Managing Affiliate Programs with State Nexus Tax Laws

This post is intended to explain the basics of the the goings on of the nexus tax laws effecting affiliate marketing programs and the industry as a whole. It is important to note that the debate continues and the rules are ever changing as legislators and courts on both the state and national level make decisions. Different states and different companies involved in the management of affiliate programs are also constantly adjusting their position as this evolves.

One heavily involved company making statements over the last 2 years and having possibly the biggest impact on individual affiliates has been Amazon, leading some to term the Nexus Tax, the Amazon Tax. To illustrate how this topic is constantly updating and continuing, look no further that the recent ruling (April 2012) by the Illinois Circuit Court on the Illinois Affiliate Nexus Tax law in which the court ruled that the law was unconstitutional. As this story is still fresh, we don’t know the immediate or long term effects that this will have for affiliates or if this will have the result of opening up more partnerships between online merchants and those involved in affiliate marketing who are based in the state of Illinois. Without a doubt, this ruling is a favorable ruling for those of us involved in the affiliate marketing industry.

Simply put, (non-legal, non-accounting), basic explanation of the Nexus Tax can be interpreted as follows. In the USA, we do not have a national sales tax as compared to many other countries. Each individual State has the authority to tax goods and services sold within the state where a transaction took place. At this time, 45 out of the 50 states, have chosen to implement a sales tax within their boundaries. Each state does this differently and can tax at different rates. Ex. I live the state of Colorado and when I walk into my local Target store  and make a purchase, I’ll see on my receipt that there is a line for Tax (I happen to live in a town that also has a county sales tax and a city sales tax as well).

The question then becomes for states that have a state sales tax, what happens if instead of walking into a store and buying something, I decide to go online and make my purchase online. Does the state still get to collect that tax. The states involved believe , yes, they do. From the state’s perspective, they are losing tax dollars if those are not collected on online purchases. That is pretty easy to see that many more purchases are being made online today than last year and the year before and this trend is expected to continue. The states argue that they need to enforce their sales tax on online purchases for all the obvious reasons that they make.

The first issue that arises is how to track, account and enforce this, which poses some challenges, but seems possible to manage. Now the next issue that comes into play is affiliates and how they are involved in a transaction and whether a nexus can be claimed. What do we do if a store selling a product is based in Colorado, a customer is purchasing and shipping the product to New York and an affiliate from Kansas helped facilitate the transaction by advertising the store. Do any of those states have the right to collect a sales tax on that purchase?

Some of the nexus advertising laws that are being debated or are currently in effect make the argument  that an affiliate publisher within a state creates a nexus or a physical presence in a state and therefor a transaction that takes place in that state is taxable. Talk about headache for merchants to enforce this, not to mention competitive edge when the purchase price on an order just goes up 5%. Many online merchants with affiliate programs wary of this (and possibly to also make a statement) have terminated their relationships with affiliate publishers from states that have enacted nexus tax laws, forcing some affiliate publishers to relocate across the border in a more tax friendly state. Again, not legal advice at all, but smaller merchants seem to be flying under the radar for the time being.

For one thing, Affiliate Publishers in effect more closely resemble a media outlet that a merchant is paying to advertise with than a true sales force within a market. My own personal opinion here, end goal aside, the fundamentals of the argument seem flawed.

The Performance Marketing Association has taken up the issue of Affiliate Nexus Tax and has in many states led the way in arguing on behalf of affiliate marketers for the fair application of these taxes that will not indiscriminately hurt our industry. PMA was instrumental  in the Illinois case arguing that the law was unconstitutional. PMA has also taken the position that if states are going to collect tax, it may be appropriate for the federal government to take a national approach to the tax question instead of having 50 different states tackle this issue and creating 50 different burdons on merchants.

Here are some of the states that have been effected by state nexus tax laws to date.

  • Pennsylvania has postponed the enforcement of their affiliate nexus tax law until September 1st, 2012.
  • California first passed and then issued a one year reprieve of their affiliate tax law in September 2011, clearing the way until at least September 15th, 2012.
  • New York has an Affiliate Tax Law in effect
  • Virginia just passed nexus legislation that would take effect in September 2013.
  • North Carolina
  • Connecticut
  • Vermont
  • Arkansas
  • Rhode Island
Versa Marketing Inc provides affiliate program management for merchants based in different states and around the globe.

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