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.

Yesterday (July 24) in his Sacramento Bee column Bruce Maiman provided his viewpoint of the whole “Amazon tax” situation. Among other things in his article he made a statement of affiliate marketing which I simply cannot miss.

Maiman wrote:

…Another claim: The law punishes thousands of California small businesses affiliated with Amazon.

To explain: Affiliate marketing is basically the Internet equivalent of a referral. When you click an Amazon link on, say, Mary’sQuilts.com, Mary gets a cut of the proceeds from whatever you buy on Amazon. In reaction to the new law, Amazon cut its ties with California affiliates. Result: No more referral fees for California online businesses. They lose money, go out of business, maybe leave the state. “Job killer!” cry Internet tax opponents.

Wait: I’m supposed to be sympathetic to businesses that were taking advantage of a loophole that never should’ve existed in the first place? It’s like a gas pump accidentally set at $1 a gallon and motorists lining up to advantage themselves of an existing flaw. You don’t complain when that gets corrected; same thing here.

I disagree. Equating affiliate marketing to “businesses” that are or where “taking advantage of a loophole that never should’ve existed” is both shortsighted and inaccurate.

You are right in your basic definition of affiliate marketing as referral marketing.

You’re also probably right that with Amazon’s actual physical presence in California affiliate terminations aren’t gonna help (I’m not a tax lawyer, so I won’t claim I know for sure). In fact, I too have a big problem with Amazon using affiliates as cannon fodder in this “fight.” As Danny Sullivan wrote in his recent open letter to Jeff Bezos:

You could collect the tax, voluntarily. You could keep your affiliates, give back to the state, be more competitive with those retailers here and not cause all this ill-will that’s more about enriching your company than fighting the good fight.

However, Mr. Maiman, please don’t make affiliate marketers look as some kind of unclean business(men)/(women) dependent on the paradigm “glitch” and imperfections of legislation. Affiliate marketing is not based on “taking advantage of a loophole”. It’s not dependent on the existence or the absence of this sales tax. The problem is that state-specific taxes like these end up targeting specifically affiliates (and not any other types of online advertising that contributes to the final sale), and yes, when, instead of collecting the tax, merchants decide to terminate the relationship with affiliates, both affiliates and the state lose — the former get an income hit, while the latter collect less in income taxes.

As always, this blog post is open to comments and expressions of your opinion(s).

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.

In conjunction with the growing popularity of news connected with the affiliate nexus tax bills and laws passed in various states, a number of merchants have approached me asking a question that may be summarized as follows:

Can the use of web hosting servers in another state be considered grounds for tax nexus in that state?

They’re wondering about a “tax nexus”. So a quick definition first:

A nexus in general means a connection. The term nexus is used in tax law to describe a situation in which a business has a “nexus” or presence in a state and is thus subject to state income taxes and to sales taxes for sales within that state. Nexus describes the amount and degree of business activity that must be present before a state can tax an entity’s income. [source]

Now back to the original question: If you’re hosting your ecommerce website in a state other than yours, can that constitute a nexus, making you liable to pay a state income tax and/or a sales tax in that state in addition to what you’re already paying in yours?

The short answer is: it depends and differs from state to state (in some cases it may, while in others it may not).

Back in 2001 Pillsbury Winthrop Shaw Pittman LLP, a law firm specializing on tax matters, noted that “some states have begun to apply these [physical presence of an out-of-state seller's employees/agents in another state] general rules in certain specific e-commerce contexts” [source]. On the same page they quote several interesting precedents and different rulings.

Yesterday night, as I was pondering about this topic, I got in touch with Rebecca Madigan, the Executive Director of the Performance Marketing Association, to see what she knows about the current situation. She couldn’t speak for every state, but shared some interesting thoughts on Texas and California. She wrote to me:

Currently, TX and CA have exempted servers from establishing nexus. But this year there are bills being introduced that remove that exemption, and at the same time just happen to include affiliate nexus tax schemes. It signifies an attempt to establish nexus for out-of-state retailers via the Internet. This is nothing new for states. They’ve tried unsuccessfully in the past to say catalogs establish nexus, or use of 800 numbers, infomercials on cable TV, credit cards. They are aggressively trying to find outside sources of revenue. So far the Supreme Court continues to say that sending something or advertising into a state isn’t nexus, a retailer needs an actual physical presence.

Obviously, it’s a question each e-tailer must carefully monitor in the state where their web servers are located.

American Bar Association (Section of Business Law) runs a greatly useful project devoted solely to Cyberspace Law. On its website they write:

Some states have found that a maintenance of local web server can constitute a physical presence within a state for certain e-commerce retailers because (1) a web-hosting service is acting as the agent of the remote seller, (2) the online seller is making use of the phone lines and infrastructure of the state, or (3) web servers constitute a physical presence on behalf of the online seller. Even more potentially troubling, a substantial nexus with the taxing state could exist based on a point of presence (POP) site in a taxing state maintained by an internet service provider (ISP) or internet access provider (IAP). …If so, then a state could find a substantial nexus with online retailers based on a theory that their IAPs and/or ISPs are acting as their agents. This would mean that an Internet-based retailer could be required to collect and remit taxes to every state in which its internet service or access provider was located and/or maintained a POP site. Due to these possibilities, the parties’ respective tax liability should be addressed in their web site hosting and ISP agreements. [source]

So, if you aren’t yet monitoring the legislation applicable to your case, now is a good time to start.

Disclaimer: The above should not be read as any sort of legal and/or financial advice. Talk to your accountant and/or finance attorney for a concrete advice regarding your concrete situation.

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.

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.