New Internet Sales Tax Laws Causing Major Issues for US Merchants & Affiliates

There is a lot of upset over the new internet sales tax laws that apply directly to online sales, and are already hitting some affiliates hard.

These laws require online merchants to collect state sales tax if they have local affiliates in those states. The states currently affected include California, Hawaii, North Carolina and Rhode Island - but many other states are in the process of following suit...

Merchants have always been responsible for sales & use tax on sales made within their own state whether that be online, offline, or mail order sales. The new laws propose that online merchants should also pay state sales tax in certain states where they have affiliates. The argument being that their affiliates represent a "physical presence" in that state.

A handful of cash-strapped states have weighed laws that would use the presence of affiliate marketers to force e-commerce companies into collecting sales tax. source

The New York State legislature has included a provision in their $122 billion budget. About $50 million of this is meant to come from a tax on some online retailers. (source no longer available)

How will the new internet sales tax laws affect you, as an affiliate marketer or as an online merchant? Good question.

So far the damage appears to be fairly contained, directly affecting affiliate marketers in the 4 states mentioned and larger online retailers that ship physical products.

You have probably already heard the news of dropping affiliates in certain states, but here is a list of merchants that dropped affiliates in New York: Merchants that Dropped New York Affiliates (link no longer available).

Merchants are fighting back

Dropping their affiliates in the affected states is a direct message to that state regarding their disagreement with the new internet sales tax laws. Basically, they are refusing to pay the additional state sales tax by pulling their affiliate program in those states.

"It's painful to have to terminate these relationships with affiliates, simply because they live in states where counterproductive (and likely unconstitutional) laws are being passed," said Patrick Byrne, Chairman and Chief Executive Officer of source

The states that are looking at passing this provision to their sales tax law obviously want to increase their tax revenue. Unfortunately, given the widespread response by major online merchants, the new laws will create hardship on their local citizens - ultimately damaging their local economy even further.

Imagine for a moment that you live in New York, and earn a healthy 6-figure income from your affiliate sites. You pay income tax, and contribute to your local community. You are one person. In steps this law, your primary merchants drop you as an affiliate, your income drops to below poverty level practically overnight. ( dropped 3,400 New York Affiliates) and, two of the internets largest retailers, have both filed lawsuits against the state of New York. Overstock dropped the NY affiliates, while Amazon decided to pay the sales tax on sales made by NY affiliates pending the outcome of the lawsuit.

The outcome of those lawsuits, and each states response to their lack of participation in sales, will ultimately influence the future of online sales and affiliate marketing.

Personally, I applaud the merchants for taking a stand, and the affiliates who have written to their state representatives regarding the new internet sales tax laws. Affiliates in the affected states are currently taking the hardest hit, but this is something we should ALL be paying close attention to.

Will the Internet Sales Tax Laws affect you directly?

If you are an affiliate in California, Hawaii, North Carolina or Rhode Island then you have probably already experienced immediate termination by certain online merchants. What about the rest of us? You need to keep an eye on your state, because you may just be next.

The question has been raised by independent merchants, regarding their sales tax obligation in these states where they may have active affiliates. To date, the laws are obviously targeting the larger online retailers.

New York, for example, has a $10,000 threshold:

If an online retailer did not make at least $10,000 in gross sales to New York residents, they are not obligated to collect sales tax. (source no longer available)

It seems obvious that they are also targeting the sale of physical products. But don't get too relieved just yet if you only deal in ebooks and virtual products. New York also wants to impose a 4 percent sales tax on online downloads of music, ring tones, games, movies and other media from online retailers. source

Are smaller retailers and info-products next on the list? Obviously that depends on each state, the outcome of current lawsuits, and the response from buyers and sellers alike. As I said, this is definitely something we all want to keep an eye on.

In the meantime, I suggest "business as usual". Do not let this deter you from setting up affiliate sites or starting your own affiliate program. I live in Tennessee which is so far unaffected, so I plan to continue managing my affiliate sites and setting up new ones.

If you live in the affected states, and worked directly with merchants who are declining affiliates in those states, look for independent merchants to work with. Worst case scenario, you can sell profitable affiliate sites to someone in another state. Partner with someone in another state. Remove affiliate links and monetize with Adsense and advertisers temporarily until things (hopefully) resolve. Create your own info products, etc.

I'd love to hear your thoughts on these new Internet Sales Tax Laws that seem to be spreading through the states like wildfire. And affiliates from California, Hawaii, North Carolina and Rhode Island - We'd love to hear from you! What are you experiencing on your end, and what is your recovery plan?


Resources Related to Internet Sales Tax Law:

About Lynn Terry

Lynn Terry is a full-time Internet Marketer with over 17 years experience in online business. Subscribe to ClickNewz for the latest Internet Marketing trends & strategies, Lynn's unique case studies, creative marketing ideas, and candid reviews...more»


  1. On a practical note...what better economic stimulus could a community in New York or Tennessee or N Carolina etc have than the influx of real, spendable, non-debt, affiliate commission money from around the planet??
    This isn't high finance...nor convoluted financial instruments...this is obvious simple healthy arithmatic.
    And the major media will begin to take notice if the blogosphere heats up enough.

  2. TX CHL Instructor says

    "As the saying goes, a democracy is 3 wolves and a sheep deciding what to have for dinner."

    Actually, it's "Democracy is 2 wolves and a sheep voting on what's for dinner. Liberty is when the sheep is armed."

    The main economic problem right now is uncertainty. Business reacts very badly to uncertainly, as is demonstrated by Amazon's reaction to the various petty state governments. Another problem is that we are experiencing the beginning of a deflation, despite the enormous amount of new money being created. The reasons for that are complex, but have mainly to do with a loss of confidence in the banking system (there's that uncertainty again), and the 9:1 reserve ratio (of money with no physical basis) that means that every dollar pulled out of the banking system reduces the effective money supply by $100. What we are seeing is a lot scarier to me than some states trying to enhance revenue by forcing out-of-state companies to do their work for them. It is the beginning of the collapse of the whole system.

    Deflation is a very unstable positive-feedback cycle. It's painful, but it is also extremely difficult to break, especially when the government is trying an uncoordinated scattergun approach to various fixes (since the most important underlying problem is uncertainty).

    It's gonna get worse before it gets better. I strongly suggest putting away some cash, and enough canned food and water to subsist for a couple of months. Better to have it and not need it...

  3. Try as I might, this is not really an issue I can remain calm, cool, and collected on.

    It's outrageous and an affront on every possible angle. I almost don't even know where to begin.

    First, I read what happened to Jerry West. I don't know him, nor remember how I even got on his list, but his subject line compelled me to open it.

    Let me make some prefacing remarks, whether people like to hear it or not. This IS a political issue ultimately, no matter what anyone says.

    Before anyone assumes anything, let it be known I do not vote either Liberal or Republican. I am of the philosophy that "The Government that Governs Best, Governs Least."

    Whatever. I only say this because some people have the tendency to pigeonhole you into either left or the right based on a single viewpoint you express, which has always amazed me.

    Depending on my opinion on an issue, I've been called a rapid liberal or a right wing nut. Go figure.

    That out of the way.

    Here's a few remarks I will make, which may p*ss some people off or may not.

    What we are dealing with here is a legal, financial, and, lastly, a moral issue.

    This isn't an issue just because we're affiliate marketers. And this isn't just an issue because some of us may be super affiliates and make a lot of money online.

    Even when I was broke, I never believed it was fair that just because someone made more they should pay more.

    Also, I am not of the opinion that as long as something becomes the law of the land that makes it right or that people should even necessarily abide by it.

    What's legal is a slippery slope. Politicians, most of whom have backgrounds as lawyers, are masters of obfuscation, problem finding (not solving) and taking issues that should be rather simple and over complicating them in order to dupe the public and make themselves feel superior and smug, especially as they lord over us.

    Before you think I have a low opinion of all lawyers, you'd be wrong. I'm sure there's got to be at least one of them on this planet whom I would like. I just have to exert the considerable effort in finding him or her first.

    Anyway, the problem in society is people tend to usually only care about an issue once it directly affects them. That's a real shame.

    Let's remember that this country was founded as a constitutional Republic, and underpinned by the rule of law.

    The constitution was never meant to be a "living, breathing" document. It was meant to be rigid and timeless.

    Once it becomes flexible, things can go anyway some lawmaker pleases.

    I have not yet been affected by the stupid, legal shenanigans of the affiliate company taxation issue but close friends of mine have been. Even if I am never affected by these issues, I will continue to be outraged by them.

    Just as I am outraged to hear about innocent people getting steamrolled by the government in industries that have nothing to do with online marketing.

    And I got news for the people who think the US is supposed to be a "democracy." These things come about precisely because we've shifted away from being a constitutional republic (rule of law) to democracy (mob rule).

    As the saying goes, a democracy is 3 wolves and a sheep deciding what to have for dinner.

    Anyway, back to my POINT here. What we are seeing is the outrageous result of careless fiscal actions by our politicians (big shock there), a mounting desperation, and therefore, their going after the productive members of society in any way they can, and distorting the law anyway they can.

    I applaud people who contact their state representatives and let their voices be heard.

    I feel badly for the people who are ignored by their state legislators, which is quite common.

    In economics, there's a saying: "capital is a coward." In short, money and capital goes where it's safe and protected. That's why people came to the US and why it became the greatest country on planet Earth.

    That's also why increasingly people are now leaving it.

    As for the affiliate company taxation issue, it complicates everything further as innocent affiliates do whatever they can (move out of state) or set up crazy companies out of state to deal with this issue.

    A friend of mine in NY is literally giving me his commissions by putting up MY affiliate links on his sites for programs he was booted out of because I am still in a "non-bootee" state and I am paying him the money and then 1099'ing him as a business partner (which he is) so I can write it off.

    I mean how insane is that. Absolutely preposterous.

    All because of a bunch of clueless nitwit politicians desperate for a revenue infusion stumbling over each other and destroying yet more productive sectors of society and taking out thousands of innoncent people in the process.

    OK rant over.

    Fight this thing. Fight it good. Fight it hard. Fight it not just because you're an affiiate marketer but because it's the right thing to do.

    Dan Ho

    • Way to go Dan. I live in Western North Carolina and in case you-all don't know the embattled farmers and plainsmen of this area started the fighting with the British way before the Minute Men from New England fired their shots. You couldn't have said it better-"The Best Government is that which governs least."

    • Thomas DePaulo says

      I was just processing an order with Macmall to purchase a new computer, when they hit me with the news that I would have to pay tax, even though I was buying it from out of state (Colorado). I cancelled my order, to despite the $230 product incentive they were offering. I am hoping that we the people will draw the line in the sand and say, "ENOUGH IS ENOUGH! Stop taxing me to death!"

      Dan, I couldn't agree with you more! It gives me hope to think that there are others out there with common sense and true American ideals.


  4. I apologize for my last post. Some parts somehow ended up duplicating each other near the top. Don't know how that happened! I would edit it if I could.


  5. Thanks Lynn!

    Well, even if the issue being discussed isn't good for my blood pressure your smiley face pic and editing skills on my botched post are. 🙂


  6. One of the things that puzzles me is why those state governments would make it less favorable for online affiliates to do business. Sure, they could make a little money on the sales tax, but have they considered the consequences of the lost income tax that they would make on those same affiliates?

    I guess one of the things that someone might want to mention to the politicians that came up with the idea to charge the extra sales taxes on online goods is that the Internet is fluid, unlike a traditional brick and mortar store. Due to this fluidity, you could technically operate your business in one state, and when something like this happens, you could move your business elsewhere, whether it be incorporating in a different state or country for that matter.

    I can understand the government may be looking for more money, but I think in the end, they will just end up shooting thereselves in the foot and end up with less than they started with.

    • Hi Marc,

      I'm sure they did not anticipate Amazon and other major online merchants pulling their programs from the state. I imagine they assumed it would be fairly simple to enforce.

      It seems obvious that they are eyeing those merchants that would be easy to target for this collection. Particularly with the merchants who sell physical products, and in NY with the threshold set at $10,000, etc.

      The affiliates were not taken into consideration beforehand. That's a result of the response of the merchants.

  7. Chris Cobb says

    Here's a blog that is keeping up with the various states

  8. Government always likes to target "big guys" first because then all the little guys get behind the new laws.

    "Yeah, they're making too much money. Let THEM pay more taxes."

    But it's all just a set-up before they go after the little guys. Give an inch, give a mile. Next thing you know, everybody is paying the tax.

    I find it very encouraging that Amazon and Overstock have basically said "Screw you!" to states who've tried to grab more money. That's the silver lining, and that's what we should be focusing on.


  9. TX CHL Instructor says

    The business of strong-arming others to do your work for you was learned from the federal government, which has imposed enough unfunded mandates on the states that there are a few of them (most recently, Alaska) actually starting to call them on violations of the 9th & 10th amendments.

  10. There seems to be a lot of confusion over the Affiliate Tax, or the Amazon Tax as it's been nicknamed. People are ranting and raving over an additional tax burden, when actually it's just an issue of enforcement.

    When you buy a product from out of state, you dont pay your state sales tax on the invoice. If you buy a product from a merchant or company IN your state, you do. Right?

    What a lot of people don't realize, its that you're still supposed to pay sales tax on those purchases - you just pay it to the state, instead of to the merchant. Except it's called "use tax" after the fact.

    A couple of good references - look up Use Tax on Wikipedia. Or google the phrase "calculating and reporting use tax in new york".

    This is not a new tax. This is a few states' roundabout way of trying to enforce the use tax, by getting the major online retailers to collect it for them - even though they dont have a nexus or a physical presence in that state.

    Apparently the state of New York started adding the use tax as a line item on income tax returns, as a means of enforcing collection of this tax. Two other states, Michigan and Utah, tried this in 2001 and reported tax revenue of $3.1 million and $250,000, respectively.

    Here's the interesting note: compliance percentages (taxpayers who reported and paid a use tax) for 2001 were 1.6% in Michigan and 0.58% in Utah. And of course it's up for debate as to whether those few reported accurate numbers.

    It's not Amazon's job to collect sales tax on sales made to buyers outside their home state. Other states are attempting to force them to, saying that since they have affiliates there - that represents a physical presence.

    But since they obviously can't seem to get their residents to report and pay the tax, they are trying to strong arm the merchants into doing the paperwork for them.

    So it's not a tax that Amazon - or any other merchant - pays. It's a tax they collect, and then turn over to the individual states. Each state having a different sales tax rate of course, which creates an unfair bookkeeping burden on the merchant.

  11. Jerry West has posted a new video:

    Amazon Affiliate Tax Solution

    Check it out!

  12. I sent that "solution" to a NC associate struggling with this and this is his take on it:
    That's called tax fraud. If the state finds out he is doing a significant portion of managing websites from in NC, it will establish nexus for Amazon. The state will sue Amazon for back taxes and Amazon will sue him for the same amount, since he is the cause.

    • Mike Hays says

      Nan, not to be disrespectful but of course they are going to scream "foul". That's like calling the IRS and asking them for tax shelter advice. The reality is there are many businesses including fortune 500 companies that have incorporated in other states. The best advice that has been already discussed is to talk to an attorney who specializes in setting up and running corporations in other states. Garratt Sutton, a well know corporate attorney in the state of Nevada has already started working with businesses from many states to resolve this very issue.

    • Hi Nan,

      Did that "NC associate" say that because it's just his opinion OR did they actually talk to their atty or tax accountant and get a "legal" opinion?

      While Jerry West's solution probably will work for "his" particular biz setup, most likely isn't a solution for most people with this issue.

      Remember ... there IS a big difference between "tax evasion (tax fraud)" (for taxes owed) and "tax avoidance" (properly done is perfectly legal).

      IF a company doesn't like a state's tax rate they're certainly within their rights to move to another state with lower taxes which is "tax avoidance". Nothing wrong with that.

      ONE thing people need to understand ...

      There is NO single "cookie cutter" solution that will work for eveyone. Everyone's setup is a bit different. That's why everyone should discuss this with their own atty and accountant and THEN make a decision which way they need to go.

      And when I say attorney, I mean an attorney that is actually qualified at dealing with these issues. Usually your divorce lawyer or general lawyer are probably not who you need to talk to. heh heh

      And yeah, I know ... This whole issue "bites" but we need to deal with it. It's NOT going away. :-/

      Rick Wilson

  13. Mike Hays says

    I thought this link was rather timely from an attorney disputing Jerry West's Amazon Tax solution.

  14. Mike Hays says

    I agree on several points that Mike Young makes i.e having separate bank accounts for two different corporations, but at the same time he takes a nasty tone attacking Jerry West. I'm also disappointed in Mike Young's solution to this ongoing problem. As an Internet attorney I feel his solution is weak. Especially the third alternative, "Order a copy of Ayn Rand’s “Atlas Shrugged” or Harry Browne’s “How I Found Freedom In An Unfree World” via Amazon and ship it to the New York State Department of Taxation and Finance." How would you feel if you went to an attorney who is charging you $150 to $700 an hour and he told you to go read a book?

    Just because someone says they are an attorney should you believe everything they write on their blog? There has been a lot of bad advice passed on by so called "expert" lawyers. I think that is why we are in this mess right now.

    One of the reason we have so many law suits in America is because there are different interpretation of the law by laypeople and attorneys. I think it is self righteous to criticize someone for their opinion and to accuse them of "practicing law". I believe Jerry was following the advice of his attorney and tax accountant and was merely listing a solution that his team came up with. I'm not going to argue if the advice was good or bad, I'm neither a lawyer or tax accountant. As a consumer and Internet Marketer I do feel it is my responsibility to obtain the best possible solution to a problem and that includes listening to the advice of people like Jerry West and Mike Young. I would then take those opposing views and seek my own attorney and accountant of whom I trust and together come up with a viable solution that fits my needs.

  15. Hi Lynn,

    It's good to see this discussion continuing here. It needs to stay on affiliate marketer's minds til this is resolved one way or the other.

    Been reading the posts by Jerry West & Mike Young on their respective blogs about all this. Been running them by my atty earlier this evening along with Jerry's "solution" post.

    For me, my "legal counsel" says that Jerry's solution, while probably very workable for him with HIS own circumstances, is not something he would recommend for me. It seems a bit more complicated than it needs to be for most people including me.

    It seems that I might have a couple options to think about, though. But definitely have to form the company in another state and have related functions like banking, mail, phone in that state too. Even a company payPal account too! LOL

    RI is such a non business-friendly state. So my whole online business entity will eventually be in that "other" state as almost all my online income is from affiliate marketing & my day trading. My biz entity is actually pretty simple for tax purposes. ALL Form 1099s. heh heh

    It's definitely gonna get ALOT more interesting when I finally get this set up. NOW ... IF only I can just get my "legal eagle" back from jetsetting around Asia with his wife, then I can get this deal started! LOL

    Have Fun All!

    Rick Wilson aka CorpRebel 8)

    P.S. Remember ... You really need to get legal advice from your own attys & accountants so you can figure out what's best for YOUR business! 😉

  16. Rich Owings says

    I've spoken with an attorney who specializes in Internet issues. He has reviewed NC's pending legislation and we have discussed incorporating out of state and having a physical office out of state. But that isn't enough -- he believes nexus is based on where significant business activities take place. If the legislation passes, I'll be talking to a sales & use tax specialist before implementing anything.

  17. Stop kidding yourselves, big companies like eBay, Google, Amazon, Overstock, etc. are stuffing their pockets with dollars that belong to the state. Why should your local seller bear the burden to compete with a infastructure built by a few and used by all. These compaines that are not paying sales taxes are boosting about the "BILLIONS" of dollars worth of cash they are setting on. Stop crying and call your Congress and Senate and tell them to step up.

  18. tax inquiry says

    Do you know what the laws are regarding state tax if a person purchases online but then PAYS in person at a third party WALK IN PAYMENT location? ie like a money wiring location? Nothing to do with an affiliate. Would the merchant be required to pay STATE tax in that scenario since payment is made in a physical location? some people without credit cards are making payments in physical locations for items purchased on the web-just wondering how tax might be affected in that case?

  19. Ashawndra says

    I'm soon starting one of many website mainly focused on affiliate marketing as well as my own products online. I actually was entangled in this mess on the customer end (paying this sales tax) getting more information with digital products. I live in nc currently, but i agree this is a huge problem I don't like it PERIOD!Guess Im moving out of state soon hope this does not spread across the nation =[

  20. Kathy Pop says

    Sales tax??? We are NOT buying anything! Sales tax is charged when you purchase something. What are we purchasing??? Do the actual buyers pay a sales tax on the product as well?

    Now, as a business, we are supposed to report our earnings as income, but we should not be paying a sales tax on top of that. I'm OK with the affiliate programs having us sign a 1099, so it can be reported as income ( I guess ) and then let the Affiliate be responsible for filing their own (income) taxes.

    There's my rant on the topic ^-^

  21. The software to calculate sales tax nationwide is readily available and used by national chains for their online sales as well as by Amazon when it administers sales for Target. The federal legislation we support would exempt small online retailers (those with less than $5 million a year in sales), so would not impose an undue burden on small businesses. Larger companies can easily implement the software. One problem with having the tax paid to the company's home state is that you would get a race to the bottom with each state trying to attract online retailers by lowering its sales tax. Another is that sales taxes are used to support services, like schools, that the customer uses.

  22. Thanks for your post. I think the logic of having the tax owed to the customer's home state, rather than the state where the seller is located, is that the sales tax revenue pays for the services (schools, roads, etc.) that the customer uses. This also extends to visiting tourists, who benefit from the infrastructure and other services provided by the state they are visiting.

  23. All this said, I’m personally not against large corporations having to pay sales taxes in the areas where they have a physical presence, whether the presence is an affiliate marketer or an actual office. Tax-free online sales have in many cases hurt local economies and these taxes would level the playing field. That said, I see how these taxes can prohibit new online businesses from even starting out, and this could damage to local economies as well.

  24. I think the idea of a sales tax on online sales is a deal killer. I used to do business with people who refused to pay sales tax in person. You think they will buy something online and pay the tax? No. As it is I can't even get anybody to buy anything online so what difference does it make whether I collect it or not, as long as I pay it? I don't charge sales tax but I report and pay it every year. It comes out of my pocket not theirs. I am not to blame for large corporations evading their obligations, they are. It's not the tax that's the problem, it's the perception of shoppers that they are taxed enough already. I understand that, but if I don't do something to make the tax man happy I lose, not the shoppers, and I can't convince them to trust me enough to buy my products. I don't have money to be throwing it around opening up a store somewhere because the economy is so depressed it would be like throwing myself in a deeper hole. I have been in business online for four years with nothing to show for it. Taxing me even more is not going solve the problem.

  25. I just now had my very first experience with this, and it pissed me off big time. I was 100% positive that what the company was doing was illegal. No doubts at all, it was 100%. Turns out, our laws, as usual, are totally screwed up!!!!

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