Expanding Sales Tax Nexus Rules: Tennessee Says “Yes” and Louisiana Says “No”

States have taken an increasingly expansive view of what constitutes physical presence, looking beyond the actual physical presence of the taxpayer to the physical presence of others who may be acting on the taxpayer’s behalf.

By Jess Johannesen, SALT senior associate

When is your company required to collect and remit a state’s sales/use tax? This question has become increasingly more difficult to answer over the years as states have constantly redefined the concept of “nexus.” Nexus refers to the degree of contact between a business and a state that allows a state to impose taxes on that business; for sales tax purposes, there must be a physical presence. States have taken an increasingly expansive view of what constitutes physical presence, looking beyond the actual physical presence of the taxpayer to the physical presence of others who may be acting on behalf of the taxpayer. This is called attributional nexus, in that the physical presence of the in-state actor is attributed to the out-of-state taxpayer. Two examples of attributional nexus concepts that states have been enacting lately are “click-through” nexus and “affiliate” nexus.

Under state click-through nexus rules, an out-of-state seller is presumed to have nexus in a state based on certain activities of an in-state referral party that generates a threshold amount of sales. For example, an out-of-state seller makes commission payments to an in-state individual for any orders resulting from a customer who clicks through on a link placed on the in-state resident’s website to the out-of-state retailer’s website. Under state affiliate nexus rules, an out-of-state entity is presumed to have nexus if it has an affiliate or related party that is physical present in the state that, for example, sells products and/or services that are the same or similar to those sold by the out-of-state entity under the same or a similar business name or product name. Other activities of the in-state affiliate entity may also create nexus. Under both nexus rules, the out-of-state company may be able to rebut the presumption by providing proof that the in-state party’s activities are not significantly associated with the out-of-state company’s ability to establish or maintain a market in the state for such company’s products or services.

In HA&W’s previous June newsletter, the legislative update article introduced Tennessee’s Revenue Modernization Act (“the Act”), in which Tennessee has adopted a “factor-presence” nexus standard for its excise tax. [1] The Act also enacted a click-through nexus provision for Tennessee Sales and Use Tax. On the other hand, a nexus bill in Louisiana was recently passed by the legislature and vetoed by the governor in a rare instance of a state pushing back on a more aggressive nexus standard. On June 19, Louisiana Governor Bobby Jindal vetoed House Bill 555 that would have enacted new nexus standard for sales and use tax. [2] That bill included provisions for both click-through nexus and affiliate nexus standards, but Governor Jindal vetoed this bill in anticipation that the proposed law would lead to “expensive litigation.” The governor said in a statement that, “the idea of ‘affiliate nexus’ has been litigated in several states, forcing those states to change their laws to conform with the court’s respective decision and creating financial instability as a result.”

These bills in Tennessee and Louisiana highlight the complexities in state tax nexus as many states expand their reach, while a few may even push back on aggressive tax programs. The evolving nexus standards span across several tax types, as seen in Tennessee’s excise tax and Louisiana’s sales and use tax. There is no one-size-fits-all nexus standard, and states will continue to amend their laws to both mimic other state tax regimes and innovate in reaction to the changes in the way that companies conduct business operations. What is the one constant across the state tax landscape? Change.

As the state tax landscape changes, is your company keeping up with the evolving rules? HA&W’s SALT team can assist your company to ensure that your business remains compliant while avoiding paying taxes where your company may not be legally obligated to do so.

Contact Jess Johannesen, SALT senior associate, at jess.johannesen@aprio.com or Jeff Glickman, partner-in-charge of HA&W’s SALT practice, at jeff.glickman@aprio.com for more information.

[1] Tennessee S.B. 603.

[2] See Louisiana H.B. 555.

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.