Because of the evolving nature of this topic, we wanted to provide an update for 2019.
Well, here we are again, talking about affiliate nexus tax laws… why? The reason I have written a SECOND post about this topic, is because most affiliate programs are not addressing this potentially ruinous issue. There is so much information out there, that it makes having a full understanding very difficult for most program managers (and their bosses).
If you haven’t yet read my previous post, “Affiliate Nexus Tax Laws – The Monster Lurking Under the Bed”, please start there. I’ll wait.
Ok, great, you now know that having a tax professional review your tax liability in each state, and forming a plan to deal with each, is the best way to make sure your company is avoiding costly tax audits. Now that you have a list of states that you know will cause you to create a physical nexus, thus owing sales tax, you are going to have to just remove all of those affiliates in each state where this applies. Right?
Well, here are a few ways that you could potentially (read: ask your tax team) keep working with affiliates in these states.
Affidavit and Annual Certification of No Solicitation
Some states will allow you to continue working with affiliates, so long as you certify that each affiliate is not engaging in direct, or indirect, solicitation of customers in that state. In most cases, this means that you will only be able to allow affiliates to host a link back to your site, but are not allowed to promote via: email, newsletter, direct mail, in person contact, etc.
From the California affidavit that we use:
“Sales and Use Tax Regulation 1684, Collection of Use Tax by Retailers, explains that the affiliate nexus provision does not apply if a retailer can demonstrate that all of the persons with whom the retailer has agreements described in the affiliate nexus provision did not directly or indirectly solicit potential customers for the retailer in California. In addition, Regulation 1684 provides that a retailer can demonstrate that an agreement is not an agreement subject to the affiliate nexus provision if:
- The retailer’s agreement prohibits persons operating under the agreement from engaging in any solicitation activities in California that refer potential customers to the retailer including, but not limited to, distributing flyers, coupons, newsletters and other printed promotional materials or electronic equivalents, verbal soliciting (for example, in-person referrals), initiating telephone calls, and sending emails;
- The person or persons operating under the agreement in California certify annually, under penalty of perjury, that they have not engaged in any prohibited solicitation activities in California at any time during the previous year; and the retailer accepts the certification or certifications in good faith, and the retailer does not know or have reason to know that the certification or certifications are false or fraudulent.”
This works for California, but your tax team needs to review each state’s tax law to determine if such a device will work.
So, what does that mean? Essentially, we need to have each and every one of our California-based affiliates fill out and sign this affidavit, then certify each year, that they have not engaged in any of the activities listed above. Some networks, ShareASale especially, have systems in place to help your program manager maintain these affidavits.
This works for California, but your tax team needs to review each state’s tax law to determine if such a device will work. The smart strategy is to determine the value of the affiliate relationships in each state and compare that with the potential exposure / risk associated with using such a device. In California, where many of our top affiliates are based, this is worth the potential risk of using this strategy.
The risks include misunderstanding the affidavit process (doing it wrong) and letting affiliate certifications lapse accidentally (a real concern if you have a lot).
Changing From CPA to CPC
If your team determines that a state’s new nexus law will prohibit you from working with affiliates in that state, but it has been determined that an affidavit will not work, you have another option. Instead of working with your affiliates on a CPA (cost per action – or sale) basis, you should consider paying-out on a per click basis, or CPC.
If you are paying affiliates a baseline commission rate of 5%, say, you can back into a per-click payout.
Here is an example: (based on 5% commission of sale value)
- Determine commission per click value: If affiliate A has generated $10,000 on 2,000 clicks, and was paid $500 in commissions (5% of $10,000), you could assign a value of $0.25/click.
- Affiliate A generates 1,500 clicks in a month, you would then pay $375. (1,500 x $0.25)
In many cases, this will allow you to continue working with your top affiliates in a state with nexus tax laws, without having to collect any sales tax.
The key here, is to make sure that you are able to track key metrics, either through your affiliate network, or via back-end systems, to ensure that this is valuable traffic and pencils-out to the baseline commission rate. In this case, you are not paying affiliates for referring sales, but simply compensating them for driving clicks to your site.
In many cases, this will allow you to continue working with your top affiliates in a state with nexus tax laws, without having to collect any sales tax. NOTE: Some states are writing new laws to prevent this activity as well, so please be sure to consult your tax team before making any strategy changes.
The Bottom Line
Ok, so you now have a few new tools in your arsenal to keep your affiliate program generating incremental revenue. I will say again, this does not constitute legal advice. I am a marketer, not a legal-law guy.
It is imperative that you constantly monitor the situation, to ensure that you are compliant with the law.
Having said that again, it is VITAL that you consult your own tax advisors, to ensure that you have a plan for each state. If you have read my previous article here, you will know that one solution for this nexus tax law situation, is to simply collect sales tax in every state that requires it. This is by far the simplest solution, assuming your e-commerce platform is flexible enough to easily allow this. Many are not, so you will have to decide solution which makes the most sense for your company.
No matter what your decision, whether it’s to completely cut ties with any affiliate in the affected state (Amazon’s policy), collect signed affidavits, or pay on a CPC basis, it’s imperative that you constantly monitor the situation, to ensure that you are compliant with the law – and paying your affiliates appropriately.
If you have any questions about this, or my previous blog post on this subject, don’t hesitate to reach out!