Does an out-of-state online retailer create Utah nexus by paying commissions to Utah-based affiliate websites that link customers to its checkout page?

Plain-English summary

An out-of-state online retailer sold nutritional supplements entirely through its own website (hosted outside Utah) with no sales force and no Utah presence. It was considering signing up "Affiliate Partners" — independent website operators, some of whom run their own servers physically located in Utah — who would place a link on their sites; when a visitor clicked through and bought something on the retailer's site, the retailer tracked the sale and paid the affiliate a commission. The retailer itself handled all order approval, payment processing, shipping, cancellations, returns, and customer service from a warehouse in a third state. It asked whether this affiliate arrangement would create Utah nexus for (1) sales and use tax, and (2) income/franchise tax.

Sales tax: yes, nexus is created. Utah Code Ann. § 59-12-107(1)(a)(iii) requires a seller to collect Utah sales tax if it "regularly solicits orders" in the state — unless its only Utah activity is advertising or solicitation by mail, email, internet, telephone, or similar means. The Commission found the Affiliate Partners were acting as the retailer's agents, soliciting orders through their linked websites (solicitation is defined broadly under Rule R865-6F-6(A)(4)(a) as speech or conduct that explicitly or implicitly invites an order). Critically, this wasn't a case where the retailer's only Utah "presence" was a website hosted elsewhere that Utah customers happened to visit — the Affiliate Partners' websites and servers were themselves physically located and operated in Utah, so their own presence, combined with their order-soliciting role as the retailer's agents, was enough to establish nexus for the retailer.

Income/franchise tax: no, nexus is not created — with a condition. The Commission applied Rule R865-6F-6(C)(1)-(2), which protects a foreign corporation from Utah's Corporation Franchise Tax if it (1) ships goods to Utah customers from outside Utah pursuant to orders solicited (but not accepted) by in-state agents, (2) maintains no office or stock of goods in Utah, and (3) engages in no other Utah activities. Because the retailer's Utah activity was limited to affiliate-driven solicitation — with actual order approval, fulfillment, and everything else happening out of state — it fell within this protection and owed no Utah franchise tax. The Commission flagged that this outcome depends on the retailer's Utah activities staying at or below "de minimis" (a trivial connection, per Rule R865-6F-6(A)(2)) — any regular or systematic Utah activity beyond solicitation, even unwritten but policy-driven conduct, would not be considered trivial and could create franchise tax nexus instead.

What this means for you

Online retailers running affiliate marketing programs

Affiliates with their own physical presence in a state (servers, offices) who actively solicit orders as your agents can create sales tax nexus for you in that state — even if you never touch the state yourself. This is a materially different (and broader) test than the protection available for a website that's merely accessible from the state.

Businesses relying on the internet-solicitation exception in § 59-12-107(1)(a)(iii)

That exception only protects sellers whose sole Utah activity is advertising or remote (mail/email/internet/phone) solicitation. It doesn't extend to solicitation carried out through agents who are themselves physically present in the state — the affiliate's own presence breaks the exception.

Businesses weighing sales tax vs. income/franchise tax exposure separately

These are genuinely different tests. Nexus for sales tax collection can attach through mere in-state agent solicitation, while income/franchise tax nexus (echoing the federal Public Law 86-272 solicitation protection) requires more — office presence, stock of goods, or other non-solicitation activity — before it attaches. Don't assume sales tax nexus automatically means income tax nexus, or vice versa.

Common questions

Q: Would this retailer have avoided sales tax nexus if its affiliates only had websites and no physical servers in Utah?
A: The ruling specifically turned on the Affiliate Partners' own physical presence (their Utah-based servers) combined with their agency/solicitation role — the Commission distinguished this from a case where the seller's only Utah contact is a website hosted outside the state that Utah customers can access.

Q: Can the retailer lose its franchise tax protection later?
A: Yes, if its Utah activities go beyond solicitation and rise above a "de minimis" trivial connection — for example, taking on any regular or systematic Utah-based activity, even informally, tied to company policy.

Q: Can other online retailers rely on this ruling for their own affiliate programs?
A: No. It binds the Commission only for this taxpayer and the specific facts described. A different affiliate structure, activity level, or division of responsibilities could change the analysis.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-12-107(1)(a)(iii) (sales tax nexus via regular in-state solicitation; exception for advertising/remote solicitation only)
• Utah Admin. Rule R865-6F-6(A)(4)(a) (broad definition of "solicitation")
• Utah Admin. Rule R865-6F-6(C)(1), (2) (franchise tax protection for solicitation-only foreign corporations with no Utah office/stock/other activity)
• Utah Admin. Rule R865-6F-6(A)(2) (definition of "de minimis" — trivial Utah connection)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/04-024.pdf

Original ruling text

REQUEST LETTER

                                   November 15, 2004

04-024
NAME
CONTRACTING SERVICE
ADDRESS

Re: COMPANY (FEIN ##-######)
Request for Nexus Determination Ruling

We wish to obtain a ruling on behalf of COMPANY regarding the interpretation of nexus
requirements in the state of Utah as those requirements pertain to agency relationships. As such,
we respectfully submit the following issue for your review and guidance:

Facts:

COMPANY is a STATE corporation engaged in the sale of nutritional supplements via a website
accessible through the Internet. All sales are made via this website as COMPANY maintains no
sales force.

The COMPANYwebsite is maintained on a server located in 2ND STATE. All design,
implementation, support, maintenance, and administrative services associated with the
COMPANY website are performed in 2ND STATE.

COMPANY is considering entering into an Affiliate Agreement with various retailers who
themselves maintain websites accessible through the Internet. One or more of these retailers has
a physical presence in Utah by virtue of servers they themselves maintain in the state. (Affiliate
retailers will be referred to as “Affiliate Partners” henceforth throughout this Ruling request.)

Under the proposed Affiliate Agreement, an internet “Link” will be established between the
Affiliate Partner website and the COMPANY website. An Internet Link is a graphic or textual
hyperlink. When placed on the Affiliate Partner website and “selected” by a user of the Affiliate
Partner website COMPANY website. These links contain technology provided by COMPANY
which allows COMPANY to track sales generated by the “Linked User” on the COMPANY
website.

A “Linked User” is a user of the Affiliate Partner website who connects directly to the
COMPANY website through a Link and, prior to terminating an active browsing session with the
COMPANY website, makes a purchase using the checkout process located within the
COMPANY website.

COMPANY will pay the Affiliate Partner a commission for purchases made on the COMPANY

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website by Linked Users.

COMPANY will be solely responsible for approving and processing every order placed by a
Linked User. In addition, COMPANY will be responsible for order entry, payment processing,
shipping, cancellations, returns, and related customer service for such COMPANY product sales.
Delivery will take place via the U.S. Postal Service. All of the activities indicated above will
occur at an COMPANY warehouse and fulfillment facility in the state of 3RD STATE.

COMPANY has no physical presence in Utah aside from the relationship established via the
proposed Affiliate Agreement described above.

Issue Statement:

It is our understanding that Affiliate Partners located in Utah may have nexus in Utah by virtue
of the physical presence of the Affiliate Partners’ computer servers maintained in the state.
However, we are unclear as to COMPANY’s status in this regard. We therefore request a Ruling
on the following issues:

   1.      Does COMPANY achieve nexus in Utah for sales and use tax purposes by virtue
           of an agency relationship with Affiliate Partners?
   2.      Does COMPANY achieve nexus in Utah for income/franchise tax purposes by
           virtue of an agency relationship with Affiliate Partners?

If you require additional information or clarification of any part of this letter, please contact me
directly at PHONE or via e-mail at EMAIL ADDRESS.

Responses to this request may be sent via fax to FAX NUMBER, via e-mail to the e-mail address
indicated above, or via mail to the following address:

CONTRACTING SERVICE
NAME
ADDRESS

Sincerely,

NAME

                                  RESPONSE LETTER

                                     February 10, 2006

CONTRACTING SERVICE
Attn: NAME
ADDRESS
Livermore, CA 94550

Page 3

RE: Private Letter Ruling Request –

Dear NAME,

   We received your request regarding sales tax issues relating to COMPANY, a STATE

corporation, selling nutritional supplements via the Internet. You stated COMPANY is
considering entering into Affiliate Agreements with persons located in the State of Utah.

    You said COMPANY does not maintain a sales force. Rather, COMPANY makes all its

sales via the Internet through affiliate retailers, called Affiliate Partners (Partners). COMPANY is
considering contracting with affiliates in Utah. Some of the potential affiliates maintain servers
in Utah.

    Partners maintain websites with an Internet Link establishing a direct connection from

the Affiliate Partner website to the COMPANY website. Partners with such websites are called
Linked Users. If someone were to make a purchase through a website operated by a Linked User
located in Utah, the website would have a link which customers would use to connect to the
COMPANY server, which is located in 2ND STATE . Through the link, COMPANY can track
sales generated by the Linked User.

   You explained that COMPANY is solely responsible for approving and processing every

order placed by a Linked User. In addition, COMPANY is responsible for order entry, payment
processing, shipping, cancellations, returns, and related customer service for such COMPANY
product sales. Delivery is accomplished via the U.S. Postal Service. All of the activities indicated
above occur at an COMPANY warehouse and fulfillment facility in the state of 3RD STATE.
Sales completed through a Linked User’s website result in a commission paid to the Linked
User.

    You asked two questions. First, you asked, “Does COMPANY achieve nexus in Utah for

sales and use tax purposes by virtue of an agency relationship with Affiliate Partners?”

   §59-12-107 (1)(a) of the Utah Code provides, in pertinent part,

           Except as provided in Subsection (1)(e) or Sections 59-12-107.1 through
   59-12-107.4 and subject to Subsection (1)(f), each seller shall pay or collect and
   remit the sales and use taxes imposed by this chapter if within this state the seller:

                                           .....

   (iii) regularly solicits orders, regardless of whether or not the orders are accepted
   in the state, unless the seller's only activity in the state is:

   (A) advertising; or

   (B) solicitation by:

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   (I) direct mail;

   (II) electronic mail;

   (III) the Internet;

   (IV) telephone; or

   (V) a means similar to Subsection (1)(a)(iii)(A) or (B);

     Utah Administrative Rule R865-6F-6 (A)(4)(a) defines solicitation as speech or conduct

that explicitly or implicitly invites an order. It appears that the Partners are agents of COMPANY
soliciting orders. Nexus for sales tax purposes is created when a seller has agents in the State of
Utah regularly soliciting orders.

    This is not a case where COMPANY’s only “presence” in Utah is a website maintained

outside of Utah that potential customers may access in order to make a purchase. Here the
websites, and some servers, would be owned, operated, and maintained in Utah, and sales would
be solicited by COMPANY’s Utah Partners. It is the physical presence of the Partners in Utah
that establishes nexus.

     Based on the information you provided, we conclude the Affiliate Partners who are

Linked Users located in Utah would be agents or independent contractors of COMPANY
soliciting orders for COMPANY. This would create nexus for sales tax purposes.

  Sales tax rates vary slightly depending on location. The applicable rate would be the rate

imposed at the point of delivery.

   Second, you asked, “Does COMPANY achieve nexus in Utah for income/franchise tax

purposes by virtue of an agency relationship with Affiliate Partners?”

    Based on your representations, COMPANY is a foreign corporation not qualified in Utah.

It ships goods to customers in Utah from points outside of Utah in response to orders solicited
but not accepted by Affiliate Partners in Utah. It maintains no office or stocks of goods in Utah
and engages in no other activities in Utah.

   Utah Administrative Rule R865-6F-6 (C)(1) and (2) states,
   Foreign corporations not qualified in Utah which ship goods to customers in this
   state from points outside this state, pursuant to orders solicited but not accepted
   by agents or employees in this state, and which are not doing business in Utah are
   not taxable under the Utah Corporation Franchise Tax Act if:

   1. they maintain no office nor stocks of goods in Utah, and

   2. they engage in no other activities in Utah.

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    Under such circumstances, COMPANY would not be liable under the Utah Corporation

Franchise Tax Act. This outcome could change if COMPANY’s activities include activities,
other than solicitations, above a de minimis level. R865-6F-6 (A)(2) defines de minimis activities
those that “when taken together, establish only a trivial connection with the taxing state. An
activity conducted within Utah on a regular or systematic basis or pursuant to company policy,
whether or not in writing, shall not normally be considered trivial.”

    You stated that COMPANY was solely responsible “for order entry, payment processing,

shipping, cancellations, returns, and related customer service for such COMPANY product
sales.” If COMPANY does more than solicit sales in Utah, nexus for corporate franchise tax
would be created. For additional information on activities establishing nexus for corporate
franchise tax, please review the enclosed copy of Publication 37.

   Should the facts be different from those represented to us in this letter, our opinion may

change accordingly. Thank you for your inquiry into this matter.

                                                 For the Commission,



                                                 Marc B. Johnson
                                                 Commissioner

MBJ/SR
04-024