New York affiliate tax complicates affiliate marketing programs
By Andrew B. Lustigman and Jonathan I. Ezor
As buying on the mobile Internet increases in popularity fostered by technological advancements in smartphones from Apple, Samsung, LG, Nokia and Motorola, the importance of affiliate marketing continues to grow in the mobile commerce and ecommerce channels.
Because affiliate marketing's success on driving online sales cannot be understated, New York's new tax on online sales generated by New York-based affiliate marketers is raising significant concerns for online and mobile retailers and affiliates, who are struggling to meet the state's evolving exemptions.
The State of New York recently passed legislation expanding the definition of "nexus" -- the connection to the state necessary for sales tax liability -- to include many Internet-based affiliate marketing programs.
Under the new law (which has been called the "Amazon Tax") and went into effect June 1, all marketers with New York-based affiliates (also called "resident representatives") generating at least $10,000 in sales during the previous year are presumed to be obligated to collect and pay sales tax for all New York-shipped sales (whether or not from affiliate links), although it is possible to defeat that presumption under certain circumstances.
There has been significant confusion among marketers, retailers and affiliates alike as to the requirements and exemptions for the rules.
Some retailers such as Overstock.com have dropped their New York-based affiliates. Also, Amazon.com and Overstock.com have each brought lawsuits challenging the law.
In response to the initial confusion, the New York Department of Taxation issued a Technical Service Bulletin (the "5/8 TSB"), TSB-M-08(3)S, on May 8.
The 5/8 TSB interpreted the law to suggest that an affiliate only using links to the marketer's site, without further promotion of the relationship, would not trigger nexus or the obligation to collect tax.
Relying on the 5/8 TSB, marketers have been modifying their affiliate agreements to limit New York-based affiliates to links alone.
Affiliate disclaimer requirements
On June 30, however, the Department of Taxation issued TSB-M-08(3.1) S (the "6/30 TSB"), which has further complicated efforts to comply with the law.
In the 6/30 TSB, the Department of Taxation stated that, while contractually obligating New York-based affiliates to limit their marketing was a necessary part of defeating the presumption of tax liability, it would not be sufficient.
First, any nonprofit or other organization serving as an affiliate would have to "maintain on its Web site information alerting its members to the prohibition against" marketing methods beyond the mere link.
This is apparently to reduce the chance that well-meaning members of the organization would act on their own to promote sales to benefit the organization even when the organization itself agreed not to.
Proof of compliance
As a further requirement for all merchants, in order for the merchant to defeat the presumption that it is obligated to collect sales tax because of New York-based affiliates, the 6/30 TSB states:
Proof of compliance condition. Each resident representative must submit to the seller, on an annual basis, a signed certification stating that the resident representative has not engaged in any prohibited solicitation activities in New York State, as described above, at any time during the previous year.
In addition, if the resident representative is an organization, the annual certification must also include a statement from the resident organization certifying that its Web site includes information directed at its members alerting them to the prohibition against the solicitation activities described above.
Furthermore, the certification must contain a statement alerting the representative that the certification and any information submitted with it is subject to verification and audit by the Tax Department.
The 6/30 TSB provides some additional requirements and details with regard to this certification requirement, and suggests that failing to get a certification from 100 percent of New York affiliates will not necessarily mean that the marketer will be subject to New York taxation liability, although the standards are unclear.
In short, based on the current guidance from both the 5/8 and 6/30 TSBs, it appears that those merchants without other New York tax nexus who wish to use New York-based affiliates must:
(a) incorporate prohibitions on marketing activities other than linking into the agreements the merchants have with the New York-based affiliates;
(b) require affiliates that are clubs or not-for-profit organizations to place the information about the prohibition on their Web sites; and
(c) require all New York-based affiliates to submit to the merchant annual certifications that the affiliates are complying with the prohibition and disclosure requirements.
The 6/30 TSB is available online at http://www.nystax.com/pdf/memos/sales/m08_3_1s.pdf.
One other interesting development with regard to the "Amazon Tax" law is that the New York State Senate (one of two houses in the state legislature) approved S08638, which would repeal the Amazon Tax.
It is unclear what the future legislative path of the bill will be in the Assembly or what the governor will do should it pass both houses.
But plainly, this law is threatening to stifle the use of affiliates and needs to be closely watched.
Please click here for a copy of the New York Department of Taxation's 6/30 Technical Service Bulletin.
Andrew B. Lustigman is attorney and principal and Jonathan I. Ezor is special counsel at The Lustigman Firm, New York. Reach them at and .