Arizona’s Affiliate Nexus Tax : The End of Affiliate Marketing in Arizona?

affiliate nexus tax
Are Arizona lawmakers going to pass an affiliate nexus tax?

Arizona is currently carrying a $1.5 billion deficit. So, in an attempt to balance the budget, Arizona legislators are thinking about taxing out-of-state online retailers  that sell to Arizonans.
Translation: Arizona lawmakers want to tax affiliate marketers on the sales to people living in Arizona.

How will this affiliate nexus tax impact the Arizona economy? Keep reading.

HB 2551: The Death of Affiliate Marketing Tax Reprieve

Technically, Arizona HB 2551 expands the legal definition of “nexus.” Nexus  refers to a person’s or business’ material connection to a given jurisdiction. Arizona’s HB 2551 claims that any company that directly or indirectly does business with a resident from Arizona (i.e., someone from Arizona purchases something from your online store) is presumed to be transacting business in Arizona and therefore must pay a sales tax on the purchase. The rule applies only if the gross proceeds or cumulative gross income exceeds $10,000 in sales over 12 months.

If the Arizona online sales tax bill passes, Amazon.com will be hit hard because of their heavy reliance on affiliate marketing.

Affiliate Nexus Tax: Desperation Smells Like Perspiration

What kind of effect would HB 2551 have if passed?

Thousands of Arizonans generate income for themselves through affiliate marketing. Just like any other business, affiliate marketers pay their fair share of taxes on the state and local level. As a matter of fact, affiliate marketers in Arizona paid $3.7 million in taxes in 2009. The amount of state revenue could be higher in 2010, but HB 2551 would have to fail.

Logically speaking, if HB 2551 were to pass, affiliate marketers would stand to earn less than before, thus suppressing the state’s ability to generate revenue. Not to mention that Amazon and other online retail outlets threatened to sever ties with affiliate marketers who live in a state that enacts a nexus tax law. Surely Amazon and the others can’t be serious about such a move!

Think again.

If HB 2551 passes, Arizonians will still be able to buy things from Amazon.com, they just won’t be able to be one of their affiliates.

Arizona Affiliate Nexus Tax Could Have A Negative Impact On Fund Raising In The State

Furthermore, HB 2551 has the potential to reduce the amount of money Arizona’s schools could raise through programs like Box Tops for Education. Programs like these often rely on affiliate websites to raise funds for educational purposes — including physical education, field trips, and other items to enhance learning. The Box Tops for Education program began when kids started collecting cereal box tops that would be traded in for a few cents apiece. Today, that program is conducted, for the most part, over the Internet through websites that donate some of the commissions they earn when people shop there. Merchants participating in this program include Best Buy, 1-800-Flowers, Avon, Land’s End, and Barnes & Noble.

Since purchasing from out-of-state retailers will remain an option for Arizona consumers, even if the out-of-state retailers don’t allocate money from their budgets to spend on advertising with businesses in Arizona, HB 2551 has the potential to reduce tax revenue instead of increasing it.

The Effects of Similar Nexus Laws In Other States: Epic Fail

Thus far, three states – Rhode Island, North Carolina, and New York – already enacted nexus online sales tax laws. These states had visions of filled coffers dancing in their head, but not one succeeded in increasing revenue. The opposite rang true. Rhode Island experienced a loss in revenue so quickly that the state legislature drafted legislation to repeal the original nexus tax.

North Carolina gave up tracking nexus tax collections. The state of New York is paying another way – Overstock.com and Amazon.com have filed litigation to block the collection of the nexus tax.

Colorado tackled the online nexus sales tax law. This transferred the responsibility for collecting such taxes to consumers from the businesses. The law in Colorado requires businesses like Amazon to send annual detailed notices by January 31, of the purchases on which customers owe tax in Colorado. Of course, such information is reported to the Colorado Department of Revenue. Consequently, Amazon pulled the plug on its affiliate program in Colorado. Latest developments indicate a federal judge blocked Colorado’s requirement for online sellers to report sales tax.

California and Illinois are among seven other states considering an online nexus sales tax. However, California’s Board of Equalization admits it’s a bad move.

Contact An Internet Law & Affiliate Marketing Attorney

Contact an Internet marketing lawyer to learn more about HB 2551 along with other online and affiliate nexus tax laws.

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