What is affiliate nexus? A guide for businesses
If you sell into states where you don’t collect sales tax, it’s important to understand affiliate nexus laws.
All states with a general sales tax require a business to register then collect and remit sales tax when the business has established sales tax nexus with the state. Nexus is a connection between a business and a state that creates an obligation to collect and remit sales tax. Affiliate nexus is one type of sales tax nexus.
Every state with a sales tax has sales tax nexus laws that can impact out-of-state sellers. And that’s almost every state: The only states with no sales tax are Delaware, Montana, New Hampshire, and Oregon. There’s also no statewide sales tax in Alaska, but many jurisdictions have local sales taxes and tax remote sales (i.e., sales by businesses with no physical presence in the jurisdiction).
Not every state has an affiliate nexus law, but where they exist, they can affect sales tax compliance. So, to be compliant, you need to understand how affiliate nexus works.
What is affiliate nexus for sales tax?
Affiliate nexus is based on a relationship with in-state entities: An out-of-state business with no physical presence in a state (i.e., a remote seller) establishes sales tax nexus with a state through ties to in-state affiliates, employees, representatives, or other entities located in the state. Like other forms of sales tax nexus, affiliate nexus creates sales tax obligations for businesses.
No two affiliate nexus laws are exactly alike. That said, affiliate nexus is usually based on one or more of the following:
- Generating a certain threshold of sales through relationships with in-state affiliates
- Having an in-state business conduct one or more activities to help an out-of-state retailer establish and maintain a market in the state
- Using trademarks, trade names, or service marks that are substantially similar to those used by an in-state business
Common ownership for in-state and out-of-state businesses can also trigger affiliate nexus. Illinois and New York offer examples of different affiliate nexus laws.
Who is affected by affiliate nexus?
Affiliate nexus laws can affect out-of-state businesses that sell into states where they have one or more in-state entities. In-state entities can include employees, representatives, subsidiaries, or other affiliates.
If you have business relationships in a state with an affiliate nexus law, you could have sales tax nexus and an obligation to collect sales tax in that state. Or, you could be at risk of establishing affiliate nexus in the future.
How many states have affiliate nexus laws?
Approximately 25 states have affiliate nexus laws for sales tax. Where affiliate nexus laws exist, they can be enforced. The onus is on you, the business, to know which sales tax laws apply to you and to comply with those laws. When in doubt, check with the state tax department or a trusted tax advisor.
Why don’t more states have affiliate nexus laws?
Affiliate nexus laws were more common before the United States Supreme Court decision in South Dakota v. Wayfair, Inc. (June 21, 2018), which allowed states to base a remote sales tax obligation on a remote seller’s economic activity in the state (economic nexus).
Prior to the Wayfair decision, states could require a business to collect and remit sales tax only if the business had a physical presence in the state (physical presence nexus). Affiliate nexus worked around the physical presence rule by tying a remote sales tax obligation to the activities of an in-state affiliate. This allowed the states to tax some of the online sales that were proliferating.
Idaho and New York enacted the first affiliate nexus laws for sales tax, in 2008 and 2009 respectively. Other states soon followed suit. Arkansas adopted affiliate nexus in 2011, for example, and affiliate nexus took effect in California in 2012.
Once states won the right to tax remote sales with the Wayfair ruling, the need for affiliate nexus declined. Starting in 2019, several states, including Arkansas and California, repealed their affiliate nexus sales tax laws.
How do states tax remote sales?
Physical nexus is one of the most common nexus triggers, even for out-of-state sellers. In some states, an out-of-state seller can establish a physical presence and a sales tax obligation by participating in trade shows in the state. Having inventory in a state can also create a sales tax obligation for an out-of-state seller, even if the inventory is for marketplace sales. And remote workers located in a state may give their employers physical presence nexus.
All states with a sales tax also have economic nexus laws. Economic nexus rules allow states to tax remote sales by any out-of-state business that reaches a certain threshold of sales activity, not just businesses with in-state affiliates. Economic nexus thresholds vary and include:
- $100,000 in sales in the state in the previous calendar year (Florida)
- $500,000 in sales in the state in the current or previous calendar year (California)
- $500,000 in sales and 200 transactions in the state in the immediately preceding four sales tax quarters (New York)
You can find state-specific details in our state-by-state guide to economic nexus laws.
Online referrals from a third party (click-through nexus) can also create a remote sales tax obligation. Approximately 15 states have click-through nexus laws.
It’s important to remember that where laws exist, they can be enforced. While some states eliminated affiliate nexus, many states kept their affiliate nexus laws. Illinois even reenacted affiliate nexus a few months after repealing it.
So, affiliate nexus laws matter and shouldn’t be overlooked. Any state with an affiliate sales tax nexus law can require an out-of-state seller to register then collect and remit sales tax based on affiliate nexus. And any business that has affiliate nexus and fails to collect and remit sales tax as required can be held liable for the unremitted tax.
What happens if you don’t comply with affiliate nexus sales tax laws?
The consequences of not complying with affiliate nexus laws can be serious for businesses. You could be found liable for back taxes and end up paying sales tax out of pocket, plus penalties and interest. Read What happens if you forget about sales tax nexus? for more details.
