NEXUS is when a manufacturer has a physical presence in your state. A physical presence is not limited to an office or other physical building. Under the different state law, it also includes the presence of any agent or representative of the seller. Any type of physical presence in the state, including a vendor’s delivery and installation of their product on a repetitive basis, will prompt use tax collection responsibilities.
On March 10, 2015, a bipartisan group of senators introduced the Marketplace Fairness Act of 2015. Similar legislation – the Marketplace Fairness Act of 2013 – was previously introduced in February 2013 and passed by the Senate on May 6, 2013. That legislation failed to be enacted. If passed, the Marketplace Fairness Act of 2015 would authorize states meeting certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes. For more information on the previous legislation, visit Federal Government Introduces New Remote Seller Bill. (Marketplace Fairness Act of 2015, March 10, 2015)
In response to the Illinois Supreme Court decision in the Performance Marketing Association, Inc. v. Hamer case, Illinois has enacted revised click-through nexus legislation, effective January 1, 2015. Under the legislation, a retailer is presumed to have nexus in Illinois for use tax and service tax purposes if the retailer has a contract with an Illinois person under which the person, for a commission or other consideration based on the sale of property by the retailer, directly or indirectly refers potential customers to the retailer by providing a promotional code or other mechanism that allows the retailer to track purchases referred by the person. Examples of mechanisms that allow the retailer to track purchases include but are not limited to a link on the person’s website, promotional codes distributed through hand delivery or by mail, or promotional codes distributed through radio or other broadcast media. The click-through nexus provisions apply only if the cumulative gross receipts from sales of tangible personal property by the retailer to customers referred to the retailer by all persons in Illinois under such contracts exceed $10,000 during the preceding four quarterly periods. The presumption can be rebutted by submitting proof that the referrals or other activities pursued in Illinois by such persons did not create nexus pursuant to the U.S. Constitution during the preceding four quarterly periods. The affiliate nexus provisions which were passed in 2011 have continued to apply and have not been amended. (P.A. 98-1089 (S.B. 352), Laws 2014, effective January 1, 2015)
On October 18, 2013, the Illinois Supreme Court ruled 6-1 that the state's click-through nexus law is pre-empted by federal law. This decision upholds lower court rulings in favor of Performance Marketing Association. The Illinois Supreme Court specifically found that the click-through nexus law is pre-empted by the Internet Tax Freedom Act (Click here for more information on the Internet Tax Freedom Act). For previous news items on this topic, click here and here.
UPDATE: Due to law changes, new click-through provisions are now effective. For additional information, see Illinois Enacts Click-Through Nexus Legislation.
(Performance Marketing Ass’n, Inc. v. Hamer, Illinois Supreme Court, No. 114496, October 18, 2013)
The federal Marketplace Fairness Act of 2013 was introduced in the House of Representatives and the Senate on February 14, 2013. If passed, the bill would authorize states that meet certain requirements to require remote sellers that do not meet a "small seller exception" to collect their state and local sales and use taxes. Under the legislation, a state would be authorized to require a remote seller to collect sales and use taxes only if the remote seller has gross annual receipts in total remote sales in the United States of more than $1 million in the preceding calendar year.
Member states of the Streamlined Sales and Use Tax (SST) Agreement would be authorized to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to that member state pursuant to the provisions of the SST Agreement. The SST Agreement would have to include certain minimum simplification requirements. An SST member state could begin to exercise authority under the Act beginning 90 days after the state publishes notice of its intent to exercise such authority, but no earlier than the first day of the calendar quarter that is at least 90 days after the date of the enactment of the Act.
States that are not members of the SST Agreement would be authorized, notwithstanding any other provision of law, to require all sellers that do not qualify for the small seller exception to collect and remit sales and use taxes with respect to remote sales sourced to the state if the state implements certain minimum simplification requirements. The authority would begin no earlier than the first day of the calendar quarter that is at least six months after the state enacts legislation to exercise the authority granted by the Act.
To enforce collection requirements on remote sellers that do not meet the small seller exception, states that are not members of the SST Agreement would have to implement the minimum simplification requirements listed below. For SST member states to have collection authority, the requirements would have to be included in the SST Agreement.
- A single entity within the state responsible for all state and local sales and use tax administration, return processing, and audits for remote sales sourced to the state
- A single audit of a remote seller for all state and local taxing jurisdictions within that state
- A single sales and use tax return to be used by remote sellers to be filed with the single entity responsible for tax administration.
- Each state would have to provide a uniform sales and use tax base among the state and the local taxing jurisdictions within the state.
- Each state would have to source all interstate sales in compliance with the sourcing definition outlined below.
- Each state would have to provide information indicating the taxability of products and services along with any product and service exemptions from sales and use tax in the state and a rates and boundary database. States would have to provide free software for remote sellers that calculates sales and use taxes due on each transaction at the time the transaction is completed, that files sales and use tax returns, and that is updated to reflect state and local rate changes. States would also have to provide certification procedures for persons to be approved as certified software providers (CSPs). Such CSPs would have to be capable of calculating and filing sales and use taxes in all the states qualified under the Act.
- Each state would have to relieve remote sellers from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of an error or omission made by a CSP.
- Each state would have to relieve CSPs from liability to the state or locality for the incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of misleading or inaccurate information provided by a remote seller.
- Each state would have to relieve remote sellers and CSPs from liability to the state or locality for incorrect collection, remittance, or noncollection of sales and use taxes, including any penalties or interest, if the liability is the result of incorrect information or software provided by the state.
- Each state would have to provide remote sellers and CSPs with 90 days’ notice of a rate change by the state or any locality in the state and update the taxability and exemption information and rate and boundary databases, and would have to relieve any remote seller or CSP from liability for collecting sales and use taxes at the immediately preceding effective rate during the 90-day notice period if the required notice is not provided.
For non-SST member states, the location to which a remote sale is sourced would be the location where the item sold is received by the purchaser, based on the location indicated by instructions for delivery. When no delivery location is specified, the remote sale is sourced to the customer's address that is either known to the seller or, if not known, obtained by the seller during the transaction, including the address of the customer's payment instrument if no other address is available. If an address is unknown and a billing address cannot be obtained, the remote sale is sourced to the address of the seller from which the remote sale was made. SST member states would be required to comply with the sourcing provisions of the SST Agreement.
On March 22, 2013, the U.S. Senate voted 75-to-24 in favor of the concept of the Marketplace Fairness Act. The actual Marketplace Fairness Act was introduced in both chambers in February, but last week Senator Enzi, the sponsor of the Senate bill, offered an amendment to the 2014 Budget Resolution that would include insertion of the language of Marketplace Fairness in the budget. It was a largely symbolic tactic since the Budget Resolution itself will not become law, but by approving the amendment, the Senate has shown that there is broad, bipartisan support for the notion of requiring remote sellers to collect sales tax.
On May 6, 2013, the U.S. Senate passed the Marketplace Fairness Act with a 69-27 vote.
UPDATE: On September 18, 2013, Rep. Bob Goodlatte, the chairman of the House Judiciary Committee released a set of seven principles that he believes any internet sales tax bill should meet. The seven principles outlined by Goodlatte are tax relief, tech neutrality, no regulation without representation, simplicity, tax competition, states’ rights, and privacy rights. For more details on the principles, click here to see the House Judiciary Committee’s press release.
We are continuing to track the activities of these bills. We are also involved in planning efforts involving states and businesses regarding the potential implementation consequences of passage. Watch for updates in the Sales Tax Compass as well as through our Twitter account and LinkedIn updates.
The text of the bill passed by the Senate can be viewed here.
For an update on this news item, visit Senate Introduces Marketplace Fairness Act of 2015.
(H.R. 684 and S. 336, as introduced in Congress on February 14, 2013; S.743, as passed by the U.S. Senate on May 6, 2013)
The Illinois Department of Revenue ruled that an out-of-state retailer was maintaining a place of business in Illinois and was required to collect and remit use tax from its Illinois customers. A retailer is considered to maintain a place of business in Illinois if it has an agent or other representative operating in Illinois under its authority. To meet the requirement, the place of business or agent or other representative may be located in Illinois temporarily or permanently. The retailer had sales representatives that regularly appeared at trade shows in Illinois to take orders for the retailer’s products. The retailer claimed that the products were sold by independent contractors, not agents, and that the contractors worked on consignment but did not provide proof to back up the claim. Notices of tax liability issued by the department were valid because they were issued before the applicable statute of limitations had run. If a taxpayer fails to file a use tax return, as in this case, the applicable statute of limitations is six years. The department issued the notices of tax liability within six years of the date the retailer incurred the liabilities. The retailer did not show that the three-year statute of limitations, applicable if a use tax return is filed, applied. (Administrative Hearing Decision No. UT 13-01, Illinois Department of Revenue, January 24, 2013)