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The State of Affiliate Marketing Sales Tax


Sales tax for online and affiliate sales have become a battleground for states, companies and even individuals who just want do a little business on the side. It's something you as a business owner need to be informed of because the issues are actively being discussed.

The main issue is how states are trying to collect taxes when there is no physical nexus—as mandated in the landmark court case Quill vs. North Dakota (504 U.S. 298, in 1992). A court case that has recently come under the microscope more than ever before with Justice Anthony M. Kennedy stating, "It is unwise to delay any longer a reconsideration of the court's holding in Quill. A case questionable even when decided, Quill now harms states to a degree far greater than could have been anticipated earlier."

For now, however, the case stands with the U.S. Supreme Court having ruled a company must have some physical tie to a state in order for that state to levy sales taxes.

Getting Around the Law

Could there be a way around the Supreme Court decision, especially considering how online sales have changed the marketplace?

No state has found a clear way through the murky legal landscape... yet.

And this is why you need to be informed. Some attempts at collecting lost revenue have been:

  • The Marketplace Fairness Act (S. 743)
  • New York's (in?)famous online sales tax law
  • Colorado's unique attempt to collect sales taxes on out-of-state purchases
  • The Streamlined Sales and Use Tax Agreement (SSUTA)

Arguments have also been presented around a federal solution to tax fairness (and whether states are over-reaching in their tax authority) between online merchants and brick-and-mortar businesses.

But most of the states' individual attempts to collect sales tax on online sales and affiliate sales involving their residents have produced little revenue.

So far, a handful of states have passed "affiliate nexus" laws (also called click-through nexus) or Amazon-only agreements in their efforts to collect sales taxes.

Consider this table of state revenue from online sales tax laws, compiled by Bloomberg BNA:

State

Date Law Passed

SSUTA Full Member

Type of Law or Agreement

Estimated State Revenue

Actual State Revenue

Arkansas

2011-04-01

Yes

Affiliate nexus law

$0

$0

California

2012-09-15

No

Affiliate nexus, corp. nexus, annual sales threshold nexus laws

$448 million (FY 2013-13 through FY 2014-15)

$197 million between Sep. 2012 and Sep. 2013

Colorado

2010-02-24

No

Reporting and notice requirements law

$12.7 million (2009-2012)

No data (in litigation)

Connecticut

2011-07-01

No

Affiliate nexus law

$9.4 million per year

No data

Georgia

2012-04-01

Yes

Affiliate and warehouse nexus law

$17.4 million per year

No data

Illinois

2011-07-01

No

Affiliate nexus law

$153-170 million per year

No data

Maine

2013-10-09

No

Affiliate and warehouse nexus law

$19-30 million per year

No data

Massachusetts

2013-11-01

No

Amazon-only agreement

$36.7 million per year

No data

Minnesota

2013-07-01

Yes

Affiliate nexus law

$5 million per year

No data

Missouri

2013-08-28

No

Affiliate nexus law

$10 million per year

No data

New York

2008-06-01

No

Affiliate nexus law

$50 million in first year

$503 million between 2008-2013

North Carolina

2009-08-07

Yes

Affiliate nexus law

$24.1 million in first year

$39 million between 2010-Oct. 2013

Rhode Island

2009-07-01

Yes

Affiliate nexus law

No estimate

No data

Tennessee

2014-01-01

No

Amazon-only law

$17.8 million per year

No data

Texas

2011-07-01

No

Amazon-only agreement

No data

No data

Virginia

2013-09-01

No

Warehouse nexus law

$24 million per year

No data

Wisconsin

2013-11-01

Yes

Amazon-only agreement

$30 million per year

No data

Note: Reasons for "no data" in the actual state revenue column may be certain states don't differentiate the amount of revenue from online sales versus retail sales. And states which have Amazon-only agreements also might prohibit disclosure due to their agreement.

As you can see from the table, most states are not yet seeing a lot of revenue from their attempts, except for New York, California and North Carolina.

"The laws have been abject failures," Rebecca Madigan, executive director of the Performance Marketing Association, told Bloomberg BNA.

The earliest state to enact a law was New York. It was the first to extend the definition of nexus to include some web-only retailers, notably Amazon.com.

The NY state legislature passed a bill along with its budget, which said web retailers have nexus in New York and must collect sales taxes if they have sales affiliates in the state and if they generate a total $10,000 a year or more in revenue for the retailer. This concept is also called "click-through nexus".

Although Amazon maintains its affiliate program in New York currently, it has cancelled other affiliate programs in certain states...just to avoid having to collect and remit sales taxes in those states. The formal Amazon affiliate agreement states:

"If at any time following your enrollment in the Program you become a resident of Arkansas, Colorado, Maine, Missouri, or Rhode Island, you will become ineligible to participate in the Program, and this Operating Agreement will automatically terminate, on the date you establish residency in that state. In addition, you must promptly notify us in writing of your Arkansas, Colorado, Maine, Missouri, or Rhode Island residency..."

Amazon can (and has) changed its mind, however. In January 2014 it cancelled its affiliate program in Minnesota, only to reinstate it in October that same year.

Next, you might notice one unique entry in the table...Colorado's "Reporting and notice requirements law". In 2010, Colorado tried a different approach to collecting revenue from online sales.

Legislators there passed a law that required out-of-state merchants to only report transactions to their customers and to state tax authorities.

This was in response to a report which said, "Colorado's state and local governments stood to lose $172.7 million last year [in 2012] because of residents' failure to pay the 2.9 percent use tax on e-commerce purchases from out-of-state retailers."

Remember, your customers are the ones ultimately responsible to pay sales taxes to the state. You as a business owner are simple passing them along (remitting them).

This Colorado state law came to the attention of the U.S. Supreme Court in December, 2014, when Justice Antonin Scalia was quoted as saying:

"Am I correct that Colorado is the only state that seeks to do this?...The fact that it's a one of a kind gives me some pause," he said. "This is certainly a very important case because I have no doubt that if we [the court] come out agreeing with you, every one of the states is going to pass laws like this" (emphasis added).

What Does All This Mean for You

If other states DO eventually pass reporting laws similar to Colorado, it would lead to consumers having to remit a lot more "use taxes" to their state government.

It would also lead to a lot more work for you in the form of additional reporting and notification requirements.

But that only means the other states will keep pushing the concept of nexus and keep trying to collect on what they see as missing revenues.

According to Bloomberg, "State legislatures realize they may be losing money under their laws and are more convinced than ever that the problem must be solved at the federal level."

The risk for you as a business owner or affiliate marketer is that legislation will be passed which you don't know about. This could lead to having to pay back taxes or even fines when you are audited.

An easy solution to this is to regularly check the Avalara website for the latest sales tax news and take advantage of our easy-to-use filing software, TrustFile. We do the hard work of sales tax processing for you!


Avalara Author
Ryan O'Donnell
Avalara Author Ryan O'Donnell