Tax departments might not put too much thought into the products their company sends to social media influencers to promote its brand online — but they should. As a Solutions Engineer at Vertex, I see a lot of tax teams miss this important step, putting their business at risk for non-compliance. To help you better understand, I’ve answered some FAQs on the topic.
What is free swag for marketing influencers?
When someone says, 'free swag,' they mean when brands give influencers free stuff – like products or merchandise. In return, these influencers give the brand a shout-out or share their thoughts on social media or other platforms. It's a win-win – brands get exposure, and influencers get freebies to show off to their followers.
Why is free swag considered taxable?
When brands provide free swag to influencers, in exchange for services like promotion, it's essentially a barter transaction. In a barter exchange, both parties receive something of value, and tax authorities consider that as a taxable event.
When it comes to taxing free swag, what is the influencer responsible for vs. the brand?
When influencers receive free swag, they have no tax responsibility since they are getting paid to promote the brand. Instead, they would have to file a 1099 and pay tax on that income.
Brands on the other hand, need to keep track of the cost of all of the goods they send to influencers and remit the use tax for those items.
What are the potential consequences for brands if they fail to tax free swag?
If a company fails to remit consumer use tax on their free swag, they are at risk for audit penalties plus interest. Risk of this is low today because most statutory audits have a 6–12- month lag time to complete. However, keep in mind that 75% of audit findings relate to consumer use tax. Jurisdictions are well aware that this is an opportunity for them to collect revenue because most brands do not self-assess.
Are there any exceptions or thresholds for when free swag might not be subject to taxation?
Generally, no. However, all states have tax thresholds that require a company to self- assess. Most of them are $100K in sales/revenue generated in that state. New York, California, and Texas have a higher tax threshold of $500K.
How can brands navigate the tax implications of free swag effectively and stay compliant with tax authorities?
Tax departments need to work closely with their colleagues in marketing to ensure any free swag given to influencers is properly taxed.
What is the future outlook of taxing free swag for influencers, and how might it evolve?
Research shows that 80% of consumers have purchased a product after seeing an influencer recommend it on social media. With this ability to drive revenue, more and more brands are expanding their influencer marketing programs.
This opens up a challenge for tax departments to self-assess what products their company is giving away and how much consumer use tax they need to remit for those items. It’s safe to say this will become an ever-expanding tax requirement for brands to comply with going forward. To have a look at the Vertex tax compliance solution, click here.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.