Affiliate Nexus Tax Laws: What's an Online Retailer to Do?

Across the country state legislatures are considering — or in some cases have already enacted — laws that attempt to collect sales tax from online purchases made from out-of-state retailers by state residents. In large part the efforts are being driven by big-box retailers that are looking to harm competitors. Many of these large retailers are spending serious time and money lobbying lawmakers nationwide to consider these proposals despite their historical failure to generate new revenue.

The details of individual state's law varies, but each state's goal is to redefine what it means for a retailer to have a presence in a state. They're seeking to redefine it in such a way that online retailers are forced to asses sales taxes on residents in the state. The most common way legislatures do this is by defining online retailers’ relationships with affiliate marketers in the state as the basis for a "physical presence," thereby creating a business "nexus."

When nexus tax laws are enacted, online retailers that offer an affiliate marketing program are faced with a difficult choice:

1. begin collecting sales tax on purchases made in each state that enacts an affiliate nexus tax (at each state's individual rates); or
2. sever ties with affiliate marketing partners in each state that's enacted an affiliate nexus tax, thereby forfeiting the revenue generated by such programs.

The first choice requires that you understand and stay current with the tax codes in each state that enacts these laws, as well as modify your checkout process by implementing specific tax rates and regulations for each state.

The second choice requires that you forgo the additional revenue generated by your affiliate marketing program in every state that's enacted these laws. Depending on how robust a program you have, this revenue loss could be significant.

Online retailers are being placed in a difficult position, but they aren't without options. Because of the increasing passage of these laws, the first step online retailers must take, no matter the size, is to consult with a tax attorney to familiarize themselves with how these laws may impact their business. Once a retailer is aware of what the repercussions might be for their business, they'll be in a better position to determine the appropriate course of action to address the issue.

Some online retailers have started to respond by educating lawmakers who are considering passing these laws about the potential job losses and disruption in income that's at stake. In some cases they're challenging the constitutionality of the laws that have already been passed.

In 1992, the Supreme Court ruled in the case of Quill Corp v. North Dakota that the Commerce Clause gives the federal government power to regulate interstate commerce and prohibits certain state actions, including applying duties, that interfere with trade among states. There are significant similarities between that case and the issues raised by state affiliate nexus tax laws and a case challenging the affiliate nexus tax law in Illinois that's currently pending. Online retailers who would like to join the effort to block these laws can have a tremendous impact by taking action in one of the following ways:

• Contact your congressman/woman and state senator to let them know you oppose these laws. Detail the negative impact that the law will have on jobs within the state.
• Join a trade group that supports similar interests in stopping these laws (the Performance Marketing Association is one such group).
• Contact other local retailers and reach out to media outlets with your story.

While it may feel as if you have little control over the outcome and effects of these laws, that's not the case. Online retailers need to be actively engaged in the political process, understand the potential impact these laws may have and create a plan of action that's best for your business. By doing so, these laws won't be an insurmountable roadblock for your business.

Oliver Roup is the founder and CEO of VigLink, a service that allows online publishers to earn money from the content on their site. Oliver can be reached at info@viglink.com.