According to eMarketer, online sales in 2009 are likely to reach $133 billion. It shouldn’t come as any great surprise to discover that cash-strapped states all across the country are trying to figure out ways to convert these sale dollars into tax revenues. Well, some states have figured out a way, but at what cost?

From the dawning of e-commerce, affiliate marketing has been a fundamental, cost-effective and ubiquitous vehicle for marketing and lead-generation in the vast digital marketplace. Moreover, these affiliates were almost universally likened to advertising channels (i.e., no different from a local radio station or regional magazine) than employees or contractors. Aside from entering into affiliate agreements, complying with a retailer’s affiliate marketing policies, and receiving commission checks, little, if any, relationship has traditionally existed between retailers and affiliates. The universe of affiliate marketing, however, has been shaken by recent developments within various state tax regimes.

Before going further, let’s understand some basic principles of State Sales Tax 101: Retailers are generally required to collect and remit sales tax to the state in which a sale of products or services occurs. A state may generally not impose a sales tax on sales made outside of its borders, unless the retailer has a sufficient taxable nexus in the state. Although each state will apply its own nexus standards, the answer will generally depend on an application of an inherently imprecise facts-and-circumstances analysis that asks whether the seller has “sufficient” contacts with a state to be subject to its jurisdiction. Traditionally, “nexus” was established where an out-of-state retailer had employees or agents physically present in the state, or where the out-of-state retailer engaged in-state, third-party contractors to perform certain activities on its behalf.Continue Reading The Amazon Tax; Friend or Foe?