Annette Nellen
Drafting and Interpretation and the Odd State of the Law Produced

As evidenced by rulings in two states, a link on a Web site may create nexus, while a paper order processed by an in-state person does not.

June 11, 2009
by Annette Nellen, CPA/Esq.

In 1992 the U.S. Supreme Court held that physical presence was necessary for a state to impose sales tax collection obligations on a vendor (Quill, 504 US 298). Since then, taxpayers, tax agencies and the courts have struggled to determine how much and what type of presence may create nexus. Low compliance rates by customers who owe use tax when a vendor is not required to collect sales tax and states' preference to collect tax from thousands of vendors rather than millions of customers, has led states to look for ways to find non-present vendors to be treated as present (see Grabbing Remote Vendors, July 31, 2008). This article contrasts two recent state tax rulings that reached opposite conclusions on whether a vendor had sales tax nexus.

New York and Internet Vendors

In April 2008, New York broadened its sales tax reach with a law that created a rebuttable presumption that vendors generating over $10,000 of sales from links on Web sites of New York residents were soliciting business and required to collect sales tax (see Grabbing Remote Vendors). At least two vendors challenged the validity of the new rule. In decisions issued in January 2009, the court dismissed the taxpayers' claims. The court found that it was "not irrational" for the state to presume that a resident with a link would "actively solicit business for the remote seller." Also, the vendor had the opportunity to rebut the presumption.

The result is that in New York, for example, a remote vendor that enters into agreements that allow others ("associates") to place a vendor link on their Web site in which commissions can be earned when a customer places an order with the vendor by first using the associate's link, can create tax collection obligations for the vendor.

Connecticut and Teachers

In April 2009, the Superior Court of Connecticut ruled on whether actions of school teachers caused a vendor to have sales tax nexus in the state (Scholastic Book Clubs v. Commissioner, Docket CV 07 4013027S (PDF)). This was not a new issue or fact pattern; it has been litigated in other states.

The Connecticut holding was similar to a 1997 Michigan case (567 N.W.2d 692) where both courts found no nexus, analogizing the teachers to parents helping children buy books rather than being similar to a typical sales force. However, other states found nexus in similar fact patterns. One distinguishing factor between the Connecticut case and prior contrary rulings is that Scholastic now awards sales bonuses to the classrooms rather than to the teachers. (Also see a California ruling; Scholastic Book Club redetermination (PDF); October 1999.)

While the teachers were not agents of Scholastic, they did help customers place orders. Typically, teachers distributed order forms to students, mailed the completed forms and money to Scholastic and distributed the books when received from Scholastic. If there were any problems, the teacher contacted Scholastic. Teachers earned points for their classroom (not for them) which can be used to buy books and equipment from Scholastic.

Contrasting the Rulings

To illustrate the odd state of the law that can result from how legislation is drafted and how fact patterns are structured and interpreted, various factors of the New York and Connecticut situations are compared below. The result seems odd because the teachers did far more to make a sale occur than associates did, yet the associates created tax collection obligations for the vendor, while the teachers did not.

In the following analysis, some of the factors that are compared are not relevant for nexus determinations, but are offered here just to compare the fact patterns.


  • Associates have a vendor link on their Web site and may have a note encouraging people to order from the vendor by first clicking on the Associate's link. Some Associates might be encouraging people to buy a particular product. The Associates cannot make someone click on the link or place an order. Some Web sites may have a captive potential customer base (such as a PTA), while others only hope that someone will visit their Web site.
  • Teachers get order forms and distribute them to their students. They also collect the completed forms and payments. While teachers cannot force a student to take an order form, the nature of the teacher-student relationship is one in which the students are likely to take the form. The teachers have a captive potential customer base, thus there is no need to canvass for sales.

Role played in processing orders:

  • Associates have no role in processing orders. Orders are placed on the vendor Web site and shipped by the vendor to the customer. If there is any problem with the orders, customers contact the vendor.
  • Teachers collect completed forms and payment, send them to the vendor, receive and distribute the books and work with the vendor to resolve any problems.


  • Associates — no.
  • Teachers — no.


  • Associates typically earn a commission based on sales placed by people who reached the vendor's Web site from the Associate's Web site.
  • Teachers do not personally earn bonus points, but their classroom earns them. However, it takes a human to use them.

Obligation to sell:

  • Associates have no obligation to actually post a link although not doing so may lead to cancellation of the agreement with the vendor. They typically have no sales or commission quota.
  • Teachers are not obligated to distribute forms or sell a certain amount of books.


  • Associates typically receive no training.
  • Teachers are encouraged to contact Scholastic to learn the process.

Necessary for a sale?

  • Associates are often not necessary for a sale. Vendors with a strong reputation, such as Amazon, will have sales without the associates. In the New York ruling Amazon noted that sales through New York associates were less than 1.5 percent of New York sales.
  • Teachers are critical in enabling Scholastic to sell books. If the teachers did not distribute forms, Scholastic would need an entirely different strategy. It would be expensive to find families, mail forms and process all orders individually.


  • Associates have a physical presence in New York, but they do not appear to be critical for vendor orders or distribution of products and they are not agents of the vendor. Instead, they seem to be advertisers, reminding anyone who visits the associate's Web site that they might want to shop with the vendor. Arguably, no physical space or person in New York is used to generate sales.
  • Teachers have a physical presence in Connecticut. As indicated above, while they are not agents of Scholastic, they are crucial in generating any sales. Also, school facilities are utilized to help process orders.

Making Sense

The seemingly odd results of the rulings discussed above are due to legislative drafting in New York (and the difficulty of rebutting the presumption) and that neither the associates nor the teachers were acting as agents of the vendors with whom they worked. The current state of the law as to when a vendor must collect sales tax leaves much uncertainty for businesses and their tax advisers. Remedies are possible, but will not be easy. States can do more to simplify their sales tax system (such as having a single rate) and educate consumers about the use tax. But all parties need to work towards finding sensible and workable rules to determine when a vendor has sales tax collection obligations. With states in dire need of revenues and vendors facing greater uncertainty on tax obligations, it is possible that this topic will gain more traction in Congress this year.

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Annette Nellen, CPA/Esq., is a tax professor and Director of the MST Program at San José State University. She is also a fellow with the New America Foundation. Nellen is an active member of the tax sections of the AICPA and ABA. She has several reports on federal and state tax reform and a blog.