Affiliate Marketing Nexus Taxes

October 2014 Update: Amazon Allows Minnesota Affiliates

On September 24, 2014, Amazon announced a new policy allowing Minnesota affiliates beginning October 1, 2014. This change was permitted because Amazon will begin collecting sales tax from purchases in Minnesota.

Amazon’s new affiliate policy, effective October 1, 2014, no longer lists Minnesota as ineligible:

Associates Program Operating Agreement – Section 2 (Enrollment), Fourth Paragraph

October 1, 2014 version

In addition, if at any time following your enrollment in the Program you become a resident of Arkansas, Colorado, Maine, Missouri, or Rhode Island, you will become ineligible to participate in the Program, and this Operating Agreement will automatically terminate, on the date you establish residency in that state. In addition, you must promptly notify us in writing of your Arkansas, Colorado, Maine, Missouri, or Rhode Island residency, which you may do via the Contact Associates Customer Service form available here.

Prior to October 2014, Amazon included Minnesota in the list of ineligible states:

Associates Program Operating Agreement – Section 2 (Enrollment), Fourth Paragraph

September 1, 2014 version

In addition, if at any time following your enrollment in the Program you become a resident of Arkansas, Colorado, Maine, Minnesota, Missouri, or Rhode Island, you will become ineligible to participate in the Program, and this Operating Agreement will automatically terminate, on the date you establish residency in that state. In addition, you must promptly notify us in writing of your Arkansas, Colorado, Maine, Minnesota, Missouri, or Rhode Island residency, which you may do via the Contact Associates Customer Service form available here.

January 2014 Update: Amazon Cancels Minnesota Affiliates

  • Amazon cancelled all Associates accounts in Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina and Rhode Island.
  • Amazon continues to deny companies and residents in these states from participating in the Associates program.
  • On January 17, 2014, Amazon Associates provided this warning for those attempting to open an Amazon Associates account in a prohibited area: “Residents of Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina or Rhode Island are not eligible to participate in the Associates program.”
  • Amazon’s Associates Program Operating Agreement now specifically restricts participation in the states of Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina, or Rhode Island:

In addition, if at any time following your enrollment in the Program you become a resident of Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina, or Rhode Island, you will become ineligible to participate in the Program, and this Operating Agreement will automatically terminate, on the date you establish residency in that state. In addition, you must promptly notify us in writing of your Arkansas, Colorado, Maine, Minnesota, Missouri, North Carolina, or Rhode Island residency, which you may do via the Contact Associates Customer Service form available here.

 

 

 

Editor’s Note: The article below was originally posted in 2013. Read the updates above for significant changes since then.

Minnesota Bloggers are Victims of 2013 State Sales Tax Law

Many Minnesota bloggers are facing some tough decisions in Minnesota: move out of state or lose your income from affiliate sales online. For full time bloggers or bloggers with popular websites, the financial cost of Minnesota’s new affiliate nexus law is devastating.

A little introduction may be helpful for those unfamiliar with how bloggers make money with affiliate marketing. Many bloggers in Minnesota make money by linking to products, and when a reader of the blog buys the product, the blogger gets a small commission. In these arrangements, bloggers are considered “affiliates” of the online retailer. A new law enacted by the Minnesota Legislature in 2013 provides that these bloggers create a sufficient connection (“nexus”) to Minnesota, giving Minnesota the right to collect sales tax on all of the online retailer’s sales in Minnesota.

Minnesota’s 2013 affiliate nexus law has enraged online retailers and their affiliate marketing companies who connect bloggers to the online retailers. Rather than pay millions in sales tax to Minnesota, major affiliate marketing companies have sent notices to Minnesota bloggers that they will be kicked out of the program to prevent the online retailers from being subjected to sales tax in Minnesota.

For example, on June 18, 2013, Amazon.com Associates Program sent the following to its affiliates in Minnesota:

We are writing from the Amazon Associates Program to notify you that your Associates account will be closed and your Amazon Services LLC Associates Program Operating Agreement will be terminated effective June 30, 2013. This is a direct result of the unconstitutional Minnesota state tax collection legislation passed by the state legislature and signed by Governor Dayton on May 23, 2013, with an effective date of July 1, 2013. As a result, we will no longer pay any advertising fees for customers referred to an Amazon Site after June 30 nor will we accept new applications for the Associates Program from Minnesota residents.

Please be assured that all qualifying advertising fees earned prior to July 1, 2013, will be processed and paid in full in accordance with your regular advertising fee schedule. Based on your account closure date of June 30, 2013, any final payments will be paid by August 30, 2013.

While we oppose this unconstitutional state legislation, we strongly support the federal Marketplace Fairness Act now pending before Congress. Congressional legislation is the only way to create a simplified, constitutional framework to resolve interstate sales tax issues and it would allow us to re-open our Associates program to Minnesota residents.

We thank you for being part of the Amazon Associates Program, and look forward to re-opening our program when Congress passes the Marketplace Fairness Act.

Sincerely,

The Amazon Associates Team

Thus, the result of this legislation is bloggers are prevented from earning commissions on sales generated by their websites. While the Minnesota Legislature apparently intended for the law to create sales tax revenue, legislators may not have considered how the law would cause Minnesota bloggers to lose their source of income.

In some cases, Minnesota bloggers are making well over $100,000. Bloggers now face the tough decision of losing this income or moving out of Minnesota to continue their relationship with affiliate companies and online retailers.

Minnesota Affiliate Nexus Law FAQ

Question: Could I avoid a nexus with Minnesota (which triggers the sales tax issue) by transferring my affiliate business, including my website, to a family member in another state and then maintain the website as my family member’s independent contractor?

Answer: An affiliate marketer cannot hire an independent graphic design company or website designer from Minnesota without creating a nexus between the vendor and the state of Minnesota.  According to the new law, a solicitor is defined as any “person, whether an independent contractor or other representative, who directly or indirectly solicits business for the retailer.”  Minn. Stat. § 297A.66, subdiv. 4(a).  In this particular scenario, the independent contractor creates a nexus by indirectly soliciting business for the vendor.  Further, even an out-of-state affiliate marketer will be considered a resident for purposes of the affiliate nexus tax where he/she has an employee providing services for the business in the state of Minnesota.  According to the new law, a resident “includes an individual who…has one or more employees providing services for the business in [Minnesota].”  Minn. Stat. § 297A.66, subdiv. 4(d).  Therefore, a nexus is created where an out-of-state affiliate hires someone in the state of Minnesota to perform services for their business.


Question: If I give my business to someone, such as my family member, in a state that doesn’t have a similar affiliate nexus law, could my family member continue my affiliate marketing business?

Answer: If your website and the business surrounding its operations has no nexus with Minnesota (no connection to Minnesota), the Minnesota law will have no effect on the business.

Overview of Minnesota’s Affiliate Nexus Tax

In order for any state to legitimately exercise its power in collecting taxes from a remote vendor, the vendor must have established a physical presence, or “nexus,” in that particular state.  A nexus is the connection that a business has with a given state—ordinarily a small sales force, plant or office.[1]  For example, an online vendor is required to collect and pay sales tax on any order purchased in states where it has an office or warehouse; yet, does not have to pay such taxes in states where it has no physical presence.

Recently, the Minnesota Legislature passed a bill (effective June 30, 2013) broadening the definition of “nexus” to include affiliate marketers, i.e. “solicitors.”   The new law requires businesses to collect and pay sales tax on orders shipped to states where it has an established presence of affiliate marketers that exceeds $10,000 in gross referral-based purchases.  The bill is based on the idea that affiliates act as extensions of a retailer’s sales force and are sufficient in themselves to establish a physical presence or nexus.

According to the new law, a retailer is presumed to have a solicitor in this state if it enters into an agreement with a resident of Minnesota under which the resident, for a commission or other substantially similar consideration, directly or indirectly refers potential customers to the seller.  The law applies to:

  1. any individual who is a resident of Minnesota, as defined in Minn. Stat. § 290.01;
  2. a business that owns tangible personal property located in this state; or,
  3. has one or more employees providing services for the business in this state.

According to section 290.01, a “resident” is defined as any individual with a permanent residence in Minnesota or that maintains a dwelling in the state and spends more than one-half of the tax year in Minnesota.[2]

As a practical result of this bill and others like it, online retailers have severed their connections with Minnesota affiliate marketers in order to avoid the pains of collecting and paying sales tax in the state.  Nevertheless, the United States Senate recently passed the Marketplace Fairness Act, a bill requiring online retailers to collect sales tax from purchasers in any state where they receive $1,000,000 in annual revenue.  Although the Marketplace Fairness Act must still be passed by the U.S. House of Representatives, its passage would remove the incentive for vendors to discontinue operations in Minnesota.  Until then, the Affiliate Nexus Tax will continue to pose a significant barrier to Minnesota residents interested in participating in an affiliate marketing relationship with an out-of-state vendor.

Options for Minnesota Affiliate Marketers

Option #1

An option with little risk is to move all affiliate marketing operations, as well as the affiliate marketer’s residence, to a state that is not prohibited like Wisconsin.  Wisconsin has some of the most lenient affiliate marketing laws in the country.  In fact, Governor Scott Walker has publicly endorsed the movement of affiliate marketers to Wisconsin, telling Tim Storm of FatWallet, “Welcome to Wisconsin.  We are not going to raise taxes as it would drive jobs out.  We want you to grow here.”

Although Wisconsin is a safe alternative to operating in Minnesota, a number of drastic changes would have to be made to a marketer’s affiliate operations and living arrangements in order to be removed  from the purview of Minnesota’s Affiliate Nexus law.  For instance, the marketer may not continue to reside in Minnesota nor own tangible property within Minnesota. Additionally, the marketer and the business employees may not provide any services while located within the state—for instance at a coffee shop. Although this option carries little risk, it does not come without the significant cost of changing residences and moving to another state.

Option #2

Another option is to create one or several LLCs in Wyoming as a potential work around to the laws in Minnesota.  This would include selling the affiliate website/business to an LLC and hiring an out-of-state independent contractor to manage the business remotely.  The difficulty here is the transfer of LLC-affiliate earnings back into Minnesota, as well as any participation in managing the LLC on the part of the affiliate marketer. If the marketer can establish a self-sustaining LLC in Wyoming without bringing its earnings back into Minnesota (at least until a federal law is passed to nullify the Affiliate Nexus Tax), the affiliate marketer may be able to continue business. Yet, this approach may harbor considerable litigation risk (from online vendors) should the Minnesota Department of Revenue find out. It is not recommended that the affiliate marketer assume such risk based solely on an unsettled interpretation of a new law.

Option #3

The safest option is to wait it out, but this means you would receive no income during the waiting period.  A bill called the Marketplace Fairness Act is currently in the pipeline in the United States Congress. The bill passed the U.S. Senate and awaits approval in the House of Representatives. The bill effectively removes the incentive for vendors to discontinue relationships with affiliates in particular states by requiring all online retailers to collect sales tax in any state where they receive $1,000,000 in annual revenue. Although this option is not the most attractive, it does include the least risk.

Option #4

The last option is to donate your Amazon Associate’s revenue to someone in another state (relative, friend, charity, etc.) who has an Amazon Associate’s account. This would allow you to support a cause or person, but you would receive no income from your website. If any funds are eventually paid to you (e.g. your friend writes you a check), you will face the same potential liability as if the funds were paid directly to you from Amazon. For small websites with little revenue, donating the funds is a reasonable option until the Marketplace Fairness Act is enacted into law.

Frequently Asked Questions

Question: Will Minnesota’s new LLC laws affect this legal issue?

Answer: No. Minnesota’s new LLC law, the Revised Uniform LLC Act, will have no effect on these legal issues.


[1] Quill Corp. v. North Dakota, 504 U.S. 298 (1992) (citing National Geographic Society v. California Bd. Of Equalization, 430 U.S. 551 (1977); Scripto, Inc. v. Carson, 362 U.S. 207 (1960)).

[2] Unless the individual or the spouse of the individual is in the armed forces of the United States or the individual is covered under the reciprocity provisions in section 290.081.  Minn. Stat. § 290.01, subd. 7(b)(1), (2).  According to section 290.081, the compensation received for the performance of personal or professional services within this state by an individual whose residence, place of abode, and place customarily returned to at least once a month is in another state, shall be excluded from gross income to the extent such compensation is subject to an income tax imposed by the state of residence; provided that such state allows a similar exclusion of compensation received by residents of Minnesota for services performed therein.  Minn. Stat. § 290.081(a).

[3] June 30, 2013.

Leave a Public Comment

  • Jeff
    July 19, 2014, 3:26 pm

    Do you see any chance of this law changing in the future for Minnesota?

    On your option 4, can I donate to a family member in another state, maybe to be used for college, and will I be taxed on any of this money. I don’t want any trouble or to be held liable. The wife says it is not worth and to just wait for the law to change. I did not make a lot of money, but a little extra cash helped out a lot.
    thanks for your great website.
    Is there a way to be updated on a email list of any new changes?

  • Alan
    July 26, 2013, 11:02 pm

    I understand Ohio is also introducing legislation against affiliate marketers and bloggers as well. I wonder if this is the beginning of something? Pity an FTC disclosure doesn’t just quite it these days

  • Tom Pick
    June 30, 2013, 4:02 pm

    Thanks Aaron for the thorough and thoughtful summary of the law, it’s effect on Minnesota bloggers, and alternatives for affiliates. I reported this story on my blog early on June 18 when the Amazon notices first went out (Amazon Shuts Down Minnesota Affiliates http://webbiquity.com/random/amazon-shuts-down-minnesota-affiliates/). What’s frustrating is that legislators knew in advance that large online businesses like Amazon would react in this manner, yet they proceeded to pass this tax anyway.

  • Kevin
    June 18, 2013, 11:27 am

    Lawmakers knew exactly what would happen, they just wanted to spend the money more.