Calvetti Ferguson

Trends in Nexus: States Extend Their Reach for Sales & Use Tax Revenues

Over the last thirty years, technological strides have had impacts considered revolutionary on the economy and the way business is done. Consumers now have super computers in their smartphones, and can access virtually any product from anywhere in the world through the internet. Businesses can now sell products to every state without ever setting foot in them. Advertising goods and services is increasingly done via online cookies and hyperlinks when, not too long ago, distributing mail-order catalogs and placing salespeople in strategic locations were the keys for entering (and maintaining) markets. All this easier access and exposure to new markets sounds like a win-win for everyone, right? Wrong. State taxing authorities believe they are missing out of precious tax revenue, and they are making bold moves to tax more out-of-state businesses that have some form of “nexus.” By putting forth new nexus policies that they contend are better suited for today’s business environment, states are extending their reach deeper into the pockets of remote online sellers. If you sell, promote, or advertise online, then you must be wary.

The Origins of the Nexus Debate

Nexus, according to the Merriam-Webster dictionary, is a “connection, or link/causal link.” In the context of state taxation, “nexus” means the connection a taxpayer has to a state or locality that makes it subject to income or sales and use tax.

The two Constitutional clauses most often cited in cases dealing with nexus are the Commerce Clause and the Due Process Clause.

The Commerce Clause grants Congress the right to regulate commerce among the states. In Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 287 (1977) the Court stated that it will uphold a tax on interstate commerce as long as each of four critical tests are satisfied, the first of which is that the tax is applied to an activity with a “substantial nexus” with the taxing state.

The Court has stated that the Due Process Clause “requires some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax,…and that the income attributable to the State for tax purposes must be rationally related to values connected with the taxing State.”

For many years, it was assumed that Commerce Clause and Due Process Nexus were substantially the same, but that changed with the Court’s decision in Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court concluded that the Commerce Clause “substantial nexus’ requirement is not like the Due Process “minimum-contacts” requirement, a proxy for notice, but rather a means for limiting state burdens on interstate commerce by upholding the power of Congress to intervene when states unduly tax. Quill, besides standing for the proposition that the Due Process and Commerce Clause contain different standards, stated that “physical presence” is necessary for use tax collection to be required. It is not at all clear, however, whether physical presence is required only in the sales and use tax context or whether it also applies to the income tax arena. It should be noted that the majority of states that have dealt with this issue have held that the physical presence standard does not apply to income-based taxes.

Challenging Quill

Although Quill established a physical presence requirement under the Commerce Clause for collecting use taxes by out-of-state sellers, today states are seeking to overturn Quill, citing technological advances in e-commerce and “outdated” nexus requirements written long before Microsoft or Apple’s products went online. Several states including Alabama, Indiana, Maine, North Dakota, Ohio, Rhode Island, South Dakota, Tennessee, Vermont, Washington, and Wyoming have recently passed legislation that would expand their “jurisdiction to tax” to out-of-state sellers. Their goal is to expand their tax base from the traditional in-state brick and mortar taxpayers holding the bag, along with state governments.

States Take New Approaches

Economic Nexus:

Under economic nexus, physical presence is not required to trigger a tax filing obligation. A taxpayer has economic nexus when its sales or gross receipts exceed a prescribed amount. There is no broad standard for what that threshold should be, however. The U.S. Constitution’s Due Process Clause prohibits states from taxing a corporation unless there is a “minimum connection,” but it does not define what that minimum connection is. As a result, states can define economic presence on their own by setting minimum levels of sales or by pegging a sum of transactions which, if exceeded, trigger a filing obligation. For instance, on October 1, 2017, Maine enacted legislation requiring remote sellers to collect and remit sales and use tax on items sold electronically and services delivered in Maine if, 1) gross sales revenue exceeds $100,000, or 2) the seller makes 200 separate transactions in Maine in either the previous or current calendar year. Since 2015, a handful of states have passed similar legislation or written new policies instituting economic nexus. More states are expected to follow, with many already having economic nexus bills drafted and awaiting review. This trend is expected to continue unless and until the U.S. Supreme Court decides on the constitutionality of the economic nexus laws – which is exactly what some states want to happen. For example, in October South Dakota, the latest and greatest opponent of Quill, filed a petition with the U.S. Supreme Court to rescind the Quill decision after its lawsuits against popular online retailers Wayfair, Inc., Newegg, Inc., Overstock.Com, Inc., and Systemax, Inc. were struck down by the lower courts.

Click-Through Nexus:

Most states have enacted click-through nexus laws in order to obtain sales tax revenues from remote sellers. Under click-through nexus rules, an out-of-state retailer that pays an in-state business commissions for the privilege of having customers in that state directed to the retailer’s own website via a web link (on the in-state business’s website), is deemed to have nexus in that state. The majority of states that have click-through nexus laws provide a minimum threshold of sales needed to trigger the obligation. Some also provide a rebuttal presumption which gives the taxpayer the opportunity to prove that the affiliate does not engage in solicitation on behalf of the out-of-state seller. Click through nexus gained traction since 2008 when New York passed its “Amazon law.” The law’s aim is to tax large online retailers like Amazon and Overstock who designed affiliate programs that contracted with online businesses and individuals in New York to provide links to their websites in exchange for referral fees. Amazon challenged the constitutionality of the law, but the U.S. Supreme Court declined to hear the case after the New York appeals court upheld the law, stating that the affiliate relationships constitute “substantial nexus”.


The improved business models necessary to keep business profitable came to be because of technological advances. At the same time, these changes resurrected important questions about the applicability of the famous Quill decision of 1992. If state governments’ wishes comes true, either the U.S. Supreme Court in a case brought before it or Congress in its legislative capacity will support nexus laws aimed at widening the states’ taxable base. Taxpayers and tax representatives must stay tuned and be proactive in understanding, not only to learn about new tax laws and their effective dates, but also to understand how changes in their business models may subject them to tax under the “newer” taxation concepts such as economic and click-through nexus.

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