Several things – important to affiliates, and affiliate marketing industry as a whole — have happened in the course of the past few days, unfortunately not all good, and today I’d like to draw your attention to the following four:

1. Pennsylvania Enacts Affiliate Nexus Tax law — Late last night (on December 1, 2011) the bad news came from the Pennsylvania Department of Revenue which “in a surprising move… issued a press release and memorandum… stating that an existing statute has been reinterpreted to include a definition that states out-of-state retailers have nexus (and must collect PA sales tax) if they have affiliate marketers” [more in today's post by the Performance Marketing Association].

2. Bing Bans Holiday Deals Sites — On November 30, it was reported that Bing, in its “version of the Google Panda Update”, has “completely removed some sites deemed thin from its search engine.” Ironically, among others they’ve also banned CyberMonday.com, a website owned by Shop.org which coined the very term “Cyber Monday” back in late 2005 [more in Danny Sullivan's post here]. As Tricia Meyer has rightfully summarized, this article is “eye opening for affiliates” — “especially those who rely on search engines for all their traffic.”

3. Federal Sales Tax Reform — The reform which can remove the Affiliate Nexus Tax, “potentially getting 60,000 devastated affiliate marketers back in business”, is gaining a “growing support” and “has a very good chance of passage” [more in the Performance Marketing Association's article here].

4. £1 Million Incubator for Affiliate Marketing — In the U.K. TradeDoubler has launched The Zoo Project, a unique initiative “offering £1m worth of business resources and industry mentoring to help” affiliate startups, fostering/encouraging affiliate marketing innovation [more in this article from November 30, 2011 at MyCustomer.com].

It certainly is a dynamic industry we work in… If I’ve missed a important news that belongs here, please do submit it through the “Comments” area below.

On Friday last week, Susan Payton has published an interesting (and important) article at Small Business Trends, entitling it The War Against Affiliate Marketing Continues. She started it with: “it seems to keep getting harder to run your business, thanks to companies that don’t want to support affiliate marketers”, and then went through 3 things:

1. Google said they didn’t like “thin” affiliate marketing sites [more here]
2. Amazon (and others) terminated affiliates over the affiliate nexus tax
3. MailChimp announced affiliates are now “personas non gratas” [more here]

All of these are real problems, and I appreciate Susan drawing people’s attention to them. However, the more I think of these, the more I wonder — is this really a “war” or more of a “business as usual”? Are these obstacles (conditions that “impede progress or achievement“) or challenges (“threatening, provocative, stimulating, or inciting” circumstances)?

Some will say “both”. To me too, but more than anything else, I believe them to be challenges, or surmountable obstacles, and conditions that, when dealt with, can really make us stronger: both as an industry, and as individual businesses.

Not that this doesn’t make it all akin to a “war” though…

As always, the “Comments” are all yours.

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.

Earlier this morning the Performance Marketing Association has made a blog post dedicated to the recent media coverage on the subject of affiliate nexus tax. Funny how it is, but I had a closely related idea in mind for my today’s blog post as well. Related, but not identically the same. I blogged a lot on the subject of the affiliate / advertising tax last year, but haven’t written much on it in 2011. Main reason being that there is not much to add: state governments that face budget deficits predictably turn to it as a “solution” to their problems failing to understand that, in reality, a step like this harms businesses, causes more job losses, and doesn’t guarantee additional income into their state’s budget at all.

As of today, the affiliate nexus tax bills are being proposed in 17 states. Last week (on Thursday, March 10, 2011) the state of Illinois (home state of such affiliate marketing companies as ShareASale, FatWallet, Coupon Cabin, Mr. Rebates, and thousands of smaller ones too) ratified a bill like this, becoming the first state to do it since 2009 (when Rhode Island and North Carolina passed such laws).

Much has been written on the affiliate (or so-called Amazon) tax since last Thursday. Today I’d like to bring you the 10 articles that caught my attention. Every one of them has important information, and when treated cumulatively, all 10 assemble into an interesting jigsaw puzzle. I hope you will find them of interest as well.

Here is my list (the order is merely chronological):

1. The Illinois Affiliate Tax is Passing Today — Author: Scott Jangro of AffBook.com

2. Governor Quinn Abolishes Affiliate Marketing in Illinois — Author: Brian Littleton of ShareASale

3. Advertising Tax: Education, not Legislation — Author: David Lewis

4. CouponCabin.com Comments on Gov. Quinn Signing Internet Tax Bill — Author: CouponCabin.com

5. Illinois Gov. Quinn Flaunts “Fairness” in Passing Nexus Tax, Cuts off Nose to Spite Amazon — Author: Angel Djambazov of ReveNews.com

6. Overstock’s Informational Letter to Runner [PDF] — Author: Mark J. Griffin of Overstock.com

7. The Senselessness of the Illinois Legislation — Author: Rebecca Madigan of Performance Marketing Association

8. Indiana and the Advertising Tax — Author: Tricia Meyer of Sunshine Rewards

9. Wal-Mart is Behind Affiliate Taxes: Hurting Small Businesses — Author: Pace Lattin of OfferVault

10. Amazon’s Affiliates are not Salesmen — Author: Peter Hamilton of HasOffers

If I’ve missed an important article that you have enjoyed, please do post a link to in the “Comments” area below.

Earlier this month Davis & Gilbert LLP released a “taxation alert” on the subject of the so-called affiliate tax [more on the tax here], and particularly the case Amazon’s appeal regarding the tax’s constitutionality in the State of New York.

The alert reads:

In February 2009, the New York State Supreme Court issued a decision that upheld the constitutionality of the statute on its face, and also as it applied to Amazon and Overstock, and dismissed both complaints in their entirety.

Amazon and Overstock appealed the decision in the Appellate Division First department, in a decision earlier this month, upheld the constitutionality of the statute on its face but ruled that further factual discover was warranted so that a determination can be made as to whether the statute … violated the Commerce and Due Process Clauses [read the full Brian Gallagher's write-up here].

In the beginning of this month the Appellate Division of the New York Supreme Court issued a decision on Amazon’s appeal stating:

… the statute is constitutional on its face, and does not violate the Equal Protection Clause either on its face or as applied, and to reinstate the complaint for further proceedings with regard to the claims that, as applied, the statute violates the Commerce and Due Process Clauses, and otherwise affirmed, with costs.

Now to support their case Amazon (and Overstock) have to prove that NY-based affiliates are not involved in direct soliciting of sales in the state, not being engaged in personal selling (which would establish nexus, making the tax collection fully appropriate in the eyes of the state).

We will continue monitoring the situation, and keep you up-to-date on any further developments.

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.

Performance Marketing Association has posted an important news earlier today. Apparently, the state of Virginia that faces a close to 4 billion budget deficit this year, has not included the affiliate tax (the bill for which was tabled by the House finance sub-committee on 24 February) in the budget bill. PMA wrote:

We just received hopeful news: the Virginia budget conferees did not include the ad tax language in the budget bill they submitted today. There is one more step to go: the governor needs to sign the bill into law. We don’t expect him to ask for the ad tax to get put back, but this isn’t over until the budget is signed.

We’ll now wait for Governor McDonnell’s signature, knowing that he rules out tax increases as a solution for Virginia’s budget shortfall, and trusting everything goes well for Virginia-based affiliates.

Today I have had a chance to interview Jen Goode, a Colorado-based affiliate marketer and business owner, to get her inside perspective on the Colorado Internet sales tax bill, Amazon’s termination of Colorado affiliate accounts, and other related questions.

Here is the interview:

GP: Once again, thank you for agreeing to be interviewed on the topic, Jen. I know how passionate you are about it, and I really appreciate you dedicating the time to this.

JG: Geno, thank you for the opportunity to share my perspective on this issue. Getting involved in fighting the Ad Tax in Colorado has definitely been a learning experience and whirl wind at that. Let me preface all this by saying I am by no means claiming to be an expert on this topic. I am not a political guru, nor do I know the exact thought processes or reasonings behind what Amazon or the legislators are doing — I am merely sharing my views as I see them.

GP: Jen, besides being a good friend, a talented artist, blogger, and a great affiliate marketer, you’ve been an active advocate for affiliate marketing in Colorado. Could you give us a quick overview of what has happened in Colorado as far as the so-called “Amazon tax” goes?

JG: I came home from a series of business trips in early February to hear that HB-1193, the Colorado Internet Tax bill, was on the table and being debated/discussed down at the capitol. It literally popped up overnight. Before I had returned home, there had already been a hearing in the House where there was a fantastic turn out of Colorado affiliates opposing the bill and testifying on behalf of the industry. The Colorado affiliate community began working together to contact legislators — sending letters, making calls and even visiting the House and Senate offices to speak to legislators in person. The bill then moved to the Senate Finance Committee where again the troops were rallied to show support and testify. At this point, with the help of countless people, the legislators and affiliates had worked together to drastically change the language of HB-1193 so that the affiliates were removed all together. The state government knew they would be passing the bill regardless — so the primary goal was to help protect the residents of Colorado, the Affiliates. The bill then moved on to the Senate floor — and again it passed. The bill traveled back to the House for a final vote and then on to the Governor for his signature.

The State officials were satisfied that the bill no longer endangered the livelihoods of the affiliates and the affiliates were happier that they were no longer a direct piece of the bill’s language — although many were relieved, I believe the affiliate community was still in a “wait and see” mode. The fact there was a bill at all that passed, we’d never crossed this bridge before so we didn’t know where it would lead.

GP: Monday morning (8 March, 2010) all Colorado-based affiliates were terminated from Amazon.com’s affiliate program. I’ve seen you say you’re “very tired of all the ignorant comments by press and opposition that Amazon is holding CO affiliates hostage or using CO affiliates”. What exactly is your take on all of this? What is Amazon doing, and what should Colorado affiliates do now?

JG: First I have to say that statement was made because I am tired of the media sensationalizing the story� against the “big bad Amazon”. I realize the media is being media, but it’s irritating. Yesterday I had the chance to speak with the Denver Post — the reporter didn’t particularly like that I was not simply agreeing with him about evil Amazon. I’m not mentioned in any of the stories the Post published today (grin). The media is reporting from very biased angles, sharing information yet not understanding the industry. When we cried for media help during the bill debates and hearings, they weren’t interested. But now that there is a big corporate America guy appearing to avoid paying taxes, it’s all over the news.

I’m also tired of legislators again pointing the finger at Amazon as being greedy and bullying. Over and over we’ve heard that “it’s just not fair” to our local businesses. In the business world, sales tax is not the biggest obstacle to becoming competitive. I don’t want to come across as disrespectful. I sympathize with the local business owners struggling to keep up with internet retailers. I can relate — I am a local business owner — I even sell in brick and mortar retail shops. But sales tax is not the differentiator and definitely not when it’s handled on a state by state case.

I feel that Amazon is purely working on their own agenda — which to many can be construed as bulldozing over everyone else. I don’t like the tactic and I am not happy that I can no longer promote Amazon products, mainly because it’s a brand everyone knows and trusts and the prices are fantastic… So from a business perspective, it’s a great merchant to work with. But Amazon has bigger issues than just Colorado’s take on Sale Tax or Use Tax or any Internet related legislation. Amazon is in a batter across the country. I don’t know the logistics and I don’t know the details. I am just looking at it from a very speculative business view — a federal tax would better serve the cause.

I had the opportunity to speak with Senator Johnston for a few minutes yesterday — he is one of our opposition. Right now those who like this bill are claiming that Amazon “simply doesn’t want to pay sales tax and is holding affiliates hostage to avoid paying taxes”. I believe this is simply not true. His argument was that Amazon is already dealing with taxes for Target. I believe the technical tax aspect for Amazon is much more complicated and involved than any of the legislators comprehend. I wish Amazon could explain it more clearly and obviously than the big bully actions they have to take. I asked Senator Johnston if he had spoken with Amazon about their view of paying sales tax and if he has asked them if they would pay a sales tax if it were a nationwide/federal mandated tax vs individual state taxes. He said “no” but did say he would contact them. Let follow up on that in a few weeks.

Right now those on our side understand the pain and the need to fix the problem, they are in the minority, their hands are tied. Those against us (even when claiming they are for us) are simply putting the blame on Amazon and won’t budge. They are claiming they are fighting for the little guy. So there isn’t much we can do in the way of expecting the law to change. We won’t be heard and we’re only be fueling the fire that Amazon is bad. The more we show how much we’ve lost or the impact because of Amazon, the worse Amazon looks and the more they want Amazon to pay.

What I think we can do, however, is let those legislators on our “team” know that we are here if they need us. Ask them how we can help. Currently the Republicans are on our side. I think a few Democrats might be as well, but Colorado is too partisan right now to really tell. But more importantly take care of our businesses and families first. Don’t wait for the government to fix the problem, be proactive and work on a solution for your own situation. If you are looking for replacement merchants and want to be extra protected, there is a new service provided by GTO Management that allows you to search for merchants based on their involvement in state tax or nexus status called Nexus Aware.

I also recommend — with any business — diversify. It’s important not to put all your eggs in one single basket (to be a bit cliche) without a plan “just in case”. If you build your business entirely around one merchant, you’re leaving yourself vulnerable to issues out of your control. Not a good idea.

Some other things affiliates can do to help:

• Educate your merchants. Let them know that the Colorado internet tax does not apply to affiliates nor nexus.
• Get to know your legislators so you can educate them on the way this industry works, most really have no comprehension of the enormity of this industry let alone how it all works.
• Build relationships within the industry so that when issues like this arise, you’re not alone trying to figure out what to do next.

GP: What do you recommend online merchants do in connection with the ever-growing number of states considering similar, or most of the time more affiliate-focused tax laws?

JG: This is a tricky question. I am not very versed in legal terms and definitely not in the position to give business nor legal advice. However, I think it is extremely important that merchants really understand these laws and how they will impact their businesses. Prior to Amazon’s termination I received notice that I was not longer eligible in two other programs… Just because I am in Colorado. Merchants need to not simply hear “ad tax passed” and have a knee-jerk reaction. In the case of Colorado, affiliates or nt, the bill applies to all online merchants — so dumping affiliates does no good. Amazon is acting out of of a bigger cause than simply affiliate nexus issues.

GP: Thank you, Jen. I certainly echo most of what you have said above. Once again, thank you for your time.

Brad Crooks, a Colorado-based photographer and affiliate marketer, has posted an important link on his Facebook wall — a link to Tax Foundation‘s new report on the harm and failures of the affiliate/advertising tax:

I have purposely highlighted, Brook Schaaf’s comment which I echo 100%. I agree that calling it an “Amazon tax” narrows (and shifts) the focus, and does a disservice to the affiliate marketing industry, hiding the real damage done to thousands of small businesses. I was happy to see though that the Tax Foundation has actually got their conclusions right, stressing that that such “taxes are unlikely to produce revenue in the near term”, burdening interstate commerce, and harming economic growth. Also, some states have already “seen a drop in income tax collections due to the law” instead of the originally projected budget increase [more here]. They will, because in states that decide to collect the affiliate tax, merchants (sad, but true) instead of collecting the tax, often choose to terminate their business relationship with affiliates, thereby removing their liability for the tax collection. Such merchant solutions cause a great harm to thousands of local affiliate marketing businesses, negatively impacting their income.