Tax Indemnity Clause – Don’t get Taxed for Another Business’ Activities

Charlotte Tax Day Tea Party

Tax indemnity in a small business context means Company A compensates Company B for taxes assessed on Company B as a result of Company A’s business activities. This concept often comes into play when two parties enter into a co-marketing agreement and one party is promoting the products of another party.  Co-marketing  sometimes leads taxing authorities to assess taxes on the wrong entity.

For example, assume that you enter into a co-marketing agreement with hypothetical company XYZ, Inc. You agree to promote XYZ’s products on your website and receive a commission for sales that XYZ generates as a result of your promotion efforts. While you are likely liable for taxes on those commissions, you do not want to be liable for other taxes associated with XYZ’s sales of its products. Including a clause like the one below would protect your business in that scenario:

“Tax Indemnity. In the event [YOUR BUSINESS] incurs a sales tax liability as a result of the marketing and promotional efforts for XYZ and/or [YOUR BUSINESS] receives an assessment from a taxing authority directly attributable to XYZ’s product sales, XYZ shall indemnify [YOUR BUSINESS] for all taxes, interest and penalties which may be assessed.   [YOUR BUSINESS] shall use reasonable commercial efforts to mitigate such assessment prior to seeking indemnification from XYZ.”

For more information regarding taxes that may be assessed on your small business visit the IRS website at: http://www.irs.gov/businesses.

Image by Flickr user jacreative (Creative Commons)


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