Complex Tax Considerations
Fifteen years ago, the idea of “influencer” as a job description was virtually nonexistent. As social platforms expanded, so did the opportunity for previously unknown career paths. But these paths create complex state tax considerations for taxpayers.
The Wall Street Journal recently published an article titled “Who Gets the TikTok in the Divorce? The Messy Fight Over Valuable Social Media Accounts,” by Katherine Hamilton, claiming that there are 12 million fulltime influencers in the United States (https://tinyurl.com/54aftuj5). This means that there are 12 million people being paid to promote products or lifestyles by companies looking to make a profit through their investment.
Influencers are considered third-party contractors. These contractors drive sales like a sales broker would. Sales brokers have been known to create physical presence nexus for the companies that hire them in states where they are physically present. The impact of a physical presence standard could be far reaching. While some protection may be offered regarding the state income tax for sellers of tangible personal property through Public Law 86-272, this is not the case for other state tax types. Public Law 86-272 is a federal law that protects out-of-state sellers of tangible personal property from being subject to state taxation on their income by a state in which the seller has no physical presence and whose only activities relate to solicitation of sales. This protection does not extend to any other type of tax, such as gross receipts and sales taxes.
State Nexus from Influencer Sales
Sales tax nexus can be established in a state where the influencer is physically located. In Tyler Pipe Industries v. Washington (483 U.S. 232, 1987), the Washington Supreme Court ruled that sales tax nexus was present. The crucial factor in the decision was the influencer’s activities within the state of Washington. The ruling declared that the independent contractor sales representative established and maintained a market within the state by performing daily activities which provided name recognition, sales contacts, and goodwill, creating a special relationship between the company and potential Washington-based consumers. This decision was upheld by the United States Supreme Court. It is important to note that the contractor’s level of involvement in this case was a key factor in the decision. Simply hiring an influencer who promotes a product may not be a nexus creating activity. But if that influencer is “establishing and maintaining” a market within a state, there is a strong chance that the state will assert sales tax nexus.
Many influencers will be provided with inventory by a company in order to demonstrate the product via social media and to give away during appearances. This inventory can be problematic from a nexus perspective, depending on who owns the product. Consideration should be given to how the product is handled, where it is stored, and who owns it when it is given away.
In addition, certain social media platforms such as TikTok allow users to add links in their bios to facilitate purchases through their individual profile. This may make the influencer a marketplace facilitator. The sales tax implications of marketplace facilitators are significant. States are viewing their activities under a microscope to determine if they create nexus for taxation purposes.
Tax Exposure Tied to Contracts
To minimize the impact of hiring an influencer, companies should consider the wording in contracts and the level of involvement that the influencer will have in their state of residence, or any state in which they may travel to promote products. Often, states will incorporate language around “purposeful direction” when drafting statutes that govern nexus definitions. For example, if your influencer is directed to increase sales in certain targeted states, that can be viewed as a purposeful direction to the state that would result in financial gain. This is particularly demonstrated if the influencer is contractually obligated to reach target goals in specified states.
While no singular fact pattern is definitive in determining if influencers are creating tax filing obligations for a company, it is critical to understand the tax implications of the wording of influencers’ contracts to avoid unintended tax consequences. Pay structure should also be considered. While influencers may be paid by a company, they are likely not considered W-2 wage earners. Is the influencer really a statutory employee? If the person cannot work for any other competitor and is paid similarly to a W-2 employee, they may be considered an employee for tax purposes. This could impact both payroll tax and nexus determinations.
Travel is another consideration. If the influencer is deemed to be a statutory employee or an independent contractor, wherever they travel on the company’s behalf could create filing obligations for income, sales, and gross receipts tax purposes.
Be Proactive to Determine Tax Issues
Influencers can potentially offer a significant boost to a company’s bottom line, especially considering their new place in the advertising world. As with any new venture, however, companies should consider the state tax pitfalls for the unwary. When drafting influencer contracts, it is important to check on any new or existing collaborations and be sure to discuss state tax implications with legal advisors.
