How will new tax laws affect your affiliates?
Amazon announced last week that they are terminating relationships with affiliates in the state of Illinois because of a new tax law signed by Governor Pat Quinn. The law requires online retailers to collect sales tax in Illinois if they have a physical presence in the state. Under this new law, “physical presence” goes beyond an office, warehouse or distribution center – affiliates of an online retailers are now considered “physical presences” – thus tax nexuses in Illinois.
This action is becoming more common as more U.S. states in search of revenue are finding creative ways to expand the definition of a local nexus.
Amazon.com doesn’t have a physical presence in many states, unlike their competitors Barnes & Noble. Therefore, customers who buy products from Amazon in states where Amazon has no physical presence, like Illinois, don’t pay sales tax for online purchases. This is clearly an advantage over Barnes & Noble, which has to charge sales tax to Illinois-based customers for online purchases because B&N has a physical presence in Illinois – and almost every other state in the U.S.
For most digital product companies, the only state that they have to consider from a sales-tax perspective is the state in which their business resides. Even if you aren’t competing with a brick and mortar company, it’s advantageous to charge sales tax in as few states as possible because your customers will pay less and you’ll have fewer sales tax reporting requirements.
THE DEFINITION OF NEXUS
State governments have started to expand the definition of “physical presence” to include affiliates that refer sales for a commission. With this change, states claim that any company that utilizes affiliates in that state has a nexus there and, therefore, is required to collect sales tax on transactions occurring from their state.
So what? If you have to charge sales tax on your product in a few states, will you see fewer sales? Depends on your product and the competition – but one thing is for sure, you will have more work to do to comply with these new sales tax laws. You will have to start charging sales tax for customers in the affected states, pay attention to changes in that state’s tax laws and remit the collected sales taxes. Is this what you want to spend your time on?
Illinois and Colorado are the first states to implement this type of law. But it’s very likely that more states will implement similar statutes soon. If you work with affiliates, whether it’s your own home-grown program or a larger program like Commission Junction or OneNetworkDirect, soon enough you will be working with affiliates in states abiding by these new tax laws.
One thing to consider is that Illinois and Colorado respectively comprise only 4.2 percent and 1.6 percent of the U.S. population, so right now the likely number of customers affected is relatively small. However, sales tax calculations and remittance of the collected money is not a trivial task, so your e-commerce infrastructure needs to support this requirement.
With these types of laws on the rise, it’s the perfect time to take a closer look at your affiliate program to make sure it is still working for you. Before making any decisions based on taxes consider the following:
- Consult a tax adviser who can give you expert advice on your specific situation
- Make sure you know how much revenue you are receiving from your “tax-nexus” states
- Keep a close eye on the new tax laws and how they affect online retailers
Whether or not any of us like it, sales tax rates and the definition of nexus will be issues that digital product owners must deal with. Because states are hungry for revenue, they are searching for untapped sources, especially ones that aren’t represented in the state.
Being educated and prepared is the best way for online businesses to deal with these up and coming tax laws.
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Thanks for the article, this is a question we get all the time from online retailers looking to outsource their order fulfillment. It's a complicated landscape. Being close to an Amazon distribution here in Pennsylvania puts us in a similar situtation to TX. In PA, we as residents are supposed to declare any unpaid sales tax for online purchases on our tax return and pay the appropriate amount. Not sure how many people are aware of that...
Ken Kowal http://www.fillship.com