It was no April Fool’s joke, although Amazon made the announcement on April 1.

The online retail giant cancelled its affiliate sales program in Louisiana the day the state’s new internet sales tax law became effective. The legislation included affiliate (click-through) tax rules that required Amazon to collect Louisiana sales tax for sales made to customers in Louisiana via its Louisiana online affiliates.

Affiliate programs often manifest as the banners and ad boxes that appear on the websites you visit. Take Amazon, for example. Amazon’s affiliates include various visuals and links on their websites. If a potential buyer clicks an affiliate’s link and subsequently makes a purchase on Amazon, Amazon pays a certain percentage of the sale to the affiliate. Pretty straightforward.

By enacting click-through nexus rules to increase revenue from affiliate internet sales, Louisiana follows the lead of states across the U.S. — including Arkansas, Maine, Missouri, Rhode Island and Vermont. Not coincidentally, Amazon no longer has affiliate programs in these five states.

Why? Because the sales Amazon makes directly to customers in these states — i.e., assuming no physical presence or affiliate in the state — are generally not subject to state sales tax collection. Affiliate sales programs complicate the tax rules.

State Sales Tax Nexus

Generally, a state doesn’t require a seller to collect sales tax on sales made to customers in its jurisdiction if the seller does not have some form of physical presence in the state, such as a warehouse or sales office. It’s referred to as nexus, or having a sufficient connection in a state to be liable for the state’s taxes. That would mean that, unless Amazon has a physical presence in the state, it wouldn’t be required to collect and remit sales tax on the transaction. Right? Not necessarily.

It’s no secret that many states are looking for new revenue sources to fill their coffers. At the same time, affiliate programs have become big business — over $4 billion in 2014. As a result, states are treating sellers with affiliates located in the state as if the seller itself was located in the state. In other words, in a number of states, affiliates are considered to establish nexus. It’s called affiliate nexus and sometimes click-through nexus and applies when a seller derives a certain amount of revenue from sales via the internet, originating from links on the websites of affiliates in the state.

So, if Amazon’s affiliate and buyer are both located in a state that has passed affiliate nexus legislation, Amazon must collect and remit the state’s sales tax.

Bottom line, states feel they’ve been missing out on the sales tax related to affiliate sales and have become creative in capturing the sellers under the nexus rules.

Legislative History

What exactly are affiliate or click-through nexus rules and how did they come about?

The landmark case on nexus for sales tax purposes — and an impediment for states hoping to tax out-of-state e-commerce — is Quill v. North Dakota. In 1992, the Supreme Court held that a state can only require a business to collect sales tax on their behalf if there was some form of physical presence at play. An office, employees, delivery trucks, something that would establish a direct on-ground link between the business and the state. Absent this presence, the collection of sales tax would present an undue burden for the business and consequently restrict interstate commerce. After all, by that time there were about 6,000 separate sales and use tax jurisdictions in the U.S.

This approach worked for many years until, enter the internet.

Since Quill put a hold on asserting sales tax nexus in a state without substantial physical presence, states have been using the affiliate nexus concept and applying it to website owners (affiliates) that sponsor out-of-state businesses.

In Scripto, Inc. v. Carson (1960) and reiterated in Tyler Pipe Industries, Inc. v. Washington State Department of Revenue (1987), the courts took the position that the presence of an out-of-state representative — employee or independent contractor — located in the state could establish nexus for a business. Neither of these cases made it to the Supreme Court, so the concept of affiliate nexus was not validated. In fact, in Performance Marketing Ass’n v. Hamer (2013), the Illinois Supreme Court upheld a lower court decision citing the affiliate nexus tax law to be unconstitutional. Consequently, click-through nexus was abolished in Illinois.

Louisiana just became the latest state to enact specific language regarding click-through nexus. Specifically, Louisiana includes language that states, Any person engaging in business in the taxing jurisdiction which shall mean the solicitation of business through an independent contractor or any other representative pursuant to an agreement with a Louisiana resident or business under which the resident or business, for a commission, referral fee, or other consideration of any kind, directly or indirectly, refers potential customers, whether by link on an internet website, an in-person oral presentation, telemarketing, or otherwise to the seller….

How This Impacts You

If you are a seller who generates revenue from affiliates or other third-party websites, you should determine the states in which you may have an obligation to collect sales taxes — and monitor your activity in those states.

You’ll also need to know each state’s detailed rules for sales tax collection. For states with explicit affiliate or click-through laws, you may not have to collect sales tax unless or until additional requirements are met. For example, in Arkansas a seller is not required to collect sales tax unless the gross receipts from the seller’s sales to Arkansas customers exceeded $10,000 during the preceding 12 months.

California, on the other hand, requires collection when both of the following conditions are met within a 12-month period: total sales from website referrals are $10,000 or more and total in-state sales are $1,000,000 or more.

Keep in mind: even if you use software to calculate the sales tax on your sales transactions, it’s still up to you to determine if you have affiliates in the various states — and if you have met the state’s requirements to be liable for sales tax collection — before any software can trigger collection for you.



Affiliate and click-through nexus rules for state taxes can be tricky.

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