to the bottom of this. The detective gave her a long steely look before answering. After all, hed seen it all before. Most states need more money, see? he explained, And it looks like Internet sales tax is the way theyre going to get it. Pay attention and Ill give you the skinny, he said. Heres how it works.

Nexus

All fun aside, we know these are serious issues. So, now, just the facts, maam.

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The bottom line is that statutes are changing at the state and federal level to require more out-of-state retailers to collect sales tax. And its not just the online retailers or mail order companies that will feel the pinch. Any businesses that sell across state lines need to be paying close attention.

Amazon Laws
Since the early 90s, states havent required multi-state online retailers to collect sales tax, unless they had a significant physical presence within that state.1 Generally speaking, this significant physical presence included things like having a warehouse, store, office, sales force or other demonstrably direct connections with a state. Years of legal battles between multi-state online retailers like Amazon and states like California hinged on whether these retailers had enough of a connection to trigger a nexus obligation. Meanwhile, many states enacted Amazon laws to require more multi-state online retailers to collect sales tax for the first time. These laws expanded definitions of nexus to include online-specific relationships such as affiliate and web advertising. Multi-state online retailers, catalog retailers, and businesses that make significant sales over the phone must also keep track of proposals at the federal level that would allow all states to change nexus. The days of tax-free online shopping may be over, but the debates rage on. Amazon laws vary from state to state and typically contain one or more of the following elements.2,3 1. Affiliate & Related Entity Nexus 2. Click-Through Nexus 3. Consumer Use Notification By incorporating affiliate and click-through language within the statutes, Amazon laws effectively remove the traditional nexus loopholewherein a company without a significant physical presence is not obligated to collect sales tax.

Affiliate and Related Entity Nexus

One strategy states use to capture more sales tax revenue is to define the kinds of affiliate or subsidiary relationships that trigger nexus for out-of-state companies. Affiliate nexus describes a type of relationship between an out-of-state seller and its in-state affiliate that triggers a nexus obligation. An affiliate is usually considered an entity within a state with activities directly benefitting an out-of-state seller. Many state laws designate what kinds of affiliate relationships trigger sales tax collection obligations on remote sellers, so tracking each state is a good idea. Arkansas.* Out-of-state-retailers must collect sales tax if an affiliate delivers installs, assembles, or performs maintenance services for the sellers purchasers within the state. California.* Out-of-state retailers must collect sales tax if they are related in any way to any entity located in the state. This includes entities that conduct business on the out-of-state sellers behalf, as well as entities that use a similar patent or the same trademark. California considers affiliate nexus to apply even if the related business operations are utterly

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separate from the retail operation in another state. Georgia.* Out-of-state-retailers that make more than $50,000 in annual gross receipts from affiliate referrals must collect Georgia sales tax. North Carolina. Out-of-state retailers that make more than $10,000 in annual gross receipts from affiliate referrals must collect North Carolina sales tax. Oklahoma. In 2010, the Oklahoma legislature enacted laws to increase the amount of taxes collected on items purchased by Oklahoma residents from out-of-state Internet retailers. Rhode Island.* Out-of-state retailers that make more than $10,000 per year in gross receipts from affiliate referrals must collect Rhode Island sales tax. Pennsylvania. Out-of-state nexus includes storing property, having employees who travel to Pennsylvania on business, or having a contractual relationship with any entity located in Pennsylvania whose website has a link that encourages purchasers to place orders. Texas. Battles between Texas and Amazon culminated an agreement with the Lone Star State, under which it began collecting sales tax in Texas on July 1, 2012.

California. Californias click-through nexus law is similar to New Yorks. Affiliated companies that advertise on websites hosted in California might trigger nexus. In 2012, California hired 100 new state auditors, lawyers, and specialists to enforce its clickthrough nexus. Connecticut. Online retailers that use affiliates to advertise within the state, that result in direct sales to an out-of-state ecommerce portal, are required to collect sales tax from customers.

Some states that are currently proposing broader nexus provisions that will likely go into effect in 2013:
Michigan. Currently considering an Amazon Law that is likely to include click-through nexus language. Utah. Recently narrowly approved a bill requiring online retailers to collect and remit Utah sales tax, as brick-and-mortar retailers do. Vermont. Will institute click-through nexus after five more states adopt similar legislation.4

Consumer Use Notification

Some Amazon laws also include a consumer use tax notification component, which requires vendors to notify consumers of their use tax obligations and/or to report in-state sales to revenue authorities. Consumer use tax is a tax paid by the consumer on tangible items, for which they were not required to pay sales tax by out-of-state retailers. Technically speaking, there is no such thing as tax-free online shopping. Its just that rather than pay sales tax at the time of purchase, consumers are required to submit consumer use tax at a later date to the state. Theyre effectively paying tax on the use of the product. Consumer use tax is intended to offset sales tax revenue not collected by multi-state businesses. Very few consumers ever actually pay consumer use tax, but that is likely going to change soon. While most states dont yet require online retailers to

Click-Through Nexus
Click-through nexus is another method states employ to capture more sales tax revenue. It is specifically aimed at multi-state retailers that use web advertisingwhen that in-state web advertisement clicks through to a remote ecommerce portal in order to complete a sale. More states have adopted affiliate laws than click-through laws, but many are now considering click-through nexus legislation.

States with click-through nexus include:

New York.** The first state to establish clickthrough nexus. Under the New York legislation, web advertisements that promote in-state sales trigger nexus. The law was recently upheld by the New York Court of Appeals.

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send out use tax reminders to customers who dont pay sales tax, some do. Oklahoma. Out-of-state retailers that do not collect sales and use taxand that made more than $10,000 in gross receipts in Oklahoma the previous year, must notify Oklahoma purchasers that use tax is due on nonexempt items. Tennessee. For the second year in a row, Amazon has sent a friendly email reminderto its customers in Tennessee, reminding them to pay use tax on their purchases. Kentucky. Thelegislature has enactedHB 440, a bill that requires out-of-state retailers to provide Kentucky customers with ause taxnotification. The marketplace fairness bill currently before Congress would expand state authority beyond click-through, affiliate, or general Amazon laws. If it becomes law, the Marketplace Fairness Act of 2013 would allow states that adhere to sales tax simplification rules to require multistate online retailers to collect sales tax. In other words, the nexus net is growing larger.

to collect sales tax from remote sellers, if they sign the Streamlined Sales Tax Agreement (SST) or if they implement a number of sales tax administration simplifications. The Streamlined Sales Tax Agreement (SST), currently signed by 22 states, works to simplify

Full member Associate member - ex to full Advisory - not conforming

Non-sales tax Project states - not advisory Non-participating

Figure 1: States by Membership Status (source: SST)

and create uniformity in sales tax administration rules. States adhering to the Streamlined Sales Tax Agreement follow guidelines intended to ease the burden of sales tax collection and remittance for multi-state businesses. These guidelines include: Uniform definitions within tax laws. Rate simplification. Uniform-sourcing rules. Simplified exemption administration. If federal legislation passes as proposed, SST states would have the authority to collect remote sales tax 180 days after passage. Non-Streamline states would get that authority 6 months from the day its enacted. Some states will be ready immediately, while it will take several years for other states to comply with federal requirements. Retailers need to be ready, but should carefully monitor which states have authority so they can start collecting when required.5

Marketplace Fairness 2013

According to many media outlets, states that let multistate online retailers out of collecting sales tax from customers, give those retailers an advantage over brickand-mortar stores. Cries of unfairness have resulted in a host of bills, notably this years Marketplace Fairness Act of 2013, which passed the Senate in early May, 2013 by a vote of 69 to 27. If the bill is eventually signed into law by the president, it would give states the authority to require remote retailers, such as online sellers, to collect sales tax. The bill would apply only to remote retailers who have annual remote sales in excess of $1 million (though this threshold is likely to change in the final legislation). The bill as written would give states the authority

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CONCLUSION
Its the end of nexus as we know it, the detective concluded, wrapping up the involved tale. Whether its affiliate and clickthrough nexus, or consumer use notification requirements or even through passage of a blanket federal law, its very likely that multi-state sellers will soon have to collect sales tax. Those are the facts, maam. Its up to you what you do with them. He paused, looking at her over the top of his glasses. You may or may not be ready for this. But Ill guarantee you one thing: The state auditors will be on this like white on rice.

1 US Supreme Court cases like Miller Bros. v. Maryland, 347 U.S. 340, 344-45 (1954), or National Bellas Hess, Inc. v. Department of Revenue, 386 U.S. 753, 756-57 (1967), or the most significant sales and use tax nexus case to date, Quill Corp. v. North Dakota, 504 U.S. 298 (1992). With sales tax, the question of nexus always comes down to whether there is physical presence. 2 3 *

Avalara blog, How Amazon Tax is Affecting Your Business These states also have click-through nexus. These states also have affiliate nexus. As of February 2013.

Weekly Tax Advisor, A Game of Cat and Mouse

** 4 5

Read more about: The Marketplace Fairness Act

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For more information, visit us at www.avalara.com or call 1-877-780-4848

Founded in 2004, Avalara pioneered a service-based platform for sales tax and compliance automation and has been recognized for years as one of Americas fastest growing technology firms. The companys cloud solutions help thousands of customers stay focused on their core businesses by providing automated end to end compliance services including sales and use tax calculation, exemption certificate management, filing and remittance, and a broad array of related services.

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