Vermont is the latest state to introduce affiliate nexus legislation aimed at increasing its sales tax revenue with H-143, which has been referred to Vermont’s House Committee on Ways and Means.
The legislation would require online retailers that use affiliate marketers based in Vermont to collect sales tax for the state. It would only go into effect, however, if Vermont residents collectively spend more than $10,000 at the retailer through Vermont-based affiliates.
According to the Supreme Court, only online retailers with nexus in a state have to collect sales tax for that state. Nexus is usually established by having an office, warehouse, or other physical presence in a state, or by having an economic presence in the state, such as a salesperson or distributor. The kind of legislation Vermont has introduced is often known as “affiliate nexus” legislation because it says, in essence, that nexus is also established when an online retailer has an affiliate marketer in the state.
Affiliate nexus legislation has become increasingly popular as states face record budget shortfalls. New York, North Carolina, and Rhode Island all have affiliate nexus legislation on the books, while California, Connecticut, Hawaii, Illinois, New Mexico, and Texas have all introduced similar legislation this year. (Mississippi also introduced similar legislation in January, but it died in committee at the beginning of this month.)
While we certainly understand why affiliate nexus legislation is so popular—it’s one way for states to increase their tax revenue without raising taxes or creating a new tax—we’re concerned that (1) it’s ineffective; most online retailers simply end their affiliate marketing programs rather than comply with the law, and (2) it hurts the small businesses that receive income through affiliate marketing.
We feel that it would be better for states to join the Streamlined Sales and Use Tax Agreement (SSUTA) and put their efforts into lobbying Washington to pass the Main Street Fairness Act, which would allow all states to compel online retailers to collect sales tax.