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Affiliates and Sales Tax: The Basics

  • Apr 14, 2016 | Laura McCamy

One of the strengths of the Internet is its ability to create connections. Affiliate marketing capitalizes on those connections to help increase the reach of online sellers. Recent click-through nexus laws, however, make it a good idea to educate yourself about affiliates and sales tax before you enter an affiliate relationship.

Affiliate Marketing Explained

The best way to describe affiliate marketing is with an example. Let’s say you have an online store selling model airplanes. You set up an affiliate relationship with a blogger who is a model-building enthusiast and whose blog other hobbyists eagerly follow. Readers of the model-building blog can click through to your website. When one of those clicks leads to a sale at your ecommerce site, you give the blogger a small commission for leading the customer to your virtual door. You can think of affiliates as sort of passive sales reps.

Working with affiliates can be a great way to extend your marketing reach. You can target affiliates who reach a dedicated audience of your target customers. Your affiliation with someone those potential customers trust helps build the credibility of your brand.

Affiliate Marketing Pitfalls

Setting up an affiliate relationship isn’t quite as easy as flipping a switch, so prepare to spend some time to get the connection between your online store and your affiliate’s website up and running smoothly.

Because the relationship requires a bit of an up-front investment of time, it’s a good idea to choose your affiliates carefully. You will want to ensure that affiliates are driving new sales to your site, not diverting customers who might otherwise have come to you directly. Verify their audience and reach and work out all the terms of your agreement, so there are no misunderstandings later.

And don’t forget to find out what state your affiliate is based in. Why? Read on.

Affiliates and Sales Tax

To understand click-through nexus, let’s go back to your model airplane ecommerce site. You are based in California, which means you have CA sales tax nexus. When a customer places an order to be shipped to a California address, you add California sales tax and remit that tax to the state.

The model-building blogger is based in New York. Let’s say the relationship is a profitable one, and many of your affiliate’s readers click through to your site and buy model airplanes. In fact, those click-through shoppers buy a lot of airplanes -- more than $10,000 worth.

New York’s click-through nexus law says that, if the total gross sales from your affiliate or affiliates in the state are at least $10,000, this creates sales tax nexus, just as if you had a physical presence in the state. Suddenly, you have sales tax nexus in New York and you need to collect and remit NY sales tax.

What’s more, NY sales tax is destination-based (based on the location of the customer). You are used to charging your California customers sales tax at a rate based on your location. Now you need to set up your store to charge New York sales taxes based on the local sales tax rates that cover your customer’s address.

Without intending to, you just created a whole lot more work for yourself. And New York isn’t the only state with click-through nexus: at least 20 states have laws creating click through sales tax nexus and more are enacting these laws every year.

Be Prepared

If you failed to collect sales tax and you later discover you had click-through nexus, you may be on the hook not only for the sales taxes but also any penalties and interest due because of late filing. Sales tax compliance software can help you stay on top of the information you need to understand where your affiliates create sales tax nexus.

An affiliate that brings $10,000 of new sales to your ecommerce store is a good thing. Sales tax nexus in a new state doesn’t have to be a bad thing. If you plan ahead and go into new affiliate relationships armed with all the information about affiliates and sales tax, you may find that affiliate marketing is a positive move for your business.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Laura McCamy
Avalara Author Laura McCamy