Notes on Affiliate Nexus Sales Tax Laws

As more and more states are looking to sales tax legislation as a way to put money back in depleted coffers, affiliate nexus legislation (the infamous “Amazon tax”) has been gaining ground. While sales tax absolutely should be collected by out-of-state retailers, affiliate nexus legislation is not the best way to reach this goal.

Affiliate nexus legislation is designed to work with the 1967 and 1992 Supreme Court rulings that say retailers need to collect sales tax only in those state where they have “nexus”—a physical presence, such as an office or warehouse, or an economic presence, such as salesperson or distributor. Since 1992, however, online sales have increased dramatically and state sales tax revenue has decreased proportionally. Since the Supreme Court rulings mean online retailers only collect sales tax for states where they have nexus, states decided to expand the definition of what can create nexus to include affiliate marketers, locally based websites that provide marketing for out-of-state merchants.

There are, however, significant drawbacks to affiliate nexus legislation. Perhaps the biggest is its effect on the affiliate marketers themselves. In states that have enacted affiliate nexus legislation, large online retailers such as Amazon.com and Overstock.com have proved themselves more than willing to end their affiliate marketing programs there—resulting in the loss of income for hundreds, if not thousands, of individuals. Indeed, immediately after the Illinois state assembly passed a bill on January 6, 2011, to enact affiliate nexus legislation, Amazon and Overstock informed their Illinois affiliates that they will terminate their affiliate relationships in the state if the bill is signed into law. Governor Quinn signed House Bill 3659 into law this afternoon (March 10, 2011), and as expected, Amazon notified its affiliates that they were terminating relationships with Illinois web sites.

What’s more, Amazon has been fighting affiliate nexus legislation in the courts. The company has been involved in a lawsuit against New York ever since the state enacted affiliate nexus legislation in 2008, and there is no end in sight. A lengthy court battle is bad for everyone, state and retailers alike. And then there’s the fact that when every state has a different approach to sales tax, it becomes harder and harder for businesses to sell across state lines. The patchwork of regulations created by affiliate nexus legislation (in New York, Rhode Island, and North Carolina), reporting and/or disclosure requirements for out-of-state sellers (in Oklahoma and Colorado), and state-initiated lawsuits intended to get out-of-state retailers to pay retroactive sales tax (in Texas and North Carolina) creates complexity for businesses and consumers alike and has a repressive effect on business.

There is a much better solution to the problem of uncollected sales tax online. The Streamlined Sales and Use Tax Agreement is a cooperative effort by forty-four states to simplify and reduce the administrative costs of sales tax collection. As part of its efforts, the SSUTA governing board has been working toward the passage of the Main Street Fairness Act (MSFA), which would authorize states to require out-of-state merchants to collect sales tax. This is a much more elegant, simple, and straightforward solution, and one that has none of the drawbacks of affiliate nexus legislation.

Unlike affiliate nexus legislation, the MSFA would not hurt affiliate marketers or anyone else who makes their living online. Although there has been some concern about the ability of small businesses to collect sales tax in every tax jurisdiction in the nation, sales tax management services are available to do this work with little input from the retailer, and at no cost. There’s no reason that a small retailer can’t collect sales tax for every state—and all affiliate marketing programs would remain unaffected. Plus, federal legislation would eliminate the problem of the patchwork of state legislation intended to deal with the problem and actually make interstate commerce much easier.

The Main Street Fairness Act (MSFA) was introduced in Congress in 2010 but was not voted on. Given the successes of the internet over the last twenty-five years and the pressures of revenue loss on state and local budgets, it is reasonable to expect that in 2011, federal legislators will act to address the issue of sales tax collection by out-of-state retailers. We support states efforts to collect sales tax revenue, and we urge them support the MSFA and join SSUTA.

One Response to Notes on Affiliate Nexus Sales Tax Laws

  1. […] written extensively on affiliate nexus laws and why federal legislation is a better solution here. Nonetheless, we’re not surprised to hear that Texas has become (or is about to become) the […]

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