Is Your Business in Violation of The New Affiliate Nexus Tax Rules?
As you likely have heard, California passed a new tax law last week that created quite a stir, and resulted in Amazon.com terminating its affiliate program in the state effective immediately.
What you may not know, though, is that this type of law - an Affiliate Nexus tax law - could require you (not just big companies like Amazon) to pay sales taxes on revenues generated via online sales in the places like California. It is critical for you to understand the rules so you don’t run into trouble with the tax man.
Let me first say that I’m not a tax lawyer or CPA, so make sure you confirm how these rules apply to your business with your own tax professional. However, I do want to give you some background here so you have a basic understanding of the rules. Historically speaking, sales taxes are required when your company has a sufficient connection with that state. The technical term is a “nexus.” Up until recent years, a nexus was defined by most states as having some kind of physical presence in that state, either by having an actual office or brick and mortar presence there, or employees physically in that state. Online transactions were not taxed unless the retailer also had a physical store in that state.
However, in recent years, a number of states have extended the definition of nexus to include online sales via affiliates. In essence, those states are treating affiliates as an extension of the retailer, similar to an employee. Amazon and other companies object to that definition. Their position is that the affiliate is a marketer or advertiser and nothing more. No matter which argument you agree with, the reality is that California joined the ranks of the states using the affiliate definition of “nexus” for purposes of collecting sales tax on transactions in the state. Let me put it another way: California will now impose a tax on any sales revenue generated in the state just by virtue of the affiliate being physically in the state (not the retailer). Online retailers with California-based affiliates are now required to collect and pay state sales tax on purchases made by California customers. As I understand it, this includes all revenue, not just affiliate revenue - the affiliates’ presence in the state just gave the state the “nexus” it needed in order to claim that Amazon and other online retailers were connected enough with the state to justify taxing their activities.
So, for example, even though the affiliate is not an employee or agent of Amazon.com, because Amazon had affiliates physically in the state, that results in a tax burden in California for Amazon.com. Amazon’s reaction was to immediately terminate its affiliate program in California so that it no longer had the “nexus” required to enable the state to tax their online sales to California residents. Other online retailers did the same thing, including Overstock.com and BlueNile.com.
This is important because it doesn’t just affect companies like Amazon. It affects you if you have an affiliate program of any kind for your company. If so, you need to make a decision about how you want to proceed. If you want to continue your affiliate programs, you must know which states require you to pay sales taxes on internet-based sales (all sales to residents of that state, not just sales through affiliates) and you need to make sure you are operating your company in compliance with each of those state statutes. The states that have these affiliate tax rules currently are: Arkansas, California, Connecticut, Illinois, New York, North Carolina, Rhode Island. Other states are considering similar legislation.
Please contact your tax professional immediately to make sure you are in compliance with all of these state rules going forward. And if you keep your affiliate program, then make sure you stay informed about any new Affiliate Nexus tax laws that pass in other states.