Affiliate nexus is imposed when an out-of-state business has an “affiliate” located within the state. The theory behind affiliate nexus is that the relationship between the in-state business and out-of-state business is such that the out-of-state business has a sufficient presence within the state for it to be required to collect and remit sales tax. What does this mean in plain English? Let’s start with an easy example.
- Department Store has a physical location within State A.
- Departmentstore.com is a separate legal entity that sells the same products as Department Store.
- Purchases made on Departmentstore.com can be returned to Department Store.
- When items at Department Store are out of stock, an employee at Department Store can order it directly through Departmentstore.com for the customer.
The case above is an example of an affiliate relationship. However, such relationships can come in a wide variety of forms. It is settled law that if a business has physical presence within a state, that state can require the business to collect and remit its state and local taxes. However, many states have started taking the aggressive position that out-of-state businesses must collect state and local taxes if they have an in-state affiliate.
Unfortunately, it is difficult to give a definition or clarify the threshold at which a business relationship becomes a nexus-creating affiliate relationship. The reason for this is that each state has its own definition of affiliate nexus. What rises to the standard of a nexus-creating affiliate relationship in one state may not create nexus in another state.
For example, in California, out-of-state retailers must collect sales tax if they are related in any way to an entity located in the state. That’s a pretty broad definition! Meanwhile, in Arkansas, out-of-state retailers must collect sales tax if an affiliate delivers, installs, assembles, or performs maintenance services for the seller’s purchase within the state. This definition is much more specific and narrow.
Sometimes, it is not just the nature of the relationship that is considered for affiliate nexus purposes, but rather the dollar amount. For example, in North Carolina, out-of-state retailers must collecte sales tax when they make more than $10,000 in annual gross receipts from affiliate referrals. However, Georgia’s threshold is higher, requiring out-of-state businesses to collected sales tax only when they make more than $50,000 in annual gross receipts from affiliate referrals.
As you can see from this sample of affiliate nexus standards, it is not easy to decipher when a relationship between two legal entities rises to the level of a nexus-creating affiliate nexus relationship. There are at least 27 states that have affiliate nexus laws on the books, which offers 27 different definitions for taxpayers to deal with.
Unfortunately, that is just getting started with the problems faced by taxpayers who operate with affiliated businesses. Each of these states not only has a different definition of affiliate nexus, but they also have different effective dates. In fact, some states even have TWO different effective dates. If you’re planning on become sales tax compliant immediately, beware! The effective dates of some affiliate nexus statutes go all the way back to 2008. That could be 11 years of liability the state will want you to cut a check for the moment you identify yourself to the state.
Regarding liability, what can you do if you realize you have affiliate nexus with a state and are not registered? There are several options. First, you can do nothing. There are obvious risks with that, such as getting audited and caught for back taxes. Second, you can try to register going forward. Some states will allow for this if you are a remote seller and act quickly while they have special options available for remote sellers. Finally, most states offer a voluntary disclosure program. Such programs can only be entered into if you have not been reached out to by the state for sales tax purposes yet. In a normal program, you would pay back taxes for a limited period, such as three years, and any additional back taxes would be wiped away.
Ultimately, if you have any consistent relationship with another business, it may be in your best interest to do the following:
- Compare your affiliated relationship with the applicable statutory definitions of “affiliate nexus”
- Identify the effective date(s) of the applicable affiliate nexus statutes
- Register going forward or apply through a voluntary disclosure program
One of the problems with this process is that it assumes you know all the states in which your affiliate has physical presence. States also have varying definitions of physical presence. Potentially you could have affiliate nexus not just with the state in which the affiliated business is primarily located, but also with a state in which your affiliated business stores inventory or has one employee residing within. Imagine being audited for taxes back to 2008 because your affiliated business had one employee residing in that state! That is the unfortunately the state and local tax world we unfortunately live in.
Fortunately, there are highly experienced lawyers that focus only in this area to make sure they are able to help you and your business to the best of their abilities. State and local tax attorneys will be familiar with affiliate nexus, click-through nexus, marketplace nexus, use tax reporting laws, and economic nexus thresholds. A competent professional can guide you through the tax compliance process, assisting you in becoming compliant with the least exposure possible. If a state has already approached you looking to initiate an audit, or has issued an assessment, a state and local tax lawyer can work directly with the state on your behalf towards a resolution of the case. As with any important business decision, it is important to arm yourself with a solid knowledge base to make educated decisions in the best interest of the future of your business. Affiliate nexus is not going anywhere, and in fact will likely expand across additional states in future years. An unprepared taxpayer could be facing devastating consequences as tax-hungry states pursue aggressive audit campaigns in the coming years.
Jeanette Moffa is an attorney who concentrates on state and local taxes at Moffa, Sutton, & Donnini, P.A. She is an executive council member of the American Bar Association Tax Section State and Local Tax Committee and the Florida Bar Tax Section. Ms. Moffa is an author of both the CCH’s Expert Treatise Library: Sales and Use Tax as well the ABA’s Sales and Use Tax Deskbook. In addition, her regular columns on state and local tax issues can be found in State Tax Notes and Actionline, a publication from the Florida Bar’s Real Property, Probate, and Trust Law Section. She also serves as assistant editor to the Sales and Use Tax Deskbook and Actionline. Ms. Moffa is a regular speaker at the American Bar Association Tax Section conferences, the Institute of Professionals in Taxation, the Florida Bar Tax Section, the Florida Bar Real Property, Probate, and Trust Law Section, and the FICPA. In her free time, she teaches as an adjunct professor at Broward College.