Navigating Affiliate Marketing Sales Tax Regulations in 2023

Since the emergence of the Internet economy in the 1990s, affiliate marketers, independent third-party publishers, and partners have played a pivotal role. Although this fundamental role hasn't changed, the landscape of affiliate marketing has evolved significantly, with shifts in processes, technologies, and policies. Over the past five years, almost every state has undergone substantial changes to their online sales tax laws. This makes it essential to stay informed about the requirements, exemptions, and compliance strategies relevant to your promotional activities.

Understanding the Complex Affiliation Dynamics

Sales 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.

Given this intricate relationship, sales tax laws concerning affiliate nexus have continually evolved, particularly following the landmark Wayfair ruling by the Supreme Court, which removed the requirement of physical presence for sales tax collection. This dynamic landscape prompts questions about how affiliates are defined and when they are obligated to collect and remit sales tax.

Affiliate Nexus vs. Remote Nexus

Affiliate nexus and remote nexus are two concepts that determine whether a business has sufficient presence in a state to be required to collect and remit sales tax. Understanding the distinction between these terms is essential for businesses engaged in interstate commerce.

Affiliate nexus refers to the connection between a business and a state through its affiliates or related entities. This connection can trigger sales tax obligations if the business's affiliates have a physical presence in the state, such as a brick-and-mortar store or distribution center. For example, if a company has a subsidiary or partner operating in a state, it may create nexus for the parent company, requiring it to collect and remit sales tax on transactions made within that state.

On the other hand, remote nexus, also known as economic nexus, is based on the volume or value of sales made by a business in a state, regardless of physical presence. This means that even if a business does not have any physical presence in a state, it may still be required to collect and remit sales tax if it exceeds certain thresholds for sales revenue or transaction volume. This concept became more prominent after the Supreme Court's decision in South Dakota v. Wayfair, Inc. (2018), which upheld South Dakota's law requiring out-of-state sellers to collect sales tax if they have a significant economic presence in the state.

In summary, affiliate nexus is based on physical presence through affiliates or related entities, while remote nexus is based on economic activity within a state. Both concepts have implications for businesses engaged in interstate commerce and must be carefully considered to ensure compliance with state sales tax laws.

Affiliate Sales Tax Landscape in 2023

Presently, 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.

Certain states have fully repealed individual click-through nexus and affiliate nexus laws, incorporating all online business activities into economic nexus laws. These states include Arkansas, California, Colorado, Ohio, and Washington. In these states, affiliates must assess economic nexus laws to ascertain their responsibilities for sales tax collection and remittance. Some of these states have marketplace facilitator laws that encompass affiliate activities as well.

Streamlining Complexities

While 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.

For online businesses operating as affiliates for major vendors, it is imperative to assess not only the affiliate nexus laws in the states where vendors operate but also the economic nexus laws that directly influence collection and remittance thresholds. While the laws are designed to be accommodating for small businesses in most states, it remains your responsibility to proactively confirm your registration for tax collection when applicable.