This question comes from a reader in Cleveland, OH, who is thinking about starting up an affiliate program:
I’m sure you’ve seen this, but I wanted your latest thoughts/updates on the tax issue. I’m also not clear on how this is handled. Who collects and how?
http://www.forbes.com/forbes/2009/0525/042-internet-taxation-software-digital-tools.html
For our program right now, CJ’s agency model looks like it would fit us best. I just get discouraged before I even begin when I think about the tax issue.
The tax issue is one purely of tax nexus, or physical presence.
Say you’re a local brick and mortar store in Ohio. You must collect sales tax on all eligible purchases, assuming your state has a state sales tax, of course. Technically it is the consumer that owes the tax to the state, but to simplify, merchants are required to collect the tax and give it to the state. Merchants don’t “pay” the tax, they just *collect* it.
Moving this model online, it gets more complicated. Since there is no physical store locations, as a compromise, if you’re an online merchant, then you must collect tax from consumers who reside in your state. So if you’re based in Ohio, and a shopper from Ohio buys something, you must collect tax from them. You don’t have to collect tax from any consumers from anywhere else in the world.
Because you’re based in Ohio, you have a physical presence there and that gives you nexus. If you have an office in California and a warehouse in Kentucky you have nexus in those two states as well. Therefore, you must collect tax from consumers from OH, CA, and KY.
That’s (over)simplified internet ecommerce tax law. So where do affiliates come in?
ALL states need money these days, and they want to collect sales tax from their residents who shop online who technically owe sales tax on everything they purchase anyway. The only practical way to get it, however, is from the merchants. So the trick is to find a way to establish nexus in their state for as many merchants as possible.
New York State was the first to identify the affiliate marketers as a way to do this with a twist of language, calling them a commissioned sales team. That law passed and has been in place for a year. This resulted in dozens if not hundreds of merchants dropping their affiliate program rather than going through the effort to collect tax from NY residents.
Since then, several states have tried to copy the concept. This time the affiliate community and anti-tax groups were ready for them and put on strong resistance. In nearly all of the states this has been raised, it has been killed or delayed thanks in no small part to the efforts of a small group of affiliate marketers.
The threat is by no means gone and affiliate marketers need to keep a close watch on legislation to make sure it doesn’t sneak its way through anywhere. It can come back in any state that has already raised it, and it can appear in new states as well.
What does this mean to you as a merchant? Basically, it means that you need to prepare for the possibility that you will need to collect sales tax from residents of more states than you may have originally planned. This typically means having the appropriate ecommerce software in place to do the right thing. The pain comes mostly to the well established merchants who are blindsided by this and are forced to act quickly to get into compliance. If you’re prepared, there really should be little impact.
How can you help? Join and support organizations like the Performance Marketing Alliance and AffiliateVoice who are working against this legislation. Money is needed to hire staff to stay on top of legislation. The PMA, for example, is currently building a team of people to do just that.
