Sales Tax Nexus Guidelines Specific to California
The following dates are specific to California:
- Economic Nexus as of April 1, 2020: Yes
- Economic Nexus Enforcement Date: April 1, 2019
- Sales Threshold: $500,000
- Transactions Threshold: None
- Measurement Period: Previous or Current Calendar Year
- Treatment of Sales for Resale, Exempt Sales for Threshold: Both
- Resale and Exempt Sales Included: Yes
- Marketplace Tax Enforcement Date: October 1, 2019
- Sales on a Collecting Marketplace Included in Threshold: Yes
Affiliate nexus is when an out-of-state business has an “affiliate” located in-state. Thus, the out-of-state business would have enough of a significant presence with the in-state business that the in-state business would be required to collect and remit sales tax for the out-of-state business.
Confusing? Keep reading.
Click-through nexus is a type of affiliate nexus. If an in-state person directly or indirectly refers a potential customer to the retailer for a commission or other consideration, the retailer is treated as having nexus in that state.
For example, if a website was based in a state and at that time had some type of ad that when a consumer clicked that ad/website, and that consumer finished that purchase through that link, you would get commission from (e.g., Amazon) and you would establish a click-through nexus.
Here is a little bit of background on affiliate nexus. In 1992, in the case of North Dakota v. Quill, the U.S. Supreme Court ruled that Quill Corp., an Illinois-based office supply company, did not have to pay sales tax because it was deemed to not have a presence in North Dakota.
However, in 2018, this decision was overruled by the Supreme Court in the South Dakota v. Wayfair, where the State of South Dakota brought suit against Wayfair and three other major online sellers, asserting that they should be collecting and paying sales tax. This ground-breaking decision (Wayfair) opened the door for states to establish their own thresholds for nexus.
The waters get further muddied when dealing with remote sales. States commonly define sale for purposes of its thresholds: tangible personal property, services, leases, licenses, electronically delivered software, SaaS (Software as a Service), and digital products.
Some states explicitly address whether a remote seller’s sales on a “collecting marketplace” are included in determining whether the remote seller has economic nexus, whereas in other states, the statute is less clear and/or state guidance is vague.
As some examples:
- Kentucky’s economic nexus thresholds apply to “Any remote retailer selling tangible personal property or digital property delivered or transferred electronically to a purchaser in this state, including retail sales facilitated by a marketplace provider on behalf of the remote.” See Ky. Rev. Stat. § 139.340.
- Nebraska’s $100,000 threshold is based on total retail sales (all sales other than resale, sublease, or subrent) in the prior calendar year or current calendar year, including sales made through a Multivendor Marketplace Platform (MMP).
- In Oklahoma, sales by a remote seller made through a marketplace forum or a referrer's platform where the tax is collected and remitted by the marketplace facilitator or referrer shall not be included in determining whether the remote seller has met the threshold amount provided in this subsection.
Many states address this in the marketplace tax provisions (not in the remote seller provisions), which may have been enacted/adopted after the remote seller economic nexus provision was enacted.
Cookies and Other Marketing Activities
As if it could not get more complicated, some states are factoring “cookies” into the threshold for nexus. We’re talking internet cookies, not your grandmother’s baked goods. Cookies are bits of code stored on a site that recognize visitors, track usage, and authenticate.
Cookie nexus is the assertion of “physical presence” due to “cookies” being placed on a prospective or current customer’s computer. As an example, when a customer accepts cookies from a merchant’s website, a merchant is creating a physical presence for nexus purposes. In Massachusetts, if the number of cookies and sales exceed the transaction threshold, then that constitutes nexus. However, Massachusetts “cookie law” is presently undergoing legal challenges.
So When Does Nexus Exist?
The inquiry as to whether a nexus exists is highly complicated, especially since there is no consistency across jurisdictions.
Every state has different standards. However, do not be lulled into a sense of false security by looking at the rules once. The definition of what constitutes nexus is proving to be very fluid. Two examples are Ohio and Oklahoma, which changed their nexus within one year.
With that said, keep the following in mind:
- All but two states have enacted/adopted economic nexus for sales tax.
- Measurement period: Although most states use a prior or current calendar year, others use the prior 12 months or previous four quarters.
- State laws are changing and adapting to legal challenges.
- Always review statutes, regulations, and administrative guidance.
- Use charts as a tool to guide you when determining economic nexus.