Industry update: Supreme Court rules on nexus issue

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Online shopping guarantees consumers ultimate convenience, a broader selection or more competitive pricing options. But it is consumers’ ability to take advantage of tax-free shopping online that has caught the attention of local and states taxing authorities.

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In a 5-4 decision last Thursday, the Supreme Court of the United States vacated the 1992 Quill Corp v. North Dakota decision, essentially reversing the ruling that required a physical presence to establish nexus, which meant out-of-states businesses were not required to collect sales tax in that state. Thursday’s ruling from the case South Dakota v. Wayfair, Inc., which compels businesses to collect tax in locations where they do not have a physical presence, can be considered a win for brick-and mortar businesses who felt disadvantaged by competing with online entities that avoided charging sales tax. It is also considered a win for states that have missed out on up to $33 billion every year in lost tax revenue. 

This decision will enforce the “economic nexus” legislation now existing in nearly 30 states, which required out-of-state sellers to collect and remit sales tax based on how much revenue was being generated by consumers in that state, among other factors. 

How does this affect affiliate relationships?

Now that a physical presence – which included having affiliates located in a particular state -  is no longer considered the primary reason for taxation, “affiliate nexus” should no longer be an issue. Throughout the past decade, certain retailers would prohibit partnerships with affiliates in a particular state to avoid triggering nexus. With the new ruling in place, retailers in theory should be more open to working with affiliates in more states, or perhaps some that they historically avoided.  

More states are now expected to pass economic nexus legislation upon returning to session this fall. All advertisers will now be expected to collect and remit sales tax for sales in any state with economic nexus legislation in place. The threshold of sales required to collect taxes will vary based on each state’s requirements.

For more information, visit the Performance Marketing Association (PMA).

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