SALT Strategies

Mid-Winter Nexus Clouds Gathering From the Great Lakes Region

greatlakes.storm_-300x200New “click-through” nexus provisions in Michigan and Illinois are fresh cause for concern for out of state retailers – and should be on your Winter 2015 Sales and Use tax Nexus Preparedness Checklist.

Both states recently adopted new legislation that requires otherwise out of state retailers to collect and remit sales tax from their in-state customers.

First, on January 15th, 2015 Michigan, with the adoption of S.B. 658 and S.B.659, has enacted “click-through” and affiliate nexus. Michigan’s provisions are effective October 1, 2015.

Additionally, last August, Illinois Governor Quinn signed S.B. 352, Public Act 98-1089, that adopted “click through” nexus that became effective January 1, 2015. As highlighted below, Illinois FY 2015-07 provides valuable guidance on complying with Illinois’ revised “click through” affiliate nexus provisions.

The potential ease with which Michigan’s nexus presumptions may be found to be met warrants attention from multistate taxpayers, as well as their tax advisors. All multi-state taxpayer activities, as well as their affiliates’ activities, and agreements with Michigan vendors and advertisers should be reviewed in light of Michigan’s new nexus provisions.

Michigan “Click-Through” and “Affiliate” Nexus

Click-Through Nexus


Michigan’s legislation sets forth that a “seller of tangible personal property is presumed to be engaged in the business of making sales at retail of tangible personal property” in Michigan if as stated in the statute:

The seller enters into an agreement, directly or indirectly, with 1 or more residents of this state under which the resident, for a commission or other consideration, directly or indirectly, refers potential purchasers, whether by a link on an internet website, in-person oral presentation, or otherwise, to the seller, if all of the following conditions are satisfied:

(a) The cumulative gross receipts from sales by the seller to purchasers in this state who are referred to the seller by all residents of this state with an agreement with the seller are greater than $10,000 during the immediately preceding 12 months.

(b) The seller’s total cumulative gross receipts from sales to purchasers in this state exceed $50,000 during the immediately preceding 12 months.

Rebutting Click-Through Nexus Presumption

The presumption set forth above may be rebutted. The statute states that presumption may be rebutted “by demonstrating that the residents of this state with whom the seller has an agreement did not engage in any solicitation or any other activity within this state that was significantly associated with the seller’s ability to establish or maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state.”

The statute says an out-of-state retailer satisfies the rebuttal to the presumption by establishing the existence of both of the following:

(a) Written agreements prohibiting all of the residents with an agreement with the seller from engaging in any solicitation activities in this state on behalf of the seller.

(b) Written statements from all of the residents with an agreement with the seller stating that the resident representatives did not engage in any solicitation or other activities in this state on behalf of the seller during the immediately preceding 12 months, if the statements are provided and obtained in good faith.

Establishing and documentation of the aforementioned rebuttal requirements pose significant gauntlet for Multistate taxpayers as well as their tax advisors who may wish to rely on the rebuttal provisions to the “Click-Through” nexus presumption.


Engaging Michigan Advertisers May Not Create Presumption

Michigan’s click-through provisions indicate that agreements under which a seller purchases advertisements from a person or persons in Michigan to be delivered through television, radio, print, the internet, or any other medium will not be considered an agreement that creates the aforementioned presumption unless the ad revenue paid to the person or persons in this state consists of commissions or other consideration that is based upon completed sales of tangible personal property.

Affiliate Nexus


In addition, Michigan has enacted an “Affiliate Nexus” provision that casts a wide net of activities that will create a presumption of nexus.

The legislation states that a “seller who sells tangible personal property” will be presumed to have nexus, be required to register with the Michigan Department of Treasury and collect tax if the seller,including an affiliate person (other than a common carrier acting as a common carrier) engages or performs any of the activities contained within Michigan’s affiliate nexus provision.

The following excerpt from Michigan’s affiliate nexus provisions highlight some of the activities that may create nexus in Michigan – and could warrant close attention:

(d) Uses, with the seller’s consent or knowledge, trademarks, service marks, or trade names in this state that are the same or substantially similar to those used by the seller.

(g) Shares management, business systems, business practices, or employees with the seller, or in the case of an affiliated person, engages in intercompany transactions related to the activities occurring with the seller to establish or maintain the seller’s market in this state.

(h) Conducts any other activities in this state that are significantly associated with the seller’s ability to establish and maintain a market in this state for the seller’s sales of tangible personal property to purchasers in this state for storage, use, or consumption in this state.

The aforementioned activities within Michigan’s affiliate nexus provisions appear to accommodate aggressive interpretations of what activities may relate the presumption of nexus.

Who Is An Affiliated Person?

Michigan’s Affiliate Nexus provisions state that an “Affiliated person” is defined as either:

(i) Any person that is a part of the same controlled group of corporations as the seller.

(ii) Any other person that, notwithstanding its form of organization, bears the same ownership relationship to the seller as a corporation that is a member of the same controlled group of corporations.

The provision continues in defining the term “Controlled group of corporations” as meaning “that term as defined in section 1563(a) of the internal revenue code, 26 USC 1563.”

Rebuttal of the Affiliate Nexus Presumption

Michigan’s Affiliate Nexus provision state that the presumption may be rebutted by “demonstrating that a person’s activities in this state are not significantly associated with the seller’s ability to establish or maintain a market in the state for the seller’s sales of tangible personal property to purchasers in this state.”

The problem is that the state has not provided any guidance about how to determine this. Absent additional clarification or guidance, the criteria for rebuttal of this presumption may be subjectively and aggressively interpreted.

Illinois’ Second Bite At “Click-Through”/Affiliate Nexus Begins January 1, 2015

Illinois P.A. 1089 was enacted to address the 2013 Illinois Supreme Court decision in Performance Marketing Ass’n, Inc. v. Hamer, in which the Court found that Illinois’ click-through nexus provision was pre-empted by the Federal Internet Tax Freedom Act . It should be noted, as indicated on the Internet Tax Freedom Act Coalition website, that the ITFA, which bars state and local taxes on internet access, was extended a fifth time in December 2014 and is now scheduled to expire October 1, 2015.

Illinois FY 2015-07 sets forth Illinois’ revised “click-through” nexus provisions, effective January 1, 2015, expanded the “type of out-of-state retailers required to register in Illinois and collect and remit Use Tax.”  FY 2015-07 says out-of-state retailers may be eligible for a 30 day grace period with respect to the P.A. 98-1089’s effective date; i.e. February 1, 2015, if the out-of-state retailer fully complies with the Act’s provisions as of February 1, 2015.

FY 2015-07 states in part that:

Public Act 98-1089, 35 ILCS 105/2(1.1) and 35 ILCS 110/2(1.1), applies to out-of-state retailers and servicemen that satisfy the following criteria:

  • the out-of-state retailer has a contract with a person in Illinois;
  • under the contract, the person in Illinois refers potential customers to the retailer and the retailer pays to the person in Illinois a commission or other consideration based on the sale of tangible personal property by the retailer;
  • the person in Illinois provides to the potential customers a promotional code or other mechanism that allows the retailer to trace the purchases made by these customers;
  • the retailer made cumulative gross sales of $10,000 during the preceding four quarterly periods to customers referred by persons located in Illinois, regardless of the location of the customers.

If an out-of-state retailer satisfies all of the above, the retailer is “presumed to be maintaining a place of business in Illinois and is required to register, collect and remit Use Tax on all to Illinois customers.

 Illinois’ Irrebuttable Presumption – A Presumption Al Capone Would Be Proud Of

Illinois’ click-through presumption is not rebuttable. Illinois FY 2007-15 states that:

An entity can rebut the presumption that it is a retailer doing business in Illinois by presenting proof to the Department of Revenue upon audit that the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.

This indicates that an out-of-state retailer that satisfies the presumption must register, collect and remit the Use Tax and only upon being audited by Illinois Department of Revenue will it have the opportunity to successfully demonstrate that “the persons in Illinois that referred customers to it had so little connection to Illinois that the nexus standards in the Commerce Clause of the U.S. Constitution prohibit imposing registration and collection requirements.”

Michigan and Illinois Nexus Provisions – More Ominous Nexus Clouds

The winter of 2014-15 will probably be considered one of the most challenging and treacherous winters in the history of recorded U.S. weather reporting. Living in the Northeast, most of our winter’s difficult weather and storms this year, as usual, have originated near or around the Great Lakes region and headed east. Akin to the most powerful winter storms that develop over Michigan and Illinois, these State’s nexus provisions pose ominous nexus storm potential for multistate taxpayers and their advisors.

Salt Strategies’ First Year Anniversary

This month marks SaltStrategies First Anniversary. It has been an amazing time for all of us at SALTStrategies. We hope our posts have been insightful and thought provoking as well as informative.   Our first year taught us how demanding it is to achieve and maintain SALTStrategies’ goal of providing VALUE to our readers.

On behalf of Jennifer Dowd, Richard Feldman, Tracey Segarra and everyone at MWE that has made SALT Strategies possible, I wish to say Thank You to all of our readers.

I humbly invite all of you to continue to join us on our journey through the dynamic world of state and local tax exploration.

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