The Aftermath of California Affiliate Nexus Tax Law

Posted on25 CommentsCategoriesAffiliate / Advertising Tax

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.

25 thoughts on “The Aftermath of California Affiliate Nexus Tax Law

  1. This is such a fail. As a California resident, I just lost a bunch of key affiliate partnerships. Way to go, thanks so much for forcing the cut off a prime income source for many site owners, bloggers, and ecommerce sites.

  2. I’m glad you’re talking about this. A big question for many Californian Affiliates now is: 1) what to do(we already know leaving the state is an option) and 2) which companies can they subscribe to now for affiliate marketing and 3) will their websites be less competitive because of the tax 4) how are others in the other states affected by this 5) what if the web owner owns their own affiliate marketing site? 6) if you were starting a website today what marketing strategies would you use.

    I know this issue is hot and new right now for Californians. But I find it interesting that so few people who call themselves seriousl about “affiliate marketing” are not jumping all over this topic and providing solid information. And then one wonders why their rank in google has gone down.

    So you being one of the few trying to stay on top of this issue, I applaud you.

    Another thing that bothers me is the “flip” answer to just move out of dodge or relocate your business. Yes “legally” and “politically” that sounds all cool. But some time for various reasons that isn’t practical or people may have issues. So I’m thinking while this subject is hot that many owners of affiliate marketing sites should be doing a lot of research and providing answers and taking their sites to the top of google and demanding to be heard on TV or at minimum doing You Tube Videos on the subject.

    In any case, thanks so much for staying on top of this with your links. I notice your blog started in 2007. Well I can tell you I am personally subscribed to web sites which started in the 90s and they aren’t even addressing this issue. What a shame.

    1. Sandy, thank you for your compliments. However, no matter how flattering they are, my post was meant to also communicate the severity of the problem through articles/posts by others. I’m certain it won’t take long for major media outlets (CNN, Wall Street Journal, Forbes, etc) will pick up the news any time now too…

      Regarding your questions: (1) there are several options (from leaving the state to switching links to CA affiliates-friendly merchants, to selling your sites… but maybe one should put together a separate post on this), (2) within a month or so, the answer to this one will become clear, (3) possibly, but not necessarily, (4) it spreads around the country as other states are considering similar “solutions” to patch holes in state budgets (see my previous articles in this section), (5) being a “no-no” and a huge conflict of interests, I haven’t seen this happen often, but sometimes it does, (6) ah! good one. maybe I’ll put together a blog post on this one some time soon.

  3. Any idea if this law allows for a rebuttable presumption of nexus such as that in New York and Rhode Island?

  4. Moving from IL to WI (or other states) was doable for FatWallet and other IL companies, but for affiliates/businesses in coastal regions, there is no close move, so that probably won’t be as common as it was in IL. All the affiliates and businesses I know that rely on performance marketing are very smart, and I’m sure they will find ways to make up some of the lost revenue, but definitely not all of it. It will be interesting to see how affiliates in the state adapt.

  5. Geno, Is there Nexus law in Nevada? Do we actually need to relocate or we can simply open a bank account in NV and forward mail to California address? Thank you in advance!

    1. Alex, no there’s no affiliate nexus law in Nevada at this time (meaning, nothing safeguards you from this happening in the future). As for the solution that will work for you, you want to consult with your accountant or a tax lawyer on this.

  6. I am a residence of California and an affiliate marketer. This is very scary. What do you do if a great deal of your income comes from your affiliate websites?

    Moving is out of the question because I have elderly parents that can’t just pack up and move.

    1-Is there another why to be financially successful at internet marketing?

    2-I have several websites. Are there other ways to monetize them? and are my sites monetize by “click bank” will they be affected also?

    Any guidance will be appreciated.

    1. I heard Buy.com is looking to work with affiliates now that Amazon has deserted them.

      I think you will need to find some other affiliates. For instance in the internet marketing field I think you can still get ebooks from affiliates like Barnes and Nobles. They already have a store presence in California so that shouldn’t be a problem with them deserting you.

      I heard, but not sure, that clickbank since it is a third party service is not affected by this; but you may want to contact them.

      It’s just going to be more challenging. I think people will need to seek out new sources for ebooks. I’m sure many internet marketers will be offering their ebooks now for affiliate marketing purposes(example “Get to Done”, Jeff Herring’s book on article marketing, Zen to Done)

      Good luck.
      In the meantime research.
      I think this is a good time for savvy internet marketers with products to emphasize that they are willing to work with these affiliates. Maybe they are working on this and need time to work on strategies.

      1. Some retail-oriented merchants are indeed dropping affiliates, but many are doing the right thing — picking them up (right from their direct competitors!) by explicitly stating that they’re CA affiliates-friendly. We have to work with what we’ve got…

  7. Unfortunately, I also live in California and lost revenue from eight different sites. I am thinking of actually moving my sites out of the country and establishing an office base outside the U.S. I am working with my accountant and attorneys to do this properly. I do not think moving states will work. With California being the most recent state to enact this kind of law, others states will surely follow. I am sure other laws will be enacted that will force more revenue losses for website owners and affiliates. When you vote in those that have the mindset to regulate the free market is always impacted. Sad but true.

    1. Sandy, affiliate networks (like Google Affiliate Network, Commission Junction, Linkshare, ShareASale, etc) aren’t gonna kick out CA affiliates. These decisions are being made on merchant level. On all of the above-quoted networks there are merchants who have chosen to cut ties with California affiliates. So, you want to check this out on merchant by merchant basis here.

  8. Well, a truckload of my clients have gotten a hold of me about this and I told them the same thing I’ve been telling people for years when I saw the writing on the wall…affiliates should only account for no more than 15% of your total income.

    Hey, I use them, but man-o-man, this will go nation wide before too long and it will clear out a bunch of online businesses before too long.

    Content, service or both FIRST…affiliates, a distant second.

  9. Similar to many of the other distressed California affiliates above, my inbox this morning was riddled with numerous emails politely informing me that I was dropped as an affiliate from multiple merchants.

    I think my work around solution will be moving my business registration to Nevada and opening separate bank accounts there. I believe another person proposed this as well. Though I might also consider taking ART’s solution and setting up “shop” abroad, but I feel as though Nevada will be a safe haven for quite some time.

    If anyone has any thoughts, new articles, or simply want to vent their frustrations please continue this dialogue. Also thank you Geno for posting such quality blog posts/article links you now have a new subscriber.

  10. We’re opening corporation in Reno, NV.
    Will close corp in CA, as soon as NV is ready.
    Entire process takes about 3 weeks and you can expect to pay $500-700 for everything.
    This will cover your $150/year Registered Agent Fee, $200 NV Business License Fee and everything else.
    You can keep your bank account in CA. Mail forwarding is only $5 + cost of shipping. You can select weekly, bi-weekly or monthly forwarding if you like.

    1. Alex, thanks for the update. Was this something a tax expert advised as an appropriate/acceptable solution? I know, I’ve asked this before, but you never replied.

      By the way, per PMA’s recent post, “The referendum to reverse the affiliate nexus tax was approved by the Attorney General and Secretary of State” and should “the campaign can get 504,000 signatures of California voters by September 27th, the law is stayed (put on hold) until it goes on the next election ballot” [more here].

  11. Just officially dissolved my CA corporation. Say goodbye to $500K a year of taxable income CA.

    Considering that additional states will most definitely follow in the coming years, a state with no sales tax, such as Oregon, Montana, Alaska or New Hampshire is the only safe place left. Personally, I went with OR.

    HOW TO STAY IN AFFILIATE MARKETING WITHOUT LEAVING YOUR STATE
    For those that do not want to or can not leave the state they are in, one work around I used was to setup a PO Box in a state with no sales tax (OR, MT, AL, etc.). Use a company such as Postal Annex or the UPS Store so you can get an address such as “123 Main Street, Suite #200”. Your “suite” is really just the PO Box number. The box should cost you $5 to $12 a month depending on the city and state you choose. Get the smallest box they offer. You do not need to go in person to setup the PO Box and they will forward your mail to you however often you want for $5 to $7 each time. They often can act as your agent in that state too (check the fine print on the PO Box rental agreement).

    You then only need to supply this address to the companies and affiliate networks where you directly interact with advertisers: Amazon, Overstock, CJ, Linkshare, Shareasale, etc.. You do not need to supply this address to secondary networks where you have no direct interaction with the advertiser: Max Bounty, OJQ, Copeac, Market Leverage, etc. The reason for this is that the advertiser has a direct relationship with Max Bounty, not you. As long as Max Bounty is not in an affiliate nexus state, the advertiser is in the clear.

    I also setup a permanent address change with USPS so that all mail that goes to my PO Box is forwarded to my real address. That way I don’t have to pay $5 every week to have my checks forwarded.

    I also asked for ACH payments wherever the option was available so that the only thing that ever really got mailed to me was a W2 at the end of the year.

    WHAT IF YOU GET CAUGHT?
    States that have affiliate nexus tax laws don’t require you to state what percentage of your income came from affiliate marketing and which advertisers supplied that income, so I believe this a safe way to stay working in affiliate marketing and remain in your current state.

    
WALMART IS BEHIND THE AFFILIATE TAX LAWS
    Remember, these affiliate tax laws are being pushed through by Walmart to keep the Amazon’s of the world from further eroding their local marketshare. Walmart figures that if they can keep Amazon from having affiliates marketing for them locally, they will not have to compete so heavily with Amazon. Do a search for “walmart is behind affiliate taxes” to learn more.

    Thus, it’s not the states trying to come down on individual affiliates, but instead the companies that have affiliates. The onus is not on us to pay any affiliate taxes, but on the corporations that pay us a commission.

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