Jeff Gibson · November 27, 2023 · 4 min read
Understanding the Complex Affiliation DynamicsSales tax regulations for affiliates remain intricate due to the unconventional nature of their relationship with online retailers. In the context of modern tax laws, affiliates don't engage in direct sales, yet they earn commissions for facilitating sales on behalf of partnered retailers. This raises questions about who is subject to taxation, the applicable rates, and the timing of taxation. Moreover, affiliates often operate from different states than the warehouses holding the goods they promote. Therefore, it becomes crucial to determine when nexus, the connection that triggers tax liability, is established in cases where sales tax is applicable.
Affiliate Nexus vs. Remote NexusThe initial consideration is whether a business qualifies as an affiliate. With all 46 states collecting sales tax having enacted remote nexus laws, which mandate out-of-state sellers to collect and remit sales tax for sales to residents of those states, there is reduced ambiguity about the timing and location of tax collection. If a business sells products in a state that collects sales tax and meets the sales threshold (typically $100,000 in annual sales or 200+ transactions per year, varying by state), registration with that state is mandatory.
Affiliate Sales Tax Landscape in 2023Presently, 24 states retain affiliate nexus laws. Several of these states have maintained affiliate nexus and click-through nexus laws that date back to the late 2000s and early 2010s. Consequently, there is confusion about the obligations affiliates must fulfill in these circumstances. Connecticut's affiliate nexus law, passed in 2011, broadened the definition of "retailer" to encompass independent contractors residing in the state. However, the enactment of remote seller nexus laws in 2019 increased the reporting and collection threshold from $2,000 to $100,000. Affiliate nexus provisions, however, remain unaffected.
Streamlining ComplexitiesWhile most state affiliate nexus laws pertain to affiliates operating within a given state, it's crucial to consider whether economic nexus applies, as it encompasses activities in other states. Notably, economic nexus laws, following the Wayfair decision, emphasize that new laws should not disproportionately burden small businesses. As a result, economic nexus thresholds are often set relatively high, ensuring that only moderately sized businesses (typically those with annual revenues exceeding $100,000, varying by state) are mandated to collect and remit sales tax. This transition actually reduces tax collection demands for businesses with affiliate programs, considering that many affiliate nexus laws had lower thresholds. Furthermore, since some form of economic nexus and marketplace facilitator laws are present in all 46 states collecting sales tax, publishers are less likely to restrict affiliates' access in states such as California and New York, which had previously imposed restrictions on affiliates. Despite the greater complexity of today's tax laws compared to a decade ago, they generally exhibit similarities and target larger entities with the capacity to handle multi-state tax collection and remittance.