Five Online Business Models and Their Tax Implications ...

Though the Internet as we know it is less than 20 years old, direct sales have been an integral part from the start. Brick and mortar stores began putting up their first websites in the early 1990?s, followed by web-only retailers like Amazon.

In this classic e-commerce model, the business maintains a physical inventory of goods either onsite or via a dropshipper company. In the U.S., the retailer is responsible for collecting and remitting sales tax in states where it is required. (There is no national sales tax in America.)

Many of these e-retailers have armies of independent sales reps known as affiliates. Let?s look at the affiliate model next.

In affiliate marketing, a person or company contracts with a retailer to sell the retailer?s products for them, resulting in a commission to the affiliate. In exchange for the affiliate?s marketing efforts, the retailer provides the affiliate with a special coded link that, when clicked, sets a cookie on a user?s computer.

One typical affiliate marketing model is the paid advertisement on a search engine network. Banner ad exchanges are also used. Many affiliates create their own websites that act as virtual storefronts, where the buyer clicks the product he wants and is taken to the retailer?s order page.

The success of affiliate marketing depends solely on whether or not the purchaser has cookies enabled; if a buyer has flushed them from her computer, the transaction cannot be linked back to the affiliate and the affiliate will lose the commission.

Most affiliates are part of an affiliate network, who handles collection of taxpayer information such as name and SSN and serves as a broker between retailer and affiliate. Some affiliate-type relationships between a retailer and a marketer can better be described as joint ventures, with specific duties and responsibilities assigned to each.

Commission or joint venture compensation received by the affiliate throughout the year, including bonuses, prizes, gifts, free products, and such, is considered self-employment income and is subject to self-employment tax. The self-employment tax can be reduced by taking business expense deductions, but only if the affiliate qualifies as a business and is able to use the Schedule C business tax form.

Source: http://chutzpahsalestraining.com/five-online-business-models-and-their-tax-implications.html

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