If your business depends on affiliate sales, watch out. Three more states have passed the so-called affiliate nexus tax which affiliate business advocates say are hurting thousands of small companies. They say an estimated 90,000 affiliate marketers have already been affected nationwide either having to shut down their businesses as a result or move across state lines.
Affiliate marketing advocates insist there is a better solution for the problem, but not all small business owners agree.
Affiliate sales happen when a visitor clicks through a special link on your site to reach another site with which you have an affiliate relationship. If, after passing through your link, visitors purchase a product or service on the other site, you receive a commission on that sale for the referral.
The Affiliate Nexus or Amazon Tax
The new affiliate nexus laws are an attempt to get around the 1992 Supreme Court Quill vs. North Dakota ruling. The decision essentially says states can only compel out of state retailers to collect sales tax from local buyers if they have a physical presence in the state.
But that decision doesn’t sit well with cash starved state governments in need of more revenue. And some brick and mortar businesses that must collect sales tax in the state in which they are located have also complained the current rules are unfair.
The response from state governments is the affiliate nexus laws. In most instances, the laws require out of state retailers to collect sales tax if a significant number of local sales are generated by affiliate marketers in the state. Lawmakers contend the affiliates give remote retailers a local presence.
As of the beginning of last month, a total of ten states had passed affiliate nexus laws, affiliate marketing advocate Geno Prussakov reported recently. Those states include Arkansas, California, Connecticut, Georgia, Illinois, Kansas, New York, North Carolina, Pennsylvania and Rhode Island, Pussakov said.
But in June, those states were joined by Maine, Missouri and Minnesota, all of which have added affiliate nexus laws of their own.
The Results
Advocates of affiliate marketing including Prussakov and the Performance Marketing Association say the results of the new laws have been devastating to the industry.
Online retailers like Amazon have decided to sever relations with affiliates in some states rather than collect sales tax under the new laws.
For example, Amazon recently terminated its agreements with affiliate marketers in Missouri.
Affiliates in these cases are faced with the choice of loosing their businesses or moving over state lines in an effort to maintain their affiliate relationships.
The Performance Marketoing Association estimates that with three states adding affiliate nexus laws approximately 90,000 affiliates have had their businesses in some way affected by the new laws. This could include anything from forcing them to close down their operations to causing them to cross state lines to stay in business.
One Possible Solution
One possible solution, and the one supported by both affiliate marketing advocates and Amazon, is the so-called “Internet Sales Tax” or Marketplace Fairness Act. The proposed bill, which has already passed the U.S. Senate, would level the playing field, supporters say.
If passed, it could require online retailers no matter where they are located to comply with local sales tax whether they have a presence in the state or other taxing jurisdiction or not.
Not Everyone Agrees
Not everyone likes the bill, however, and opponents have made efforts to kill it. With 9,600 taxing authorities in the U.S., complying with all those local sales tax regulations could be extremely complicated for some small business owners.
Ebay has voiced opposition to the plan on behalf of its members. Ebay sellers would be required to collect the tax if their sales rise above a certain threshold. Individual ecommerce sites could also be required to collect sales tax in states or other taxing districts where they have sufficient sales.
Tax Photo via Shutterstock
Re “all those local sales tax regulations could be extremely complicated for some small business owners.” This is absurd. First, the proposed legislation does not apply to small businesses. Only businesses with more than $1 million in *out-of-state* sales are impacted.
If you’re selling more than $1 million out of state, you can purchase a wondrous device called the personal computer and install software that calculates the tax due on any sale to any address. The only burden is in submitting payment to multiple state governments, but for businesses of this scale, it manageable.
I’d abolish sales taxes today if I could, but the status quo of exempting remote sellers at the expense of storefronts is a disaster. Please stop spreading nonsense.
Amiba, with all due respect, it’s not nonsense. First, $1 million in out-of-state sales is not a lot. I know of 2-person businesses that do $10 million in ecommerce volume.
Second, there’s many a slip between proposed legislation and what’s actually implemented. To add another metaphor, it’s a slippery slope once you start down a certain path.
I understand that you feel strongly, but we try to present many sides of an issue. To add a Paul Simon song to the mix of crazy metaphors in this comment, “One man’s ceiling is another man’s floor.” Small businesses are affected in many many different ways by Internet sales tax. To insist that there’s one “small business” position is simply not accurate.
– Anita
Anita,
We represent primarily brick and mortar businesses and there is indeed unanimity among the constituents who have cared enough about the issue to contact us. If you have an argument as to why large internet retailers should get hugely preferential treatment, rather than competing on a level playing field, please make it.
With all due respect, Amiba, even Avalara, a proponent of the MFA admits it’s too burdensome. http://emainstreet.org/avalara-marketplace-fairness-act/
Jennifer, Alvara has blatantly obvious self-interest in dispensing such a message. Not persuasive.
As someone who runs a software company I’m biased when I say software is awesome…but I’m not biased enough to say it’s magic wand. No business owner is going to be able to simply plug-and-play new software into their existing infrastructure and be instantly compliant. And the argument that the cost to implement said software is free is not accurate either.
Lost in the story is the real issue – sales tax needs to be simplified for all types of businesses. If we focused on simplification then compliance would skyrocket. The current system is totally broken. Those of us that have ever tried calling a state to get an answer on nexus or filled out a sales tax form in a destination-based state are all too aware of the hours wasted each month just trying to stay compliant.
These new laws are not making things easier for people trying to do the right thing to run their business. Instead, it’s becoming more difficult. How is that fair?
With all due respect, that’s plain nonsense Amiba. You cheerfully ignore MAILING those 9,600 payments MONTHLY (!) to all those different localities (which many city and states require). I don’t know about your office, but I would need to hire someone full-time to print, stuff, and postage all those checks, not to mention the charge I get from the bank of 15-cents for every check I write! Not exactly a “cheap” solution! And then you need a SECOND person on the phone CALLING each sales-tax entity every month one asking if the rate we had was correct (on average, about a dozen are changed every month, the problem is WHICH dozen). If every phone call lasted only 60 seconds,from dialing to hangup, that’s 160 hours by itself!
And, yes there are companies that will “handle” that stuff for you, but it isn’t cheap–and can run many thousands of dollars every month in ADDITION tot he sales tax money you collected.
I am not against states collecting the tax due them by law. Right now most states, that have sales tax, already have a law requiring taxpayers to pay their out-of-sate purchases on their state tax return. Most don’t… So why doesn’t the states enforce their own law. Not paying in tax evasion, which is a crime.
For online businesses to collect the tax is not a problem. There is software for that. The problem is filing tax returns for the 45 states that require it. It’s not always one a year, sometimes you have to file quarterly. For a small business to keep up with 45 different state regulations and requirements would be impossible. There is NO software to file all of those returns!
How would you like to be a brick and mortar store and every time a customer came in you had to ask where they lived and collect sales tax for THEIR home address? Then sent the collected tax and file returns to 45 different taxing authorities. They would have to hire extra help just to handle all of the tax returns.
Under the proposed bill there is an exemption for small businesses who’s online sales are under one million dollars. That threshold is way too low! The cost of complying would bankrupt thousands of small businesses.
By-the-way… Why do you think all of the large retailers are in favor of this? It’s because it would put a nail in the coffin of the small online business. The the “Main street” businesses want FAIRNESS what are they not asking that they be able to buy their wholesale products at the same cost WalMart or Kmart pays?
There is a solution to this. If we are going to require All online businesses (Over a million) to collect and remit sales tax why not do this?
A business has a SINGLE sales tax ID # for all states. Using software they can collect the sales tax for each state. Then when they file their home state tax return there would be a line item for each different state. Their home state collects all of the collected sales tax for each different state and then under the individual ID Numbers disperses the funds. This would be a very small burden on each state and could be done electronically.
This seems to have hit a nerve, but I think both sides can agree that the goal is uniformity. That way all parties use the same rules.
Jim makes a good point that it is not just collecting and remitting the tax that is costly to small business. Filing returns across the U.S., even with software that can actually prepare the returns, can be a huge burden. Part of the total solution needs to be a method of centralizing the reporting. Force the states to work together to come up with method that does not inundate small businesses with reporting requirements.
I continue to be amazed and disappointed by comments such as “you can purchase a wondrous device called the personal computer and install software that calculates the tax due on any sale to any address.” The statement is painfully trivial and naive.
Just because there may be software that makes the tax calculation doesn’t get it bolted in to your e-commerce site. There’s a big cost to that, and in some cases it may not be possible to be done at all … meaning an e-commerce retailer would have to rebuild their website. That’s obviously not free either.
The comment about this being a plan of big businesses to stomp small ones is right on the mark. The so called “Marketplace Fairness Act’ is anything but fair. It’s a pro-Big Business move in the guise of helping the little guy … a wolf in sheep’s clothing if you will.
If the desire is to collect sales tax on all online sales then why not do the following: All retailers whether they are brick and mortar or e-commerce collect taxes at their local rate and submit them to their home state with some documentation as to where the sales were made. The home states then decide amongst themselves how to split up the revenue.
Not only would this make the collection of tax from online sales manageable for e-commerce retailers, it would encourage individual states to keep their sales tax rates low due to the real possibility that an e-commerce vendor would flee their high sales state for a low sales tax one. This competition on sales tax rates would be similar to the one on income tax rates. Competition is good and keeps government spending in check.
Mike… Well said!
So, are the brick and mortar stores going to have to start collecting sales tax when an out of state customer walks into their store.? Under this, they need to reimburse to each state the walk in is from. Then is might be a marketplace fairness.
Deb, The applicable sales tax is where the goods are delivered not where the customer lives. If he is from NJ and he took delivery of goods at Tiffany’s in NYC, he pays the 8.875% sales tax not NJ sales tax.
Here’s a simpler solution – one that a couple of commenters have eluded to – online businesses collect the sales tax for their area, on all sales, just like a brick and mortar store would. And they pay it to their own state. Period. Just like a brick and mortar store would, no matter where their customers came from. I live just a couple of miles from a state line. Plenty of people, from both sides, cross that line to shop, but the store owners are not required to keep track of where each customer lives and pay accordingly.