Having a presence on the web usually equates to more customers and more money, so of course it makes sense for small businesses to hire bloggers and other influencers to promote their products to a wider audience.
However, while this marketing strategy can pay off big time, it can also come with unexpected sales tax consequences. In today’s post, I’ll explain how hiring a blogger to promote a product can create sales tax nexus and why that matters to your business.
What is sales tax nexus?
When you hear someone say, “that will give you sales tax nexus,” you might be thinking that sounds like a good thing! However, it’s important to understand what the term “sales tax nexus” means and how it affects your business.
Sales tax nexus is the connection between a business and a state that requires that business to collect and remit sales tax on transactions within that state. If your business has nexus in a state and has met the state’s minimum threshold amount for revenue or transactions, then you’re on the hook for collecting and remitting sales tax.
It used to be that nexus was established through physical presence, which means if you had a store, warehouse, or employee physically working in that state, you would have sales tax nexus. However, since the rise of e-commerce and digital marketing, what triggers sales tax nexus has evolved as well.
Now, in many states, having an employee–even an independent contractor–living in the state can create sales tax nexus. In other words, if you hire a blogger to promote a product, and that blogger lives in a different state than where your business is located, you may have to collect and remit sales tax to the blogger’s state. This all depends on the role that blogger plays for your company (more on this in a minute).
Who or what is the Tyler Pipe case?
There have been and continue to be lots of court cases around the idea of sales tax nexus as states try to expand the definition so that they can collect more money in sales tax. The court case that really sheds light on how hiring a blogger can create sales tax nexus is the 1987 case of Tyler Pipe Industries v. Washington.
I won’t bore you with all of the details, but basically, this case was about whether or not the Tyler Pipe company, based in Texas, should have to collect and remit sales tax in the state of Washington even though the company did not believe it had a physical presence there.
The state argued that even though none of the company’s manufacturing was done within the state, since the company used independent contractors to land deals and sell their products in Seattle, then Tyler Pipe had sales tax nexus in the state.
The court agreed with the state saying that the sales reps acted daily on behalf of the company and that even though they were independent contractors, they worked to “maintain and improve the name recognition, market share, goodwill, and individual customer relations” of the business. The Washington Supreme Court determined that the “crucial factor” deciding nexus in this situation is whether the business significantly relies on the contractor’s activities to “establish and maintain” a market within the state.
The reason this case may apply to your business is that the Supreme Court of the United States has stood behind this decision–along with similar decisions in other states–creating a standard for how sales tax nexus is determined when hiring out-of-state contractors.
The bottom line is, if the blogger, influencer, affiliate marketer, or similar contractor you’ve hired is providing you with important guidance about the market in their state or is working to help you break into or increase sales in that state’s market, then you’ve triggered sales tax nexus in that state.
What are sales tax nexus factors to consider when hiring a blogger?
When thinking about hiring bloggers or influencers who live out-of-state, there are several factors to consider when determining whether or not this decision will trigger sales tax nexus:
- Economic Presence: Bloggers who generate sales and promote products to local audiences establish an economic presence, which can create sales tax nexus.
- Affiliate Marketing: If a blogger or influencer participates in affiliate marketing programs you’ve established to help them earn commission for sales generated through their creative efforts, this financial arrangement can strengthen the nexus argument.
- Targeted Marketing: If a blogger specifically targets audiences in a particular state, then your business may be seen as having purposefully targeted that state’s market, which will strengthen the nexus argument as well.
- Volume of Sales: The volume of sales generated by a blogger within their particular state can also increase the likelihood of sales tax nexus.
How do I know if I have sales tax nexus within a state?
Many states set their sales tax threshold at $100,000 in revenue or 200 individual transactions. So once your business hits those numbers, it’s seen as having economic nexus within the state and is therefore required to collect and remit sales tax.
However, since the nexus rules vary from state to state and a blogger’s presence within a market can create nexus, it’s important to investigate each state’s rules and requirements prior to hiring a blogger or other employee. If you’re unsure about the requirements, it’s always best to consult an experienced accountant to help.
Should I hire a blogger if it will create sales tax nexus?
Having sales tax nexus is not the end of the world! Breaking into a new market with the help of a blogger or influencer means your business is expanding, and that’s a great thing! Of course, you’ll want to run numbers first to make sure your profit margin still makes sense.
As e-commerce, digital marketing, and the world of social media influencers continues to evolve, it’s important for you to understand potential sales tax implications when hiring bloggers and influencers to promote your products. Like with everything else in your business, you’ll just want to have a plan in place for following the tax laws in each state where you do business.
Making sure my clients are well-informed about tax laws and implications is something my team takes seriously. If you’d like someone to have your back in this area of your business, our accounting and bookkeeping team can make sure you’re all set.
By the way, are you wondering who to contact or even how to contact your state about sales tax questions? Just click here for all of the details.