Understanding your nexus footprint is an essential part of sales tax compliance. But there’s one type of nexus many businesses are completely unaware of: click-through nexus. In this post, we break down how it affects online sellers.
Nexus is the qualifying criteria for a seller to be required to collect and pay taxes on sales in a state. That has traditionally been defined by a physical presence and more recently by an economic presence.
But another, often-overlooked way of establishing nexus is a concept known as click-through nexus.
Click-through nexus enables states to tax a business that receives a significant amount of referrals from other businesses in the state. Even if they don’t have a substantial physical or economic presence there. This means that the sales you make through referral programs and affiliate links are taxable.
Click-through nexus predates economic nexus. But since South Dakota v Wayfair, the regulations behind click-through nexus have become unpredictable. States regularly discontinue or modify these laws as they continue to develop their understanding of economic nexus. As such, finding detailed information about each states’ click-through nexus legislation can be a challenge.
Click-through nexus falls under the broader category of affiliate nexus, which establishes sales tax responsibility in ways other than online referrals.
Any type of business can develop affiliate nexus. But click-through nexus is designed to specifically target ecommerce sellers. If you sell products online and receive even a small number of referrals, there’s a chance you have nexus.
Click-through nexus primarily targets the referrals you get from other businesses. But depending on the state, it’s also possible that affiliate links and partnerships with social media influencers can affect your click-through nexus.
The threshold for economic nexus in most states is between $100k and $250k. But the average threshold for click-through nexus is significantly lower. Most states, like New York and Georgia have thresholds between $10k and $50k. Connecticut has an even lower threshold of $2k. And Pennsylvania has no minimum revenue to achieve click-through nexus. That’s a shocking $0 threshold.
In other words, online sellers that use affiliate programs can develop click-through nexus very quickly. And because this type of nexus is less understood than economic or physical nexus, it’s possible you have significant sales tax liability you aren’t even aware of.
Like other forms of nexus, the only way to get compliant with click-through nexus is by knowing exactly what your liability is. To do that, you’ll need to look at every state you receive referrals from and determine if they exceed the nexus thresholds in that state.
From there, you’ll need to register to collect sales tax, pay any owed taxes and configure your ecommerce platform to start collecting taxes. But before you get registered, you should try to take advantage of sales tax refunds, marketplace facilitator laws and other exemptions that can reduce your total liability.
Click-through nexus is a perfect example of how ecommerce sellers can easily develop liability without even noticing it. Fortunately, every business can get compliant by following the right steps.