“Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state.
You have likely heard about the Nexus tax laws (or Amazon tax) that seem to be cropping up every month. You hear that one state has a new law going into effect, or that another state has repealed an existing law. It’s a really complicated issue with many possible solutions. What is Nexus? “Nexus, also known as sufficient physical presence, is the determining factor of whether an out-of-state business selling products into a state is liable for collecting sales or use tax on sales into the state. Nexus is required before a taxing jurisdiction can impose its taxes on an entity.” (source: salestaxinstitute.com)
Your affiliates can possibly CREATE Nexus for you through their various marketing strategies.
Well that doesn’t sound too bad… but reading further you see: “Today, most states define nexus under their definition of a retailer engaged in business as “maintaining, occupying, or using permanently or temporarily, directly or indirectly or through a subsidiary, an office, place of distribution, sales or sample room or place, warehouse or storage place or other place of business.” The definitions also include activities by individuals including, “having a representative, agent, salesman, canvasser, or solicitor operating in this state under the authority of the retailer or its subsidiary on a temporary or permanent basis.” (source: salestaxinstitute.com) UGH. I apologize if any of you fell unconscious attempting to read that. Ok, so why do we care? Well, unfortunately, even if you don’t have a physical presence in a state, your affiliates can possibly CREATE Nexus for you through their various marketing strategies. This is the “monster lurking under the bed”! I have managed many programs over my 4+ years here at JEBCommerce. My clients have all approached this situation differently, ranging from “Don’t really care, it doesn’t apply to us”, to “Oh my lord, don’t work with ANY affiliates in ANY Nexus state…EVER!” and solutions in-between.
Hire (or consult) a tax firm that specializes in this and have them review each state’s law, and determine the best strategy for each state.
So what is the solution? Well, it depends. If you collect sales tax in every state (that requires it), you are covered. No worries. THIS IS THE BEST SOLUTION from a purely managerial perspective, though it may require you to add more infrastructure to support this (I imagine whole armies of tax accountants, but with modern platforms, it could be easier than that). If the army of tax accountants is not an option, and you aren’t collecting sales tax in states where you have no physical presence, here is the best option for you: Hire (or consult) a tax firm that specializes in this and have them review each state’s law, and determine the best strategy for each state. This will need to be done annually, as this changes all the time. This is the ONLY way to make sure you have the best solution for your company. For example, we work with an IR Top 50 client that performed a similar review. Not only did we remove any states that have Nexus Tax laws, we removed 2 states that had vague tax laws. So, they didn’t have Nexus laws, per se, but they were worried about the ambiguity of the language. Consequently, they don’t work with those states anymore to ensure they aren’t exposed.
Only you can decide what protects your company to the fullest degree.
Here at JEBCommerce, we are very tied-in to the affiliate community and we likely know more than most when it comes to this issue. BUT, we are not qualified to give you the advice that will protect you from being audited by the multitude of different tax jurisdictions. We can absolutely work with your team to implement strategies, but ONLY YOU can decide what protects your company to the fullest degree. Each state has different versions of Nexus laws, and some will allow you to work with affiliates without establishing Nexus. California and New York are two that will allow you to work with affiliates, so long as the affiliates agree, in writing (and certify every year), that they are not doing anything other than posting your links on their site. That means (usually) no emails, newsletters, targeted marketing, brochures, catalogues, etc. If you are not collecting sales tax in all applicable states already, and you have an affiliate program, this issue should be at the TOP of your list for 2016! I’m guessing that if you don’t have a tax department, and end up hiring a consultant, this will be expensive. But I doubt it will be as expensive as being audited/fined by several states for being in violation of their tax laws. By making sure that tax professionals have reviewed your strategy in each state, you will be able to sleep soundly at night (monster-free), without having to leave the light on. Good luck! Still here? Some resources that will provide more information: Commission Junction has a helpful nexus tax law map here Performance Marketing Association is always a great resource for all things affiliate marketing and their nexus tax map here. And finally, a pretty good write up on nexus laws by SalesTaxSupport.com here