‘Remote seller’ battle just getting started

May 14, 2012

By Steve Hall, JD, LL.M. and Adam Garn CPA, JD

Collection of sales taxes by “remote sellers” is a priority this year for state legislators around the country. While a recent win in Colorado provides some relief for remote sellers, the battle between remote sellers and states is still heating up.

Why all the press?

A University of Tennessee study estimated in 2012 alone, states will lose out on the collection of about $12.6 billion in sales or use taxes ultimately due from purchasers for purchases made over the internet.1 Over the past several years, states across the nation have adopted legislation to attempt to collect lost revenue from sales where a remote seller has not collected the tax. Recent legislation typically includes provisions addressing one or more of the following issues:

  1. Click-through nexus 
  2. Notice requirements 
  3. Affiliate nexus 
  4. Using economic development policies to permit a delay in collection of sales tax by certain remote sellers 

This article is intended to provide a brief overview and update on some of the sales and use tax issues associated with remote sellers.

What is a remote seller?

A remote seller is a business that sells products to customers in a state using the Internet, mail order or telephone without having a physical presence in that state.2 A long-standing precedent set by the Supreme Court requires a seller to have a physical presence in a state before the state can require the seller to collect and remit sales tax to the taxing state.3 States are becoming more creative regarding the physical presence standard; for example, legislation has been enacted that essentially deems a physical presence to exist in certain circumstances.

Although controversial at the time, New York attempted to legislate the conclusion that a physical presence existed under certain circumstances. By adopting a “click-through” nexus law, New York identified a method for other states to attempt to require a remote seller to collect sales tax in the state where traditionally no physical presence existed.

“Click-through” nexus

The “click-through” nexus laws, generally, are targeted at a version of the following scenario: Remote Seller has no physical presence in State A, but desires to sell to purchasers who reside in State A. John Reef resides in State A and has a website that Reef has established. Reef is incentivized to find buyers for Remote Seller because Reef is paid a referral fee from Remote Seller whenever Reef’s link to Remote Seller’s website results in a sale by Remote Seller to a resident of State A. Under General Tax Amnesty, those who owed but had not paid certain taxes that were due and payable as of May 1, 2011, will pay the entire amount of the tax. In return, the State of Ohio will forgive all penalties and half the interest. Qualifying delinquent taxes do not include any taxes for which a bill, notice of assessment or audit has been issued.

States have passed laws that generally conclude that Reef’s presence in the state satisfies the required “physical presence” standard such that State A can constitutionally require a Remote Seller to collect sales tax in State A. The laws, however, must be read carefully, because some may contain opportunities for a Remote Seller to use creative structuring to avoid the application of the “click-through” laws.

  1. New York In 2008, the New York legislature realized the significant amount of sales and use tax that was uncollected from remote sellers lacking a physical presence in New York.4 To combat the issue, the New York legislature passed N.Y. Tax Law § 1101(b)(8)(vi), which was intended to force remote sellers to collect sales tax for purchases made by residents of New York where the remote seller had a referral agreement in place with a resident of New York.

    The law created a rebuttable presumption that a seller making sales of tangible personal property or services will be deemed to have a physical presence in New York (and therefore required to collect sales tax) if the seller enters into an agreement with a resident of New York where the resident, for a commission or other consideration, directly or indirectly refers potential customers to the seller, and the cumulative gross receipts from such sales by the seller to customers is in excess of $10,000 dollars for the previous year.5 The presumption is rebuttable if the seller is able to establish the only activity of its New York resident representatives on behalf of the seller is placing a link on the resident representatives’ website to the seller’s website.6 Further, a resident representative may not engage in any solicitation activity in the state targeted at potential New York customers or the protection is lost.7 To further rebut the presumption, a remote seller must prove that its resident representative did not engage in solicitation of sales in the state.

  2. Pennsylvania While states typically adopt legislation to address the click-through nexus issue, the Pennsylvania Department of Revenue merely issued Sales and Use Tax Bulletin 2011-01. This bulletin articulated the agency’s purported physical presence standards in Pennsylvania to determine when a remote seller will be required to collect sales tax within the state. In Bulletin 2011-01, the Pennsylvania DOR indicates that the DOR believes that a remote seller has sales tax collection nexus with Pennsylvania if the remote seller has a contractual relationship with an entity or individual physically located in Pennsylvania whose website has a link that encourages purchasers to place orders with the remote seller and the in-state entity or individual receives consideration for the contractual relationship with the remote seller.

  3. Illinois Illinois passed a law similar to New York’s law. In Illinois, a remote seller may be treated as having a physical presence in the state if the remote seller meets the following elements:
    1. Has a contract with a person located in Illinois
    2. Such person directly or indirectly refers potential customers to the retailer by a link on the person’s website for a commission or other consideration that is based upon the sale of tangible personal property by the remote seller
    3. The remote sellers’ sales through all such persons’ referrals exceed $10,000 dollars for the prior year.8

Notice requirements

In 2010, Colorado became the first state to require remote sellers who do not collect sales tax in the state to provide notice to a consumer that the purchase may be subject to sales or use tax and to provide names of customers to the state taxing authority. Specifically, a non-collecting seller who had more than $100,000 in total Colorado gross sales for the prior calendar year was required to provide notice to each consumer that:

  1. The remote seller does not collect sales tax in Colorado. 
  2. The purchase is not exempt from sales or use tax merely because it is made over the Internet. 
  3. Colorado requires a consumer to file a sales or use tax return reporting all Colorado purchases that were not taxed and pay tax on those purchases that were not taxed.9

If the notice requirement ended here, remote sellers could presumably have easily complied with the law by providing the notice on the invoice to the consumer. However, Colorado attempted to take the requirements further. Colorado also required the seller to provide:

  1. An annual notice to most Colorado purchasers summarizing the purchaser’s Colorado purchases or the preceding calendar year.
  2. The Colorado Department of Revenue a purchaser’s billing and shipping address and the total mount of purchases made during the year.10

The law was challenged, and on March 30, a Federal District Court issued a permanent injunction against the Colorado Department of Revenue prohibiting Colorado from imposing the notice requirements on out-of-state sellers.11 The District Court explained that the notice requirements violated the Commerce Clause of the United States Constitution by discriminating against interstate commerce and imposing an undue burden on interstate commerce.12 Although the permanent injunction may be appealed, it is likely Colorado may be required to enact a less burdensome notice requirement in order to satisfy the Commerce Clause jurisprudence.

Other states have also adopted notice requirements, including Oklahoma, South Dakota, Tennessee and Vermont. However, notice requirements in other states typically require the seller to merely provide an initial notice to a purchaser indicating that the transaction may be subject to sales and use tax.13 Although not yet challenged, the notice requirements in these states may be upheld because the requirements appear to be less burdensome.

Affiliate nexus

Many states have also adopted “affiliate nexus” statutes or proposed such type of statutes. Under a typical affiliate nexus statute, a state will consider the ownership structure and relationships between in-state and out-of-state companies for purposes of determining whether a physical presence exists within the state for the alleged “remote seller.” For example, Indiana recently introduced House Bill 1119.14 Under the proposed Indiana bill, a seller will be presumed to be engaged in business and subject to the collection of sales tax if the remote seller’s affiliate15 has a physical presence in the state and one of the following apply:

  1. The remote seller sells a line of products similar to the affiliate’s products. 
  2. The affiliate uses in-state employees or facilities to advertise, promote, or facilitate sales by the remote seller to customers.
  3. The affiliate uses trademarks, service marks or trade names in Indiana that are the same or substantially similar to those used by the remote seller.16

A remote seller may rebut the presumption by demonstrating the affiliate’s activities in the state are not significantly associated with the remote seller’s ability to establish or maintain a market in the state.17

Delays in collecting sales tax

States have also adopted legislation which can, in certain circumstances, permit a remote seller that would otherwise be treated as having “affiliate nexus” in the state to delay the collection and remittance of sales tax for several years with respect to sales by the remote seller.

Tennessee recently adopted legislation that concludes that, in certain circumstances, the activities of a remote seller’s affiliates (including the sale of tangible personal property for resale and other non-retail activities) are not considered in determining whether the remote seller has a physical presence in the state, assuming that the in-state affiliate meets the legislative requirements.18 To be eligible for the legislative “safe­harbor” conclusion that the remote seller is not required to collect sales tax on remote sales, the remote seller must have an in-state affiliate who:

  1. Places one or more distribution facilities in service, directly or through a third party after Jan. 1, 2011 and before Jan. 1, 2014. 
  2. Makes a capital investment in the state of at least $350 million after Jan. 1, 2011 and before Jan. 1, 2014. 
  3. Creates at least 3,500 qualified jobs after Jan. 1, 2011 and before Jan. 1, 2014. 
  4. Maintains at least 3,500 qualified jobs until Jan. 1, 2016.19 If a company has an in-state affiliate with these qualifying activities, the company may delay the collection of Tennessee sales tax until the earlier of Jan. 1, 2014 or the effective date of a law passed by the United
States Congress requiring remote sellers to collect tax.20 South Carolina was the initial state to develop this type of economic development policy exception to affiliate nexus. South Carolina required:
  1. A distribution facility to be placed in the state prior to Dec. 31, 2013. 
  2. A capital investment of $125 million before Dec. 31, 2013. 
  3. The creation of at least 2,000 full-time jobs with a comprehensive health plan prior to Dec. 31, 2013.21

Once a company meets these requirements, the company must maintain at least 1,500 of the full-time jobs with a comprehensive health plan until Jan. 1, 2016.22 If a company satisfies all of the requirements, including maintaining 1,500 full-time jobs, the remote seller is able to avoid the collection of sales tax in the state until 2016.23


The policy of attempting to require remote sellers to collect sales tax will likely continue over the next several years, as states continue to develop new laws and administrative guidance. Many of the laws that exist are subject to Constitutional challenges, and all remote sellers should consider the legalities of statutes as well as the risks involved in failing to collect sales tax on remote sales.

Steve Hall, JD, LL.M. in Tax, is a member in the Columbus Office of McDonald Hopkins. His practice focuses on state and local tax controversy, planning and policy.

Adam Garn, JD, Masters in Tax, CPA, is an associate in the Columbus Office of McDonald Hopkins. His practice focuses on state and local tax controversy, planning and policy.

1 Donald Bruce, William F. Fox, LeAnn Luna, State and Local Government Sales Tax Revenue Losses from Electronic Commerce, the University of Tennessee (2009).
According to Quill Corp. v. North Dakota, 504 U.S. 298 (1992), prior to being required to collect and remit sales tax, a company must have substantial nexus in a state. At a minimum to have substantial nexus, a company must have physical presence within the state. Recall, of course, that the purchaser is nonetheless still liable for the tax, even if the seller cannot be required to collect it.
In most states, the purchaser would still be subject to use tax and be required to remit the balance due to the applicable state department. However, individuals may not have knowledge or simply disregard their obligation to pay use tax if sales tax has not been collected on the transaction.
N.Y. Tax Law § 1101(b)(8)(vi).
New York State Department of Taxation and Finance, TSB-M-08(3,1)S (2008).
New York State Department of Taxation and Finance, TSB-M-08(3,1)S (2008).
35 Ill. Comp. Stat. §105/2.
Colo. Code Regs. §39-21-112.3.5.
Colo. Code Regs. §39-21-112.3.5.
Direct Marketing Association v. Huber, Civil No. 10-cv-01546-REB-CBS (D. Colo. March 30, 2012). However, note the permanent injunction issued against the Colorado Department of Revenue only addressed the notice requirements for remote sellers. An affiliate nexus statute was not challenged and must be considered for Colorado purposes.
12Direct Marketing Association v. Huber, Civil No. 10-cv-01546-REB-CBS (D. Colo. March 30, 2012).
13See, Okla. Stat.68§1406.1, S.D. Codified Laws § 10-63-2, Tenn. Code Ann. § 67-6­5__, and Vt. Stat. Ann. § 9783.
142012 IN 1119—DI 58.
15Under proposed 2012 IN 1119—DI 58, an affiliate is any member of the same controlled group of corporations as defined by IRC § 1563(a) or any other entity, without regard to form of organization, that bears the same ownership relationship to the remote seller as a corporation that is a member of the same controlled group of corporations as defined by IRC § 1563(a).
162012 IN 1119—DI 58
172012 IN 1119—DI 58
18Tenn. Code Ann. § 67-6-5__.
19Tenn. Code Ann. § 67-6-5__.
20Tenn. Code Ann. § 67-6-5__.
21S.C. Code Ann. § 12-36-2691.
22S.C. Code Ann. § 12-36-2691.
23S.C. Code Ann. § 12-36-2691.