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From Overstock to Overtaxed

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From Overstock to Overtaxed

The Dubious Legality of State Click-Through Nexus Taxes

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As online shopping has boomed in recent years, several states have enacted legislation aimed at collecting sales taxes on their residents’ purchases from out-of-state Internet retailers. Over a dozen states’ tax laws now require out-of-state sellers that use “affiliates”—in-state Internet advertising partners—to collect sales taxes whenever one of their residents makes a purchase by clicking a link on an affiliate’s website.

The push for “click-through” Internet sales taxes received a major boost in March 2013, when New York State’s high court upheld that state’s law in a split decision that the U.S. Supreme Court declined to review. States have since continued to enact similar tax laws, bolstered by the New York ruling. Most recently, in June 2014, New Jersey enacted its own click-through nexus tax modeled on the New York law.

However, the U.S. Supreme Court has held that the Constitution forbids states from taxing out-of-state businesses that lacks a “physical presence” in the taxing state. As this paper will show, affiliates do not meet this requirement. Therefore, Internet retailers and affiliate marketers who are burdened by these taxes should sue to enjoin their enforcement—and courts should invalidate state laws that tax out-of-state Internet retailers merely because they maintain in-state affiliates.