California Passes New Affiliate Nexus Tax

At the end of last month, Governor Jerry Brown signed a bill into law that will establish a sales tax nexus in the State of California for online retailers who use in-state affiliates to market and sell their products.  These marketers are essentially independent contractors who market for the online retail business.  The affiliate nexus tax, or as some call it, the “Amazon Tax,” after the company Amazon.com, which uses quite a number of affiliate marketers, is a way for states to collect taxes on internet transactions from online retailers operating out of state.  This tax is sweeping because it will establish sales-tax nexus in the State of California for non-California businesses based solely on in-state affiliate marketers, who are not employees for the non-California business!

By way of background, the U.S. Supreme ruled in 1992, in the case of Quill vs. North Dakota, that retailers do not have to collect sales tax unless the retailer has a physical presence in the state, known as a “nexus.”  The nexus can be established by a physical office or even a single employee in a state.  What the new tax does is to create another basis for establishing nexus.  The law states that any online merchant must charge sales taxes on any buyer’s purchases, if the purchase occurred through an online California affiliate marketer.  This law is an attempt at creating a level playing field between brick and mortar businesses in California—who must collect sales tax—and out-of-state online retailers who, until now, could sell to California residents and/or through California affiliates while still avoid paying sales tax.  Needless to say, this law has created a huge backlash by online retailers.  For instance, news story report that Amazon.com immediately severed all dealings with its affiliate marketers in California.

What are the consequences of the affiliate nexus tax for your business?  If you are or could be considered an affiliate for a larger website, your contact with California might present negative tax consequences for the business you serve.  As we saw with Amazon, you might be dropped as an affiliate marketer.  Until there are national laws on the books allowing or disallowing an affiliate nexus tax, online businesses will simply forum shop to find affiliates in states that will not tax them.  Please contact our law offices at 530-345-2212 to learn more about this law, how it affects your business, and what you can do to remedy the situation.