If you’re a performance marketer, you’ve probably heard of the “nexus” tax laws that are being proposed in several states (also known as the Amazon tax). And you may be wondering if you should be concerned.
As I’m learning, if something has to do with laws, taxes and politicians, you should be very concerned. Mostly this is because issues are subject to inaccuracies, complications and whims of those involved. And that has caused a lot of confusion over this issue.
Before describing the issue, I must preface it: states are desperate for budget money and your legislators are looking under every rock for a solution. One might even say they’re acting crazy.
So while you are reading this description of the issue, I ask you to suspend disbelief. You may say to yourself “This is nuts! This makes no sense! They are completely wrong!” And you’re right, but that won’t change anything. The performance marketing industry is actually winning against these proposals, but not so much with logic.
The Tax Facts
First, it’s important to know a couple of things about collecting sales tax. Let’s say you go into 7Eleven to buy a pack of gum. That store, which has a physical presence in your state, is required by law to collect sales tax and pass that sales tax back to the city and state – except in states like Montana that don’t collect sales tax. Physical presence, also known as “nexus,” is defined as having a store, warehouse or sales representation within the state. Merchants who sell products via a catalog, direct mail or the Internet, aren’t required to collect sales tax if they don’t have a physical presence in that state. This is based on the U.S. Constitution, by the way.
Now several states are attempting to define affiliates living in their state as establishing a physical presence for out-of-state merchants. Therefore, these out-of-state merchants would now be responsible for collecting sales tax for purchases made in that state. If there is even just one affiliate in that state, that merchant now has “nexus” in that state and must collect sales tax for all purchases made in that state. Affiliates have been erroneously classified because they are paid commissions based on sales.
This is Advertising
As I’m sure you are all aware, affiliate marketers are clearly not sales representatives for their merchants. Affiliates don’t sell products or services. Affiliates don’t collect payment from consumers. Affiliates don’t deliver anything to consumers. Affiliates usually don’t even know who the consumers are! Affiliates advertise. They don’t sell.
Chances are that the infomercial you watched at 2 a.m. is using the performance advertising model. The television station probably earns a payout on those ads based on the number of items sold, just like online affiliate marketing. But these laws specify Internet-based sales only.
One strong lobbyist, the American Booksellers Association, has been behind much of this taxation push. They have been very aggressive in their effort to convince legislators that local, mom-and-pop businesses are being shut down because online merchants aren’t charging sales tax. They are deliberately going after Amazon.
There are a couple of problems with their argument. First, I’m pretty sure lower-priced Walmart, Target and Costco books are the real threats against local booksellers. Second, thousands of local booksellers sell their books through Amazon, too, and they don’t collect sales tax for those purchases from consumers in other states.
Resistance Is Futile
Many online merchants can’t afford the expense of collecting sales tax. Every city can set its own sales tax rates, and sales taxes are charged based on the purchaser’s address. So that means the merchant would need to calculate thousands of different tax rates.
But there is a solution available for these merchants: they can cancel their affiliate programs. No affiliates – no nexus! Ouch! Over 100 merchants shut down their New York affiliate programs instead of facing the burden of collecting sales tax. In that case, the state doesn’t end up collecting sales taxes from the merchants who sever their affiliate programs anyway, and they put affiliates out of business in the process.
Nexus laws have been proposed in California, Connecticut, Hawaii, Illinois, Maryland, Minnesota, New York, North Carolina, Rhode Island, and Tennessee. So far, the law has only been passed in New York. We have been able to block these bills by our own grassroots efforts. Your letter writing campaigns, visits to legislators, storming state capitols, press and protests, have been working. The fact that tens of thousands of small businesses are being threatened is what your legislators really understand. They have been hearing that message loud and clear, thanks to your fight.
My bet is that nexus taxes will be proposed again next year because desperate politicians have short memories. But we all did a pretty good job this year and I’m confident we’ll win the fight again next year.