Sorting out “Sales Affiliate” Taxes

UPDATED: There are TWO initiatives underway right now regarding taxation of Internet sales.

At the moment, the more visible of these two initiatives is the so-called “Amazon Tax.”  This effort is aptly described as the “Complex Nexus” initiative – it involves unilateral state-by-state legislation designed to redefine the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses.

The second of these two initiatives is commonly referred to as the “Streamlined Sales Tax” initiative – which involves a multilateral forty-four state coalition which has been working together for over ten years to modernize and simplify sales tax codes to ensure consistent collection by all businesses.

As the media and legislative spotlights have turned toward these debates, they have been categorically referring to them under a single topical headline of “Internet Sales Tax”.  While the dramatic posturing of opposing viewpoints in the debates over these initiatives are as familiar and timeless as taxation itself, we have also seen these debates evolve into unintentionally combining or confusing these two initiatives as one single effort.  This is unfortunate as the two initiatives have dramatically different implications, legal precedents, and costs to consumers and internet merchants large and small.

Complex Nexus legislation was first developed in isolation by the State of New York in 2008, which has resulted in ongoing litigation between that state and and  The basics of this redefinition of nexus instruct that when an out-of-state company (let’s say “Company X”) pays a sales commission to a web site located in New York (”CompanyY”) for linking a customer from Y’s website to X’s website, then Company X has established economic nexus, and is then required to register as a business in that state – with full licensing obligations and tax collection requirements, just as if Company X had a “swinging door” retail location in that state.  This approach seems to be exclusively targeted toward affiliate marketing businesses, (e.g. Amazon Associates, Commission Junction, Google Affiliate Network,, etc.).

The New York law activates upon any Seller (regardless of location) who pays a commission to a New York entity related to the sale of over $10,000 worth of taxable goods over the preceding 12 months – that seller’s New York affiliate is to be considered an employee or agent of the Seller, effectively establishing substantial economic nexus.  Specifically an agent/affiliate would be any New York entity which actively solicits New York residents and “directly or indirectly refers potential customers, whether by a link on an Internet website or otherwise” to the Seller.  An as-of-yet undetermined implication of this approach is whether other geographically targeted advertising-based relationships may also qualify under such Complex Nexus legislation.  Will pay-per-click and pay-per-lead be clearly delineated from commissions on sales?  A significant concern surrounding this legislation is that it could be interpreted to include any commission bearing direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus.

It is in this context that over the last few weeks the Amazon Affiliates program has threatened to cut ties with affiliates in California, and actually ceased operations with affiliates in Rhode Island, North Carolina, and Hawai’i – potentially cutting off revenue streams to thousands of small businesses.  This step is unfortunate but understandable, as is being forced to withdrawal its affiliate programs in these states based upon their contemplated adoption of Complex Nexus laws.

Perhaps what is most puzzling regarding these states’ recent pursuit of Complex Nexus legislation is that all of these states have also been working on and contributing toward the formulation of the Streamlined Sales and Use Tax Agreement (SSUTA) since 2000.

The SSUTA is an approach to Internet sales tax resulting from 10 years of iterative legislation, negotiation, and development involving a collective effort of vendors, technology providers, industry associations, and forty-four states. Participants include New York and the other states now considering legislation implementing Complex Nexus. SSUTA is designed to simplify and standardize sales and use tax laws (including standard definitions for taxable goods, tax holidays, and rate change notices), with the goal of enabling any out-of-state sellers to easily comply with local sales tax initiatives. Moreover, unlike the concept of Complex Nexus, SSUTA is also based upon and supported by an extensive body of regulation and case law surrounding sales and use tax jurisdiction and liability.

In 1992, the Supreme Court confirmed in Quill Corp. v. North Dakota that taxation of interstate retail transactions (at the time mail order) were under the control of Congress, and declined to redefine place of business to include Quill Corp. catalog recipients in North Dakota. At that time, it was unrealistic to require remote sellers to keep track of many thousands of state and local tax codes, and thus interstate transactions have not to date been subject to taxation. However, with the rapid evolution of the Internet along with the advanced computing resources and standardized tools available today, the technical capacity to keep track of hundreds of thousands of items, and tens of millions transactions per quarter is no longer in question.  We believe the continued commoditization of computing power is precisely what will enable SSUTA to succeed.

Sales tax, in many places, is the law of the land, and the privilege of a computer, a credit card and an internet connection should not exempt a purchaser from that obligation.  Sales taxes are approved directly or indirectly by the voters of each state, per the laws of that state, to pay for local police, fire and hospitals.  These sales taxes are routinely collected by merchants large and small, from the states’ residents.  This is taxation with representation at its classical best, and is cleanly implemented by the Streamlined Sales Tax approach and supported by a large crowd of commercial and government interests.

The Streamlined Sales Tax approach enables local sales taxes to be paid by the voters that vote upon, and benefit from, these local sales taxes – the citizens of the states themselves.  The  initiative supports taxation WITH representation.  While some states may choose to also expand the definition of nexus to encompass contractual business relationships, but this should not be conflated with SSUTA.

In the interest of full disclosure, is a Certified Service Provider under the SSUTA, optimized for the needs of small merchants.  Our TaxCloud service is provided at no cost to merchants and only minimal integration required.  While our system enables accurate determination of local sales tax under any approach, we clearly believe the SSUTA model is best for taxpayers, businesses, and the states.

5 Responses to Sorting out “Sales Affiliate” Taxes

  1. […] The article continues by describing how the State of New York has gotten restless in awaiting legislation necessary for the Streamlined effort to become adopted as federal law (The Main Street Fairness Act, soon to be introduced before congress). Last year New York enacted a law which redefines the concept of substantial nexus (i.e. “place of business”) to single-out Internet-based affiliate network businesses. Forbes readers should have significant concerns about this state legislation, because it could be interpreted to include any direct response mechanism (or for that matter, any contractual relationship) as it blurs the historical “bright-line” test of physical presence to determine substantial nexus, which is why we call it Complex Nexus. We have written about this in much more detail on our Blog. […]

  2. […] scheme is appropriate for California.  As we have said repeatedly in previous posts (particularly this one), targeting affiliate marketing oriented businesses will only affect a handful of Internet […]

  3. […] Complex Nexus legislation (often referred to as the “Amazon” Tax – as we have written about before). While Rhode Island and North Carolina passed similar legislation last year, they have not […]

  4. […] Comments Response: Denver Pos… on All aboard!?All aboard!? «… on Sorting out “Sales Affil…Response: Another LA… on Sorting out “Sales Affil…Response to Forbes … on […]

  5. […] is a form of legislation frequently referred to as “Amazon tax”- we tend to refer to it as Complex Nexus because, well, it is complex!  It involves unilateral state-by-state legislation designed to […]

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