How Return Policies Affect Affiliate Nexus - Taxify
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How Return Policies Affect Affiliate Nexus

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How Return Policies Affect Affiliate Nexus

Affiliate Nexus and Return PoliciesAffiliate nexus is one of the more straightforward areas of nexus.  However, that has not discouraged states from attempting to expand on affiliate nexus’ potential to allow them to garner more sales and use taxes. It is clear from the case law that affiliation alone with an in-state business has been insufficient to create nexus. However, the affiliate nexus theory contains a second component under which an in-state business can create nexus for its out-of-state affiliate.  This is based on the concept of “agency nexus”.  Under this rule, a related company can create nexus if it acts as an agent on behalf of its out-of-state affiliate. But what falls under the definition of being an “agent”?

Accepting Returns: The Borders Case

A good example of what constitutes agency in the context of related companies is a case involving Borders Bookstore. In the Borders case, it was determined that an out-of-state Internet seller had nexus because affiliated stores in the state accepted returns of merchandise purchased online on its behalf.  Bloomingdale’s and Saks Fifth Avenue cases found that occasional returns of mail order merchandise at retail stores in the state did not create nexus.  The Borders decision is consistent with those cases. Borders Online sold books, music, videos and other products online via its Internet website.  They conducted their online business completely from locations outside the state.  All of its products were delivered by mail or common carrier to purchasers in California, and the company had no physical presence in the state. An affiliated company owned certain Border’s retail stores located in California and sold similar products to that of Border’s online products.  On its website, Borders Online directed its customers to these local stores for returns or exchanges of authorized returns.  This slight difference in return policies proved sufficient enough to create nexus for Borders Online.  Unlike Borders Online, neither Bloomingdale’s nor Saks Fifth Avenue directed customers to affiliated stores. Borders Online, on the other hand, directly authorized these affiliate stores to act on its behalf by directing its customers to the retail stores. This distinction is important because nexus can be attributed from one-third party to another only if it performs significant market-making activities on behalf of the out-of-state seller. So what’s the lesson learned by this case?  It’s crucial to clearly define what your returns policy is and to take into consideration that working with a third-party can, and in some cases, absolutely will create nexus for you. Note: If you think this type of nexus may apply to you, Lawmaker’s Guide to Sales Tax Nexus offers a more comprehensive overview of the cases. Have some more questions? Let us know! We’re happy to help, and we love talking taxes. Are you an Amazon seller? Check out our Amazon site!

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