Discussed this week on twitter was the recent nexus sales tax law passed in California that may affect affiliates who promote products on their websites. Through a series of tweets, I explained why using Linkshare’s affiliate program for iOS products is unaffected. That said, I thought sales tax deserved further explanation and would be a good topic for this weeks #idevblogaday post. Sales and use tax can be confusing, so I’ll try explain from a layman’s perspective.
Discussed this week on twitter was the recent nexus sales tax law passed in California that may affect affiliates who promote products on their websites. Through a series of tweets, I explained why using Linkshare’s affiliate program for iOS products is unaffected. That said, I thought sales tax deserved further explanation and would be a good topic for this weeks #idevblogaday post. Sales and use tax can be confusing, so I’ll try explain from a layman’s perspective.
After becoming a LLC in 2003, the next step for Creative Algorithms was registering our business in the state of Illinois. One of the main responsibilities, when doing so, is to collect and report sales tax, as well as report and pay use tax. Most people are familiar with sales tax, but not “use tax.” Use tax is the sales tax individuals are required to submit to their state on items purchased by them in or from another state, that they did not already pay any sales tax on to either state. Use tax has become more common with the increase in internet commerce.
When purchasing via the internet, most people will notice that sales tax is only being charged if that company has a physical presence in their state. For example, you will be commonly charged sales tax on Apple products because they most likely have some sort of brick and mortar store somewhere in your state. Some companies only have warehouses in a state, but this also qualifies as a presence. If a company doesn’t have a presence, they do not have to collect sales tax, but individuals are obligated to pay the tax on their own, as use tax, to their state.
When we started selling shareware on our website in 2003, we used PayPal to process credit cards. They are one step away from a merchant account so the tax responsibility fell on us. We have a presence in Illinois, so when a Illinois resident bought a product on our website via our old PayPal account, by law we have to collect sales tax. We had set up our PayPal links to do this. Later we changed our shopping cart provider to Mobihand, who takes our products at wholesale and sells them, so the sale is technically made in California, where they are located. Only residents of CA are assessed sales tax by Mobihand. If you belong to an affiliate program, a similar approach is applied. The sales are made by the company to which you are affiliated. They collect sales tax where they have a presence, and you receive a commission for the sale.
One of the reasons companies selling products over the internet only collect tax where they have a presence, is that collecting and reporting sales tax in all 50 states has been determined a burden. Since companies already are collecting, reporting, and remitting sales tax where they have a presence, collecting sales tax via the internet in that state is not an extra burden. So payment of tax for sales in other states is up to the customer—again, they are expected by their state to pay the sales tax as use tax, directly to their state. However, it’s obvious that this payment is not always done consistently.
Many big internet companies have found that they can increase their sales and brands by offering affiliate programs. You promote software or products on your websites, and if people click thru and make a purchase, you get a commission. These affiliates were not counted as a presence for the internet retailer, so sales tax was not collected where these affiliates resided.
Recently, as the states have been scouring for additional revenue, they have looked to the internet. One gaping hole has been the gap between individuals paying use tax and companies collecting sales tax. Because enforcing use tax is difficult and potentially costly (too many individuals, too many small purchases), states have decided to start forcing the big internet companies to collect the sales tax for them. One way to do that is to declare a nexus, or connection, to the affiliates. So, as these nexus laws passed, affiliates are now also considered a “presence” and companies, such as Amazon, have to collect sales tax in those states. States have also argued that this helps the brick and mortar businesses in their state—the internet companies no longer have the advantage of the “sales tax discount.”
Internet companies, most prominently Amazon, have decided to dissolve affiliate programs in the states that pass these laws. Illinois passed a law like this recently, so our affiliate account with Amazon was dissolved. Now California has passed a nexus law that affects affiliates. Some companies have taken the Amazon position, dissolving affiliate links in those states, others have complied and started to collect sales tax for sales in those states.
So you are an affiliate, how are you affected? Affiliates never collect sales tax—they don’t actually sell products, just get a commission from recommending them. So you do not have to worry about collecting sales tax when these laws are passed. If you were an Amazon affiliate, and your state passed a nexus law, you are no longer an affiliate. Amazon does not want the extra burden of collecting sales tax in your state. If you use Linkshare (the middleman) for an iTunes affiliate program, then you are not affected. Apple has not decided to dissolve it’s affiliate program, most likely because they are already collecting sales tax in most states. It is not an extra burden to them. Are other Linkshare affiliate programs affected? Perhaps. It really comes down to if the company with the actual products will start collecting sales tax or merely dissolve their affiliate programs. Hopefully this blog post has helped clear up how sales and use taxes, and the recent nexus tax laws, apply to affiliate programs.
