Understanding Sales Tax Ramifications of Affiliate Marketing

Anyone in the sales tax industry can tell you that affiliate marketing is a pretty dangerous thing. In fact, it’s one of the many reasons behind why some legislators are pushing for a nationwide sales tax and why Amazon and other retailers are particularly selective about where they offer affiliate marketing programs.

Arkansas residents and businesses, for instance, cannot participate in Amazon’s affiliate marketing program because Arkansas passed legislation that creates sales tax nexus for companies who have affiliates within their borders. Nexus, in case you’re wondering, is the reason why companies have to collect and remit sales tax in specific states.

If you’ve been considering running an affiliate marketing program for your business, be sure you understand what it might do to your sales tax liabilities.

Sales Tax Liabilities from Affiliate Programs

There’s a lot to think about when you’re deciding to run an affiliate marketing program. Will you run the service yourself or use a third-party to do it? But what you should be asking is what happens to your sales tax liabilities when you start affiliate marketing programs.

Before you assume that your products or services are non-taxable and you don’t have to worry about sales tax, remember that every state makes their own rules about sales tax and they change all the time. While your goods or services might not be taxed in your state, they might be in another where you want to have an affiliate. And there’s always the possibility that your affiliate’s state decides to change the law and start taxing your goods—which may mean sales tax liabilities, even if you terminate the affiliate relationship.

But there’s certainly no hiding the fact that affiliate marketing programs work and work really well to sell huge amounts of goods. If an affiliate marketing program is a must for your business, how should you go about it?

Reducing Sales Tax Liabilities When Running Affiliate Programs

First thing to know is that by running an affiliate program yourself, you’re setting yourself up for lots of trouble. Not only would your business suddenly be in the affiliate marketing business, your sales tax liabilities would sky rocket through the roof.

Amazon’s affiliate problem is they run their own program, not through a third-party service like many companies that are trying to avoid sales tax nexus. This means that Amazon’s sales tax liabilities increase if they offer affiliate marketing programs in states like Arkansas where affiliate nexus laws exist.

Finding the right third-party affiliate program service comes down to more than just the service itself but to where it is located. Looking for an affiliate in a state that doesn’t have affiliate nexus laws is a must if you’re trying to avoid sales tax nexus. FatWallet, one major affiliate marketing network, moved 5 miles over a state line to preserve their nexus-free services for their clients.

Keep in mind, however, that you’re taking the chance that the state won’t institute affiliate nexus laws that would change your company’s ability to succeed. If your entire business model is built on affiliate marketing, nexus issues can completely stunt your business growth or possibly destroy your work and dreams.

A Backup Solution for Affiliate Marketing Campaigns

In one NYTimes article from 2012, a running shoe business owner found out just how prohibitive sales tax nexus was to his company’s growth. They intended to set up kiosks in stores that allowed customers to design custom shoes for manufacture, paying stores a portion of the sales. But since these kiosks acted like affiliate marketing campaigns, it became an impossible endeavor.

“Given the size of our company, the accounting cost alone makes this prohibitive,” said Mr. Sashen, 49, who shelved the kiosk plans. “It’s not collecting sales tax that’s the hard part; paying taxes in the jurisdictions is an accounting nightmare.”

The kiosk idea was tabled but the shoe company eventually started their own affiliate marketing program because affiliate marketing was such an important aspect of their business’ success. If you’re serious about making affiliate marketing an important part of your business model, you just have to deal with sales tax as part of the package. But it doesn’t have to be a nightmare either.

Technology created the affiliate nexus problems we’re in now—and it can get us out too. Filing sales tax with jurisdictions can be done in just a few minutes for most businesses, no matter how small or large their company, with the right technology and outsourcing is always an affordable option when your company just can’t afford to do it in house.

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