We’ve been monitoring what’s been happening in California with affiliate nexus tax over the years, and now that the bill AB155 is signed, and many merchants are re-instating and/or re-inviting California affiliates back into their programs, I thought it’d be interesting to get an affiliate take on these things, and reached out to one of the first U.S. affiliate marketers I met in person (some 5-6 years ago) — a California-based writer and affiliate star Rexanne Mancini (more about her here).

Today I’d like to bring you my interview with her:

GP: Rexanne, thank you for agreeing to be interviewed on this important topic.

RM: My pleasure, Geno.

GP: To begin with, how would you summarize what has happened in California with (and around) the affiliate nexus tax law in the course of this year?

RM: CA legislators proposed that the “affiliate nexus bill” would result in an income generation for the state of more than 3 billion dollars, based on he assumption that if a merchant had CA-based affiliates, this represented a “physical presence” for these merchants (in effect, getting around the “taxation without representation” interstate commerce laws currently protecting merchants from the onerous burden of collecting state tax on sales made outside their own state’s borders).

Governor Gerry Brown (CA) was inundated with phone calls, emails and affiliates present in Sacramento trying to educate him on the futility of this law, which didn’t help. When he signed the proposed budget, more than 25 thousand California affiliates were dropped by Amazon.com and hundreds of other online merchants who simply had to drop CA affiliates in order to evade the new law and therefore pay no tax to the state of CA for online purchases anyway. For these merchants, it was business as usual because their affiliate programs were still in tact, still selling to residents in CA but California-based affiliates were denied the ability to sell through their programs. All it did was disrupt the businesses of California-based affiliates and created lost revenue for the constituents of the state.

GP: As a California-based affiliate, I’m sure, you were terminated from multiple affiliate programs as soon as (on July 29) Governor Brown signed the bill into law. Two questions in this regard: first of all, approximately what percentage of merchants you worked with terminated you from their programs because of the law, and, secondly, was it the termination from Amazon’s affiliate program, or something else, that was the worst hit for you?

RM: I’m not sure of percentages, however, I was dropped from about 150 affiliate programs overnight and hundreds more over the following weeks, creating havoc on my web sites and greatly diminishing the user experience for visitors to my pages.

The termination of my Amazon.com affiliate account had the hardest hitting effect. I had several thousand Amazon.com links on my site, across hundreds of pages.  Amazon.com continued to makes sales from the links on my site because the links still landed on the Amazon.com targeted pages. I just wasn’t making any commission on these sales. The other merchant programs that dropped me were through affiliate networks and most of those links were immediately invalid when clicked from my sites. I’m not sure which was worse. lol – That Amazon had no disruption of sales through my efforts on their behalf while I was denied commissions on sales irks me. Granted, my visitor experience was not affected which is a small consolation.

GP: We know that Amazon has recently invited CA affiliates to re-instate themselves in their affiliate program. Have you seen any other major affiliate programs doing the same?

RM: Yes, many other merchants have re-instated California affiliates because of this reprieve.  Ironically, it took Amazon.com the longest time to reinstate CA affiliates, with most merchants reinstating CA affiliates immediately. Amazon.com (conveniently?) waited until the beginning of Q4 to reinstate.

GP: On Sept 8 Amazon.com cut a deal with CA legislators (and on Sept 23 Gov. Brown signed it into a law) which postpones the collection of the tax for one year. What would be your forecast/expectations on where it’s gonna go?

RM: I’m not confident of my opinions about what will happen a year down the line to talk about it with any authority. I believe Amazon.com struck a deal with the state of California to  build warehouses in the state, thus creating a physical presence in CA anyway which will result in Amazon.com having to pay CA sales tax if a federal Internet tax law is not enacted by the end of the year. I’m not sure I understand all the particulars or how this will help Amazon.com in its attempt to avoid paying Ca sales tax. I believe the idea is to wait for a federal Internet tax law to be imposed which will negate the state laws that have been passed. If there is no federal law enacted within a year, my understanding is that online merchants will again be liable for CA sales tax. It all sounds like a crap shoot to me, evidently based on if a federal law is passed within a year.  Again, the Ca-based affiliates are the pawns in the chess game. i.e.: disposable. It could happen and California affiliates need to be on top of any legislature moving forward and be ready for any eventual fallout.

GP: Is there anything that hasn’t been brought up in blogs, speeches and articles that you’d like to draw affiliate community’s attention to (in regards to anything related to the situation in California)?

RM: There are so many issues that this legislature has brought to light for small business owners and affiliates, across all the states that have passed these misguided laws. Most importantly for affiliates of any state, the need for diversification across multiple merchant programs to withstand these attacks on our livelihoods.

Another issue that I think needs to be looked at closely is the viability of affiliate marketing as a business model. It concerns me that individual affiliates have no real power in this industry, or any real value when state legislation can wreak havoc on our livelihoods overnight. The foundation of this business is on unstable ground and I think we need to build a reinforced structure going forward to protect the affiliate business model.

GP: You’ve touched upon the stings that will, undoubtedly, resonate in the hearts of many of my readers, Rexanne. Once again, thank you for your time.

Following the signing of California statute AB 155 (which I discussed a week ago here) Amazon has invited California-based affiliates — over 10,000 of which were terminated from Amazon’s Associates program in June 2011 — to re-enroll in their affiliate program. As Sarah Duxbury — who, apparently, was one of the booted affiliates as well — wrote in San Francisco Business Times yesterday afternoon, Amazon “told” her the following when she “went to re-enroll”:

The Amazon Associates Program has invited all California Associates whose accounts were closed as a result of now-repealed legislation to re-enroll in the Associates Program.

To re-enroll in the program, please agree to the terms and conditions of the program by clicking the check-box beside the link to the Operating Agreement and clicking the Re-Enroll button. All of your Associates accounts will be re-opened right away. [source]

Per the Associates Re-Enrollment FAQ page, upon the re-enrollment Californian affiliates get back their old Tracking IDs, as well as the previous Associates ID they had before the termination; so they “don’t need to make any changes to special links created … in the past”. Unfortunately “traffic referred” during the closure of the affiliate account “will not be eligible for advertising fees”.

While the latter isn’t that great of a news, the good news about the possibility to reinstate your Amazon affiliate account certainly overshadows the bad one, especially in light of the upcoming holiday shopping season.

On Friday the Governor of California, Jerry Brown, signed AB 155 — “a statute that repeals the Affiliate Nexus Tax law for one year” [source]. I tweeted about it on Friday, and also retweeted the news on Sunday, receiving an immediate question (a very good question): So what’s next?

Well, let’s rewind things back 3 months, and look at the whole chronology:

1. On July 29, 2011 Governor Brown signed “the online sales tax law, AB 28 1x” the essence of which was “to seek to force online retailers who have no physical presence in California”, but receiving sales’ referrals from California-based online affiliates, to collect sales tax [more in this Los Angeles Time article].
2. The expected aftermath immediately followed, and tens of thousands of California affiliates were terminated from multiple affiliate programs including, but not limited to, Amazon’s Associates Program (as well as affiliate program is its subsidiaries Audible.com, Endless.com, Zappos.com, 6pm.com, etc) and Overstock.com’s affiliate program [more here].
3. Performance Marketing Association, as well as Amazon, start working on changing things. On July 11 Amazon filed a petition for a referendum in California seeking 500,000 signatures of California voters to repeal the new law [more at TheStreet.com].
4. In the meantime, some continued to misportray who affiliates actually are, and how/why they make their money [more here].
5. On September 8, 2011 Amazon.com cut “a tentative deal with legislative leaders … that would allow it to postpone collecting sales taxes from Californians for another year”. Everyone looked towards Governor Brown “whether he would support the deal” [more in Los Angeles Times].
6. On September 23 Gov. Brown signed the above-quoted bill AB 155 into law, giving “25,000 web-based entrepreneurs” hope “to get back in business” [more here] while everyone works with Congress on a federal level solution, also known as the Main Street Fairness Act, by July 2012.
7. If the federal legislation is not in place “by July 2012, the original terms of ABX1 28 will be reinstated” [more at Blog.FedTax.net and at ReveNews.com]

As mentioned in an interview I had in the Spring of this year — when asked how I “think the tax legislation will play out” — “I believe we’ll continue seeing new affiliate nexus bills proposed nationwide (most states still face bad budget shortfalls), affiliate marketers fighting for their jobs (winning some battles, and losing others), and only a carefully weighed federal solution can put a period in the sentence”.

Since my last post on the bad news from California, Governor Brown has signed the bill [more here], while Amazon has announced its decision to cut ties with its California-based affiliates (which includes not only affiliates of Amazon.com, but also of all its subsidiaries, such as Audible.com, Endless.com, Zappos.com, 6pm.com, and others).

As an example, here’s an excerpt from the 6pm.com’s message that has hit affiliate inboxes at midnight tonight:

6pm has worked with many California residents through Commission Junction. Unfortunately, a potential new law that may be signed by Governor Brown compels us to terminate this program for California-based participants. It specifically imposes the collection of taxes from consumers on sales by online retailers – including but not limited to those referred by California-based marketing affiliates like you – even if those retailers have no physical presence in the state.

As a result, we will terminate contracts with all California residents that are marketing affiliates of 6pm through Commission Junction as of the date (if any) that the California law becomes effective. We will send a follow-up notice to you confirming the termination date after the California law is enacted.  In the event that the California law does not become effective before September 30, 2011, we withdraw this notice and this termination will not become effective.

Overstock.com has also announced that it is dropping its California affiliates. Jonathan Johnson, the president of Overstock rebranded into O.co earlier this year, said that “Companies like O.co and Amazon and others are going to be forced to terminate their relationships with those affiliates rather than be forced to be unconstitutional sales tax collectors for the state of California.” This, as a result, will actually tax decrease revenue to the sate [listen to him here].

Much has been written (and said) on the law and its immediate ramifications in the course of the past 24 hours, and in what follows I’d like to link to 8 articles, blog posts and other discussions of the law that have caught my personal attention:

1. Brown Signs Law Requiring Sales Tax on Online Purchases; Amazon, Overstock Axe State Affiliates by Jon Brooks of KQED News
2. Amazon To Cut Off California-Based Web Affiliates video report at KTVU with participation by Mark Welch
3. California Forced Amazon to Stop Advertising Here by Mark Welch
4. The Affiliate “Big One” Hits: California Passes Catastrophic Nexus Tax by Britt Raybould
5. An Open Letter To Jeff Bezos On Terminating The Amazon Affiliate Program In California by Danny Sullivan
6. Thanks for Nothing, Jerry Brown by Trisha Lyn
7. Governor Jerry Brown Passes Law to Destroy Small Business in California by Shawn Collins
8. Merchants Terminating CA Affiliates thread at ABestWeb

If I have missed an article (or discussion) that must be linked to from here, please do add it through the “Comments” function below.

Bad news has just come from the state of California — the affiliate nexus tax, which I frequently cover in my blog, seems to be on the threshold of materializing.

No, not into cash — the state treasurer is right on the money when saying that the online sales tax revenue is good in theory, but not being sure certain if the dollars would really materialize [source] — but into a law.

Rebecca Madigan, Executive Director of the Performance Marketing Association, reported:

Governor Brown of California has announced he has secured enough votes to pass his budget, including the Affiliate Nexus Tax and 2 related nexus bills: AB 153, AB 155 and SB 234. The law will go into effect immediately upon signing, and he must sign before July 1st, 2011. [source]

Bad news for California-based affiliates, and thousands of California small businesses.

Merchants, don’t make hasty decisions based on what you may see larger e-tailers like Amazon and Overstock doing in relation to this (in my opinion, there’s more politics behind their decisions than pure economics). In the unfortunate event of the law passing look into collecting the tax. There are multiple tools (e.g. Avalara, or ShareASale’s “US State Revenue” report) than can either help you fully streamline the process, or simplify the monitoring on your end.

You may remember the year 2009 when California had its affiliate nexus bill revived, and then vetoed by Gov. Arnold Schwarzenegger, pointing to the right reason — the unemployment was already “at an all time high”, and the Governor advised: “we should be doing everything we can to keep jobs and create jobs in California”.

Well, Nancy Skinner’s bill is back again, and just as before it is specifically targeting affiliate marketers. If passed into law, it “would require online retailers to collect sales tax if they do business with in-state web site affiliates that refer online shoppers to them” [source]. On Tuesday, May 31, the bill was approved by the state Assembly. However, it is nonsensical to expect for this law to “generate $83 million alone from Amazon” [source]. Just as in earlier instances, Amazon has already made it clear that it will “cut off more than 10,000 affiliates in California if state lawmakers pass” this legislation [source]. Amazon has done this on numerous occasions before, and there’s no reason to presuppose that they aren’t being serious now.

House Bill 3659, signed by Governor Pat Quinn last March, victimizes Illinois entrepreneurs, small businesses, and even non-profit organizations who publish online advertisements for out-of-state retailers in an unlawful attempt to expand the state’s taxing authority…

“HB 3659 is a calculated assault on the burgeoning performance marketing industry and a misguided attempt by the state legislature and Governor Quinn to shore up the state’s budget deficit on the backs of small business,” said Rebecca Madigan, Executive Director of the PMA.  “We’re striking back at a law that not only unfairly targets our industry but also would arbitrarily broaden the state’s definition of nexus.  That’s a direct violation of the Commerce Clause and flies in the face of decisions already established by the Supreme Court.” [full text here]

Yesterday’s issue of The Sacramento Bee, the capitol newspaper for California, contained an editorial which I simply couldn’t miss. Let’s start right with an excerpt from it:

Amazon.com had $34 billion in sales last year, and is the world’s largest Internet retailer. Sadly, it remains a corporate citizen of questionable ethics.

…The company bases its business model on a refusal to collect sales taxes. By acting as a scofflaw, Amazon is able to save individual customers a few bucks. Overall, the amount of uncollected sales taxes on Amazon’s sales is huge – $83 million a year in California alone.

…Three bills are pending in the California Legislature, carried by Assemblywoman Nancy Skinner, D-Berkeley; Assemblyman Charles Calderon, D-Whittier; and Sen. Loni Hancock, D-Berkeley. …The Legislature ought to pass these bills, which attack the problem in different ways, and Gov. Jerry Brown ought to sign them.

The article also mentions in passing that the “company threatens that if California insists that Amazon collect sales taxes, it will terminate its relationship with 10,000 small-business operators who place Amazon ads on their websites in exchange for payments when visitors click on the ads”. It’s not a threat. They’ve done it in other states that passed a similar legislation (e.g. Rhode Island, North Carolina), and they’ve made it clear that they will do it again.

Just as back in 2009, a law like this will translate into immediate harm for thousands of small businesses (also known as affiliates or affiliate marketers). Amazon.com and Overstock.com have already made it explicit that they will terminate their California affiliates should the pending affiliate nexus tax legislation become law. The New York 2008 situation (with hundreds of online merchants terminating in-state affiliates) may repeat itself, and then 10,000 may end up being the lower-end estimate. Why the terminations? A fellow affiliate marketer, Mark Welch, explained it well in the comments under the above-quoted Sacramento Bee’s article. As he pointed out, the three bills that the newspaper is referring to apply only to “merchants who maintain performance-based advertising relationships with in-state publishers” (aka “affiliates”). So by terminating relationships with its affiliates, Amazon will take care of the situation (in a way I certainly do not support, but they didn’t ask me), continuing to sell online to CA residents without collecting the tax.

Finally, just as in 2009, “besides the obvious income, tax and job losses, the bill could also have a significant long-term impact” with small web-focuses businesses force to “leave California and new companies will choose other states for setting up their businesses, making California less competitive in the tech sector” [more here].

Focusing on Amazon, we’re missing the full picture here. The problem is that thousands of entrepreneurs will get their hands tied, and be forced to either more affiliate-friendly states, or face even less optimistic ramifications.

Much has happened on the affiliate nexus tax front since my last post on the subject two weeks ago. Sadly, most of these news aren’t positive ones, but how could they be when we’re talking conditions that make it hard for businesses to function?

Today I’d like to highlight 5 important news and developments for you. Here is my list (in reverse chronological order):

1. Advertising Tax Hits Arkansas — Governor Beebe signed the bill into law, making Arkansas “the fifth state to enact this sort of small business killing legislation.”

2. Texas Affiliates Testify at Senate Hearing — “Texas Senate Finance Committee put the Affiliate Nexus Tax bill (SB 1798)” on hearing agenda again; so around thirty TX-based affiliates went to testify against the bill, and express their concern (see also this post).

3. Merchants Terminate Illinois Affiliates — Multiple merchants have terminated relationships with IL-based affiliates “due to the enactment of the Illinois advertising-nexus law”. Among them: Amazon and Endless.com, Zappos and 6pm.com, Overstock, Diapers.com, Soap.com, CSN Stores, and others.

4. Overstock’s Bold Move: Sending a Message to the States — Overstock announces “it is taking the money it spent on affiliate advertising prior to the [affiliate nexus tax] laws passing, and giving it back to its customers who are part of their Club O loyalty rewards program.”

5. FatWallet Moves Operations to Wisconsin — FatWallet.com leaves “Illinois for Wisconsin as a direct result of the recent tax legislation passed in that state last month” [source]. Governor Walker welcomes FatWallet assuring they “are not going to raise taxes as it would drive jobs out”.

If I have missed anything that must be mentioned here, please post about it in the “Comments” area below. Your constructive input in always greatly valued.

On Thursday, March 10, 2011 Illinois Governor Pat Quinn signed into law a bill that prescribes collection of an Internet sales tax (6.25%) from retailers who have more than $10,000 in annual  online sales in the state of Illinois [more on it here].

The law also applies to sales driven for merchants through their Illinois-based affiliate marketing partners, or online affiliates.

On the day the bill was signed Chicago Tribune predicted:

The move is expected to have little effect on consumers but deals a blow to small Web businesses that count Internet retail giant Amazon and other online merchants as a major source of ad revenue.

The above is a very accurate prediction. Yes, the “businesses that count Internet retail giant Amazon and other online merchants as a major source of ad revenue” (read: affiliates who get paid a commission of each sale they refer to online merchants) will (and, in fact, already do) suffer from this decision. Several major online retailers — e.g. Amazon, Overstock, Zappos, etc — have already terminated relationships with Illinois-based affiliates. Essentially, a law like this puts thousands of them out of business, “cutting jobs” by killing numerous Illinois-based value-added websites (e.g. comparison shopping platforms, coupon- and rebate-oriented websites, niche/thematic sites that monetize through affiliate links, etc).

Additionally, as larger online retailers terminate their relationships with Illinois affiliates, the chances of collecting considerable amounts (into state budget) with this new Internet sales tax law also become very slim. Yes, “these affiliate laws could capture additional income from Internet sales” but with the $10,000 threshold level “they affect mainly large Internet retailers like Amazon and Overstock.com” [source] who have already made their stance clear.

Yesterday (March 25, 2010) the Joint Finance Committee of the state of Connecticut has passed its version of the Internet sales tax bill (HB 5481) or the “act concerning the collection and remittance of the sales tax by remote sellers” (italics mine). There were 35 votes “for” versus only 13 “against”. Bill HB 5481 specifies “that sales tax is due when an online retailer uses an in-state affiliate to sell its products” (italics mine / full text here).

What next?

Melanie Seery of Affiliate Advocacy clarifies:

The next step is a final recheck of the bill (which should be quick as it is a repeat of last years bill) and it will then be assigned a calendar number. Once it has a calendar number it will go to the floors for full vote. The Finance Committee is a Joint Committee meaning it has members from both houses. Support for the bill existed among both Senators and Representatives.

Affiliates should continue to prepare for bill passing to minimize the impact. Identify replacements for any vulnerable merchants. A few merchants have gone on record as likely to terminate but there are solutions.

Termination of affiliates is never a good option. As noted elsewhere, a number of online merchants (e.g.: ToysRUs) have been collecting sales tax from Internet customers for quite some time already, and end-customers don’t mind. Both online merchants and CT-based affiliates should be on the alert, and prepared to adjust their business strategies depending on the way the situation develops further.

Read more about Bill No. 5481, and the Connecticut state legislative process here, and again the full text of this bill may be found here.