United States: Michigan Enacts Sales And Use Tax Click-Through Nexus And Affiliate Nexus Provisions

On January 15, Michigan Governor Rick Snyder approved legislation that implements click-through nexus and affiliate nexus provisions for purposes of the state's sales and use tax.1 The click-through nexus provision creates a presumption of nexus for out-of-state sellers that have an agreement to pay a Michigan resident for providing a link to the seller's Web site. The affiliate nexus provision creates a presumption of nexus for out-of-state sellers if a person or affiliate in Michigan performs certain activities for the seller. The legislation is effective October 1, 2015.

Click-Through Nexus

A seller is presumed to be engaged in the business of making retail sales of tangible personal property in Michigan if the seller enters into an agreement with one or more Michigan residents under which the residents, for a commission or other consideration, directly or indirectly refer potential purchasers, whether by a link on an Internet Web site, in-person oral presentation or otherwise, to the seller.2

This provision only applies if the cumulative gross receipts from sales by the seller to purchasers in Michigan, who are referred to the seller by all residents with this type of agreement, exceed $10,000 during the preceding 12 months.3 Also, the seller's total cumulative gross receipts from all purchasers in Michigan must exceed $50,000 during the immediately preceding 12 months.4 For purposes of these thresholds, the 12 months before the effective date of this law are included as part of the "preceding 12 months."5 An agreement under which a seller purchases advertisements from a person in Michigan to be delivered through television, radio, print, the Internet or any other medium does not constitute an agreement subject to the click-through nexus rules unless the advertising revenue paid to the person in Michigan consists of commissions or other consideration that is based on completed sales of tangible personal property.6

Rebuttable Presumption

The click-through nexus presumption may be rebutted by the seller by demonstrating that the Michigan residents with whom the seller has an agreement did not engage in any solicitation or any other activity within Michigan that was 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 the state.7 The presumption is considered rebutted by evidence of:

  • Written agreements prohibiting all of the residents with an agreement with the seller from engaging in any solicitation activities in the state on the seller's behalf; and
  • Written statements from all of these residents stating that they did not engage in any solicitation or other activities in the state on the seller's behalf during the immediately preceding 12 months.8

Affiliate Nexus

A seller of tangible personal property is presumed to be engaged in the business of making retail sales in Michigan if the seller or a person, including an affiliated person, other than a common carrier, engages in or performs any of the following activities in Michigan:

  • Sells a similar line of products as the seller and does so under the same or similar business name;
  • Uses its employees, agents, representatives or independent contractors in Michigan to promote or facilitate sales by the seller to purchasers in the state;
  • Maintains, occupies or uses an office, distribution facility, warehouse, storage place or similar place of business in Michigan to facilitate the delivery or sale of tangible personal property sold by the seller to its purchasers in the state;
  • Uses, with the seller's consent or knowledge, trademarks, service marks or trade names in Michigan that are the same or substantially similar to those used by the seller;
  • Delivers, installs, assembles or performs maintenance or repair services for the seller's purchasers in the state;
  • Facilitates the sale of tangible personal property to purchasers in Michigan by allowing them to pick up or return tangible personal property sold by the seller at an office, distribution facility, warehouse, storage place or similar place of business maintained by the person in the state;
  • 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 the state; or
  • Conducts any other activities in Michigan that are significantly associated with the seller's ability to establish and maintain a market in the state for the seller's sales of tangible personal property to purchasers in the state.9

An "affiliated person" means: (i) any person that is part of the same controlled group of corporations as the seller; or (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.10

Rebuttable Presumption

The affiliate nexus presumption may be rebutted by demonstrating that a person's activities in Michigan 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 the state.11 Unlike the click-through nexus rules allowing the seller to rebut the presumption of nexus in certain circumstances, there are no specific examples of evidence provided to serve as safe harbors to rebut the affiliate nexus presumption.

Commentary

Michigan is the latest state to follow the trend of enacting click-through nexus and affiliate nexus provisions that are designed to increase sales and use tax collections.12 Although the sales tax nexus legislation that has been enacted by many states is similar, the legislation in each state differs slightly from the legislation in other states.

Unlike some of the other states that have enacted affiliate nexus provisions, the Michigan affiliate nexus legislation has no explicit requirement that the "person" in Michigan actually be a member of the same controlled group of corporations as the seller.13 Nexus is established if the "person" engages in any of the listed activities for the seller, though in many cases, the enumerated activities typically would be performed by an entity that is an affiliate of the seller. This is especially true of the activities involving the use of intellectual property that closely resembles or is identical to the seller's name and/or product. Also, this is true in situations where the person in Michigan shares management, business systems, business practices or employees with the seller. The Michigan legislation also differs from the legislation enacted by other states because it does not clearly require that the "person" in Michigan itself have substantial nexus with the state.

During 2014, Colorado, Illinois14 and New Jersey were the only states to enact sales tax nexus legislation. Therefore, the rate at which states have been enacting sales tax nexus legislation has begun to slow down. However, as potential federal legislation addressing the sales tax nexus issue has not been adopted to date, states that have not adopted legislation expanding sales tax nexus are likely to consider such legislation on their own terms.

Footnotes

1. Act 553 (S.B. 658), Act 554 (S.B. 659), Laws 2014.

2. MICH. COMP. LAWS §§ 205.52b(3); 205.95a(3). For purposes of use tax, the seller is presumed to have nexus with Michigan and must register with the Department of Treasury and collect the tax. The click-through nexus provision applies to transactions occurring on or after October 1, 2015 and without regard to the date the seller and resident entered into the agreement. MICH. COMP. LAWS §§ 205.52b(6); 205.95a(6).

3. Id.

4. Id.

5. MICH. COMP. LAWS §§ 205.52b(6); 205.95a(6).

6. MICH. COMP. LAWS §§ 205.52b(5); 205.95a(5).

7. MICH. COMP. LAWS §§ 205.52b(4); 205.95a(4).

8. Id. The written statements must be provided and obtained in good faith.

9. MICH. COMP. LAWS §§ 205.52b(1); 205.95a(1). For purposes of use tax, the seller is presumed to have nexus with Michigan and must register with the Department of Treasury and collect the tax if the person performs any of these activities.

10. MICH. COMP. LAWS §§ 205.52b(7); 205.95a(7). The provision adopts the definition of "controlled group of corporations" from IRC Section 1563(a).

11. MICH. COMP. LAWS §§ 205.52b(2); 205.95a(2).

12. The following states have enacted click-through nexus laws: Arkansas, California, Connecticut, Georgia, Illinois, Kansas, Maine, Minnesota, Missouri, New Jersey, New York, North Carolina, Rhode Island and Vermont (contingent on 15 or more states enacting click-through nexus legislation). Also, the following states have enacted some type of affiliate nexus legislation: Arkansas, California, Colorado, Georgia, Illinois, Iowa, Kansas, Maine, Missouri, New York, Oklahoma, South Dakota, Texas, Utah, Virginia and West Virginia.

13. Note that some of the states that have more recently enacted sales tax nexus legislation such as Iowa, Kansas, Maine and Missouri take a similar approach and do not require that the out-of-state seller have a common ownership relationship with the person located in the state. Thus, the more recent legislation tends to be broader in scope, based on the states' position that a common ownership relationship does not have to be a prerequisite to subject a seller to the sales tax.

14. The Illinois legislation was enacted in response to an Illinois Supreme Court decision, Performance Marketing Association, Inc. v. Hamer, 998 N.E.2d 54 (Ill. 2013), which held that the state's clickthrough nexus statutes were void and unenforceable due to the federal prohibition against discriminatory state taxes on electronic commerce contained in the Internet Tax Freedom Act.

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