The U.S. Supreme Court ruled over 20 years ago that a state could not force an out-of-state company to collect sales tax from the state’s residents if the company does not have a physical presence in the state. A company generally has a physical presence in the state if it has an office, employees, equipment, delivery trucks, etc. in the state.
What is Affiliate Nexus?
In 2014, the Michigan legislature passed a law that requires out-of-state sellers to collect sales tax from Michigan residents if the out-of-state seller has Michigan residents acting as solicitors. The solicitors do not have to be employees of the company. Basically, Michigan considers the out-of-state company to have physical presence in the state based on the presence of non-employee solicitors who are Michigan residents. This is referred to as affiliate nexus and similar laws have been passed in other states.
Amazon.com, among other companies, have affiliate programs where residents (individuals and business entities) can place links to the companies’ products on their own websites. The company would then pay a commission to the resident if a purchase is made from a purchaser who clicked through that resident’s website to the company’s.
Under the new law that became effective October 1, an out-of-state company is presumed to be engaged in the business of retail sales in Michigan if the seller has entered into an agreement with one or more Michigan residents under which the resident refers potential purchasers (by an internet link, by in-person oral presentation, etc.) to the seller for a commission or other consideration based on completed sales.
Which Out-of-State Companies are Affected?
The out-of-state company is exempt from this new law if it only has minimal sales in the state. The provision will apply if:
• Gross receipts from all referred sales to purchasers in Michigan are greater than $10,000 during the immediately preceding 12 months AND
• Gross receipts from all sales to purchasers in Michigan exceed $50,000 during the immediately preceding 12 months
Example: Internet.com sells products via the internet across the country. It has an affiliate program in Michigan. It has no other connection or presence in Michigan. The affiliate program generates $5,000 in sales over the past 12 months. Internet.com’s total sales in Michigan are $100,000. Internet.com is not subject to the new law because it has less than $10,000 in sales from the affiliate program.
Example 2: Same facts as above except that Internet.com has $10,001 in affiliate program sales and $50,001 in total Michigan sales over the past twelve months. Internet.com is now presumed to be in the business of retail sales in Michigan and is required to collect Michigan sales tax from Michigan residents because it surpasses both thresholds.
How Out-of-State Companies Rebut the Presumption
A company meeting the above requirements is presumed to be engaged in making retail sales in Michigan. The presumption can be rebutted by demonstrating that the residents with whom the seller has an agreement did not engage in any solicitation or other activity that is significantly associated with the seller’s ability to establish or maintain a market in Michigan.
The Michigan Department of Treasury issued proposed guidance on what type of evidence will rebut the presumption.
This evidence includes:
Contract Conditions: the agreement between the seller and the resident provides that the resident is prohibited from engaging in any solicitation activities in Michigan on behalf of the seller.
Proof of Compliance: Each resident representative provides to the seller a signed statement stating that the resident has not engaged in any prohibited solicitation or other activities in Michigan on behalf of the seller.
Merely hiring an advertising company or agent in Michigan will not subject the seller to this new law unless the advertising company or agent is compensated with a commission or other consideration based on completed sales.
Two Final Notes…
First, even if this law was not passed. Amazon.com is expanding its office in Detroit and will have a physical presence in the state that would require it to collect sales tax from Michigan residents anyway.
Second, Michigan residents were already required to report purchases from out-of-state companies and pay use tax on these purchases on their Michigan income tax returns.
To see how this applies to you, give us a call at 248-538-5331.
Buzzkill Disclaimer: This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.