November 18, 2014

Tax Considerations When Using Amazon Affiliate Program

Question:

Our non-profit organization (NPO) participates in the Amazon affiliate program. We offer books on our website specifically related to our organization's exempt purpose. In addition, we also provide a link for individuals to purchase other non-related items from the Amazon website. 

Are there any tax considerations our NPO needs to be aware of?

Answer:

There are three conditions that must be met in order for certain income producing activities to be taxed as Unrelated Business Tax Income (UBTI). Those three conditions that determine if an activity generates unrelated business income (UBI) are the following:
  1. Is the activity a trade or business?
  2. Is the activity regularly carried on?
  3. Is the activity not substantially related to the exempt purpose?
If the answer is yes to each of the above conditions, it is likely the income producing activity is subject to UBTI, as defined under Internal Revenue Code Sections 512 and 513.

We are familiar with a couple ways of using the Amazon affiliate program that result in tax considerations. First, If an organization sells or advertises goods that are directly related to and further the organization's exempt purpose, these types of sales are likely not subject to UBTI even though conditions No. 1 and 2 above are met (1995 IRS Letter Ruling 9550003).

Second, if the organization is receiving commissions when individuals "shop for other items," the commissions would be subject to UBTI. If gross income from unrelated sales is less than $1,000, then a UBTI return would not need to be filed or tax be paid.

We suggest that the organization should keep track of the two types of commissions received. 
  1. The commissions for sales relating to the tax exempt purpose can be considered program-related commission income. 
  2. The other commissions would be considered unrelated commission sales; if these sales hit $1,000, then a UBTI return (Form 990-T) is needed.
As always, we recommend the organization to contact their tax professional and request guidance through this situation. 

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