Affiliate Marketing Sales Tax Regulations in 2023

Have you ever felt like dealing with sales tax is like walking through a minefield—where one wrong move could blow up your business's finances? If so, you’re not alone. But what if you could avoid those explosions and use the changing tax landscape to your advantage?

Understanding how sales tax works isn’t just a necessary evil; it’s a chance to get ahead of the competition, adapt to changes quickly, and save money where it matters.

The world of sales tax is constantly shifting—new laws, changing rates, exemptions—it’s a lot to keep track of. But if you stay informed, you can navigate these complexities with confidence. Let’s turn those confusing tax changes into opportunities to give your business an edge.

A Brief Overview of Affiliate Marketing and Tax Obligations

Affiliate marketing is very similar to many self-employed pursuits. As a result, you’re responsible for paying your taxes and filing the necessary tax forms, just like any other business owner. It’s important to note that the IRS considers affiliate marketing income taxable income.

Business Owner vs. Self-Employed: Which is Better?

Many people believe that forming a formal business entity (such as an LLC or corporation) results in better tax advantages. However, for most small-scale affiliate marketers, there are few tax benefits to forming an official business entity.

Income from affiliate marketing is typically reported on Schedule C of Form 1040, which is the same form used for self-employed individuals, sole proprietors, and freelancers.

While an LLC or corporation may offer limited liability protection, it won’t necessarily reduce your tax burden in affiliate marketing. According to the IRS, forming an LLC may lead to more administrative tasks.

Still, it won’t significantly alter how most affiliate marketers pay taxes unless they earn substantial income and require the protection of a corporate structure.

When Do Affiliate Marketers Start Paying Taxes?

Income earned through affiliate commissions is taxable and must be reported if you earn more than $400 during the tax year [2]. In 2021, the Bureau of Labor Statistics reported that approximately 16 million Americans were self-employed, including those in affiliate marketing [3]. This self-employment comes with a tax rate of 15.3%, covering both Social Security and Medicare taxes [2].

Additionally, affiliate marketers are advised to save about 25% to 30% of their income to cover federal, state, and local taxes [4]. States like California impose additional income taxes ranging from 1% to 13.3%, depending on income levels.

Understanding the Complex Dynamics of Affiliate Sales Tax

The relationship between affiliates and online retailers, such as Kintsugi, is unique, particularly regarding sales tax compliance. In the realm of affiliate marketing, affiliates don’t sell products directly but earn commissions for driving sales. However, this arrangement can raise questions about tax responsibility—who collects and remits the sales tax?

The Supreme Court's 2018 Wayfair ruling removed the requirement for physical presence to establish tax liability [5]. This has made the concept of nexus—the connection between a business and a state that triggers tax obligations—more complex. Even remote affiliates may trigger sales tax obligations if their business meets specific thresholds.

Affiliate Nexus vs. Remote Nexus

Understanding the difference between affiliate nexus and remote nexus is crucial for businesses engaged in interstate trade, including those involved in affiliate marketing and partnered with Kintsugi.

• Affiliate Nexus: Refers to the relationship between a business and a state through its affiliates or related entities. For example, if an affiliate has a physical presence in a state (e.g., a warehouse), it may create a tax obligation for the business. States like New York and California enforce affiliate nexus laws.
• Remote Nexus (Economic Nexus): Post-Wayfair, states can require businesses to collect sales tax if they exceed specific sales thresholds, even without a physical presence. For example, South Dakota requires businesses to collect sales tax if they make over $100,000 in sales or have more than 200 transactions annually in the state.

The National Conference of State Legislatures (NCSL) reports that 43 states have implemented economic nexus laws since the Wayfair ruling, making it critical for affiliate marketers to understand where they might have obligations.

The Affiliate Sales Tax Landscape in 2023

As of 2023, 24 states still enforce affiliate nexus laws, making it important for affiliate marketers to be aware of their tax obligations. These states typically require affiliate marketers to comply with local tax laws if they have a physical presence in the state or their activities meet specific thresholds. However, economic nexus laws introduced after the Wayfair ruling have significantly changed the landscape for online sales.

In states like California and Washington, affiliate marketers may be subject to economic nexus laws. These states have repealed specific affiliate nexus rules, instead incorporating all online business activities under broader economic nexus frameworks.

As a result, affiliate marketers must evaluate their income levels and transaction volume to determine if they need to collect sales tax.

Critical State Sales Tax Thresholds:

• California: $500,000 in sales
• Texas: $500,000 in sales
• New York: $500,000 in sales and more than 100 transactions
• Florida: $100,000 in sales
• Colorado: $100,000 in sales or 200 transactions

Common Questions for Affiliate Marketers

Do Affiliate Marketers Need to Pay Taxes Across Multiple States?

No. Affiliate marketers work with companies across multiple states but do not sell products directly, so they are not required to pay sales tax in those states. Their tax obligations are confined to their state of residence, where they pay income and self-employment taxes.

Do You Need a Tax ID for Affiliate Marketing?

No, you do not need an EIN unless you form a business entity. As a self-employed individual, you can use your Social Security Number (SSN) for tax purposes. However, if you decide to incorporate, you may need an EIN.

Do Nexus Taxes Apply to Affiliate Marketers?

Nexus laws apply to retailers who sell products or services above specific thresholds. Since affiliate marketers don’t make direct sales, nexus laws do not apply to them. This is a common misconception, but affiliate marketers are only responsible for income tax, despite their involvement in affiliate marketing.

Streamlining the Complexities

For most individuals involved in affiliate marketing, income tax remains the primary tax obligation. Although affiliate nexus laws apply in some states, economic nexus laws focus on larger retailers. These laws often set thresholds that smaller affiliates do not meet. Affiliates working with companies like Kintsugi must primarily comply with income tax, not sales tax.

As of today, all 46 states collecting sales tax have implemented economic nexus and marketplace facilitator laws. These laws generally target larger businesses capable of managing multi-state tax compliance [7]. Understanding these laws reduces the risk of overpaying or miscalculating taxes for smaller affiliates.

Affiliate marketing has grown substantially, with the industry expected to reach $8.2 billion in the U.S. by 2022 [8]. Staying informed about tax regulations, nexus laws, and state-specific thresholds is vital for compliance.

For those partnered with Kintsugi and other affiliate programs, understanding both marketing tax responsibilities and nexus laws is essential. By staying proactive and ensuring compliance, affiliates can focus on growing their businesses without tax-related uncertainties.

Sources

[1] irs.gov
[2] irs.gov
[3] bls.gov
[4] ftb.ca.gov
[5] scotusblog.com
[6] ncsl.org
[7] taxfoundation.org
[8] statista.com