Affiliate marketers, third-party publishers, and partners operating independently of vendors have provided a valuable cornerstone for the Internet economy since its inception in the 1990s. While that has not fundamentally changed, the processes, technologies, and policies surrounding affiliate marketing have changed quite a bit. Sales tax laws around online sales have been overhauled in almost every state in the last five years, so it’s more important than ever to be up to date on what’s required, what’s not, and how to ensure compliance wherever you are promoting.
The Relationship Between Affiliates and Online Retailers
One of the reasons sales tax for affiliates remains so tricky is that the relationship between affiliates and the online retailers they support is unconventional, especially in the context of modern tax laws. Affiliates are not strictly selling anything, but they do receive commissions for each sale made on behalf of the retailers they partner with. So who is taxed, for how much, and when? Not to mention the fact that affiliates are rarely in the same state as the warehouse of the goods they helped sell, so for instances where sales tax is applicable, when is nexus established?
As a result of this complex relationship, affiliate nexus sales tax laws have shifted consistently, even following the Wayfair ruling by the Supreme Court, holding that physical nexus was no longer required for sales tax to be collected. The question remains—how are affiliates defined, and when do they need to collect and remit sales tax?
Affiliate Nexus vs. Remote Nexus
The first thing to consider is whether a business is, in fact, defined as an affiliate. Because all 46 states that collect sales tax have passed remote nexus laws that require out-of-state sellers to collect and remit sales tax on sales to that state’s residents, there is very little ambiguity about when and where to collect sales tax. If a business sells goods in a state that collects sales tax and reaches the threshold for collecting sales tax (typically $100,000 in annual sales or 200+ transactions per year, though it varies by state), they are required to register with that state.
But affiliates are defined differently in some states. Marketplace facilitator laws, for example, exist in many of the states that now have economic nexus laws. These laws require larger businesses (like Amazon and eBay) to collect and remit sales tax on behalf of smaller vendors who operate on their platforms, capturing a large percentage of remote sales. Because of these laws, several existing affiliate nexus laws have been appealed. For example, Arkansas, California, and Colorado all appealed their affiliate nexus laws in 2019, shortly following the passage of economic nexus legislation. Others have revised and rewritten their affiliate nexus laws to accommodate modern affiliate programs and loopholes created by the new online approach to sales tax.
What Sales Tax Looks Like for Affiliates in 2023
There are currently 24 states in which affiliate nexus laws remain. Many of these states have on the books the same affiliate nexus and click-through nexus laws they did in the late 00s and early ’10s. The result is that there is some confusion about what affiliates are required to do in these instances. Connecticut’s affiliate nexus law, for example, was passed in 2011 and broadens the definition of “retailer” to include anyone employed as an independent contractor who lives in the state of Connecticut. The enactment of remote seller nexus laws, however, raised the reporting and collection threshold from $2,000 to $100,000 in 2019. Affiliate nexus remains, however.
Other states have fully repealed their individual click-through nexus and affiliate nexus laws, encompassing all online business activities in economic nexus laws. These states include:
In these states, affiliates should evaluate economic nexus laws to determine what responsibilities they have for collecting and remitting sales tax. All of these states have marketplace facilitator laws on the books as well that, in some cases, encompass affiliate activities.
How Things Are Broadly Simplifying
Most state affiliate nexus laws apply to those affiliates operating within that state, but it’s important to check if economic nexus also applies as it broadly applies to those who operate in other states.
The broader benefit, however, of the advent of economic nexus laws is that the Supreme Court, in the Wayfair decision, emphasized the importance of new laws not being burdensome and onerous to small businesses. As a result, most economic nexus thresholds are quite high, ensuring only moderately sized businesses (typically doing $100,000 or more in business within a state each year, though it varies by state) will need to collect and remit sales tax. Because many affiliate nexus laws had much smaller thresholds, this actually reduces the tax collection requirements for businesses operating affiliate programs.
Additionally, because some version of economic nexus and marketplace facilitator laws exist in all 46 sales tax collecting states, publishers are less likely to reduce access for affiliates in states like California and New York that had previously targeted affiliates. While there is a much broader, more expansive set of tax laws in place now than 10 years ago, these laws are generally similar to one another, and they are more interested in collecting sales tax from larger entities that have the resources to collect and remit in multiple states at once.
If you run an online business that serves as an affiliate for larger vendors, be sure to evaluate not just whether the states those vendors operate in have affiliate nexus laws, but also if they have economic nexus laws that directly impact the thresholds at which you are required to collect and remit sales tax. While the laws are designed to be friendly to small businesses in most states, it is still your responsibility to check in advance and ensure you are registered for collection when applicable.