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Click Through Nexus – Michigan Latest to Enact Click-Through Nexus

Although nexus sounds like a terrible disease, it is just a fancy word meaning a connection or link. If a company has enough of a connection or link to a state, then the state can impose its power of the company. With nexus, a state can impose its laws on the business including sales tax laws. From a sales tax perspective it can require the business to charge, collect, and remit state taxes such as sales tax. In 1992, Quill v. North Dakota was decided, which announced that having a physical presence in a state was sufficient nexus to require a company to follow a state’s state and local tax laws. In other words if your business has an office, a warehouse, some inventory, or a person (employee and yes, an independent contractor) then it likely has nexus under the physical presence test in Quill.

For life in the 1990’s this was big news to businesses who engaged in innovative marketing. Businesses that were on the cutting edge that sent things like mail order catalogs and floppy disks to solicit customers were being harassed by states alleging they had nexus. Today, with the internet as the backbone to the modern economy, states are trying the same tactics by creating laws to get more companies under its rule.

In 2008, New York led the innovative charge for click through nexus legislation. Also known as the “Amazon law,” due to its perceived targeting of Amazon, New York created a law that if a New York residents website generated over a certain number of sales in a 12 month period for a particular company, then there was a presumption that such company had nexus in New York. Amazon and Overstock took exception with this law, but ultimately lost at New York’s highest court. Unfortunately, the Supreme Court of the United States declined to hear the case.

Being that the law was deemed to be constitutional in New York and the Supreme Court of the United States declined to hear the case, many other states said why not and enacted similar click through nexus legislation. Michigan was the most recent to join the fad of click through nexus legislation.

Specifically, on January 15, Michigan approved a law that created click-through nexus and affiliate nexus provisions for purposes of Michigan sales and use tax. Like many states, the click-through nexus provision creates a presumption of nexus for a seller if the seller enters into an agreement with one or more Michigan residents under which the residents, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by a link on an Internet Web site, in-person oral presentation or otherwise, to the seller. In regular English if a company generates sales from a Michigan resident’s click through website, then the company also has sales tax nexus. Similar to New York there is a threshold of $10,000 in a 12 month period.

The affiliate nexus provision creates nexus if an affiliate has nexus. An affiliate is a person that is part of the same controlled group of corporations as the seller; or (ii) any other person that, notwithstanding its form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations.

For the most part, Michigan’s new law looks similar to most states’ recent enactments. Why wouldn’t Michigan, or any other state, enact a similar law to capture as many companies as possible in its sales tax collection net. Michigan’s law differs slightly in its affiliate nexus legislation has no explicit requirement that the “person” in Michigan actually be a member of the same controlled group of corporations as the seller. Rather if a “person” engages in a similar enumerated activity of the seller then nexus can be found. Until the Supreme Court acts, then there is reason to expect many other states to follow suit in 2015.

About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone at 954-642-9390.

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