Affiliate Nexus Tax Laws: What's an Online Retailer to Do?
Across the country state legislatures are considering — or in some cases have already enacted — laws that attempt to collect sales tax from online purchases made from out-of-state retailers by state residents. In large part the efforts are being driven by big-box retailers that are looking to harm competitors. Many of these large retailers are spending serious time and money lobbying lawmakers nationwide to consider these proposals despite their historical failure to generate new revenue.
The details of individual state's law varies, but each state's goal is to redefine what it means for a retailer to have a presence in a state. They're seeking to redefine it in such a way that online retailers are forced to asses sales taxes on residents in the state. The most common way legislatures do this is by defining online retailers’ relationships with affiliate marketers in the state as the basis for a "physical presence," thereby creating a business "nexus."
When nexus tax laws are enacted, online retailers that offer an affiliate marketing program are faced with a difficult choice:
- begin collecting sales tax on purchases made in each state that enacts an affiliate nexus tax (at each state's individual rates); or
- sever ties with affiliate marketing partners in each state that's enacted an affiliate nexus tax, thereby forfeiting the revenue generated by such programs.
The first choice requires that you understand and stay current with the tax codes in each state that enacts these laws, as well as modify your checkout process by implementing specific tax rates and regulations for each state.
The second choice requires that you forgo the additional revenue generated by your affiliate marketing program in every state that's enacted these laws. Depending on how robust a program you have, this revenue loss could be significant.