The Real Effect of the Advertising Tax

by David on February 22, 2010

It finally happened. What many of us have feared from the start. Online stores closing their affiliate programs because of the Advertising Tax (aka the Affiliate Tax, Amazon Tax and several other names). Today we received notice from a store that is completely closing its affiliate program immediately (yes, effective today) due to concerns over the Advertising Tax bills that have either been passed or are pending in several states.

California Dreamin’… er, Nightmare

California, the only state I have ever called home, is considering ABX8 8 which would change the definition of nexus to include any online store that has an affiliate earning more than $10,000 per year and is based in the state. State legislators claim that they are attempting to get out-of-state retailers, namely Amazon, to collect the sales and use tax that California residents are required to pay. Amazon and other out-of-state retailers have responded that they will terminate California affiliates if the bill passes, just as they have done in other states. Overstock terminated all of its California affiliates when a similar bill was passed last year. Governor Schwarzenegger vetoed the bill and our relationship was restored.

Legislators feel that they are being strong-armed by the retailers and they see no reason to give in to such tactics. I’ll give a reason: My livelihood. State legislators will keep drawing their salaries and their stock and bond portfolios will keep their value. One of my two biggest assets will lose significant value and my income will plummet. I am not alone. Thousands, if not tens of thousands, of other California taxpayers will suffer the same fate. And if we have to start laying off employees, we’ll really see the Trickle-Down Effect. To make matters worse, the State won’t collect any additional sales tax from Amazon, Overstock or the other large online-only retailers who will terminate their affiliate relationships with California affiliates.

Governor Bev Perdue of North Carolina said it best: North Carolina is the seventh largest state in economic terms and Amazon won’t stop selling there. She was right about an irrelevant point. Amazon terminated all of its NC affiliates and still ships to the state. NC affiliates had their businesses devastated. Oh, and Amazon doesn’t collect sales tax for North Carolina. How was this a win for Gov. Perdue’s state?!?

Unintended consequences

Today we received a termination notice from Drs. Foster & Smith. You see, the good doctors aren’t so much concerned about the collection of sales tax. They are concerned that if they have nexus in many states, they will be required to file state income tax returns in all of those states. I remember as a CPA doing tax returns for a company that had nexus in 19 states. It took a team of half a dozen of us months to get the returns done. I can see why the mere threat of having to file the returns is enough even if no income tax is due in those states that have changed the definition of nexus.

Off-shore it!

I predict that next year Affiliate Summit West will be in Vancouver and Affiliate Summit East will be in London. There won’t be a reason to have a US-based conference. There won’t be any US-based affiliates if this continues.

Performance marketing offers many different types of sites for merchants to advertise on. The value of our sites won’t go away. The value will simply be picked up by foreign entities.

The Letter from Drs. Foster & Smith

It is with great regret that we have to inform you that we are shutting down affiliate marketing at Drs. Foster and Smith effective immediately  February 22, 2010.  This closure is across the board in all states with all affiliates and is not related to you only as one of our affiliates.

We regret having to do this for a variety of reasons, not the least of which is that so many of you have done a great job for Drs. Foster and Smith and will be adversely affected by the loss of revenue from Drs. Foster and Smith sales.  Thank you for all you have done to promote our company on your web sites.  We apologize for the hardship and inconvenience that this creates for you.

The single reason for the decision at this time is the moving target of the ever-growing patchwork quilt of state legislatures that are considering nexus legislation relative to affiliate marketing and sales tax.  It has become increasingly difficult to determine who is considering such laws, where they are in the process and what the ramifications are in each state.  What affiliates may not be aware of is that such nexus situations do not only relate to sales tax collection, but potentially state income tax for a corporation as well.

We wish there was clarity on this issue from state to state and nationally, but there isn’t.  So until this matter is cleared up nationally, we are shutting down all affiliate marketing.  We apologize for any hardships this brings to you and your team.  We have greatly appreciated the work that you have done on our behalf.  The sudden nature of the move by California to reintroduce legislation late last week and to push for a quick vote, emphasized the ever-changing nature of this issue and our need to be ahead of such votes and decisions.

With our appreciation for your contribution to our company,

Sincerely,

Drs. Foster and Smith Affiliate Marketing Team

Solutions for State Legislators

I learned while speaking with California assemblymembers, senators and journalists that I am required to offer a solution when fighting bad legislation so here it is:

  1. Do nothing: In business, doing nothing is often a better solution. This applies to government as well. Imagine if a state legislator proposed closing all prisons and releasing all prisoners. This would save California $10,000,000,000. I think we can all agree that doing nothing is a better solution. Of course, repealing the Three Strikes law and spending more on rehabilitation would both save the State money and better society.
  2. The Federal Solution: Don’t EVER mention this to state officials. They HATE it! They have no control and they know that it will never happen. Of course, they also know that the Supreme Court ruled in Quill v. North Dakota in 1992 that legally it is the only constitutional solution but they’ll ignore that. The problem is that if Congress passes the Streamlined Sales Tax Project it will, in essence, create what feels like a new tax to voters. Even if this is the collection of an existing tax, voters won’t see it that way. To add insult to injury, Congress won’t get control of any of the money. Why would they take a risk of upsetting voters when they don’t even get to spend the money?
  3. Service Tax: Why is it that we only tax sales? Our economy has become a service economy so most of what as a state produce and consume goes untaxed. While most things that the Canadian government does is a mistake, have we looked to see what would happen if we start taxing the services of lawyers , doctors, accountants, architects, engineers, etc.?

The Silver Lining

AB178, the original nexus-changing bill in California, was amended so that it didn’t include the comparison shoping engines or search engines. ABX8 8 seems to leave pay-per-click advertising in the definition of nexus. If that happens, companies will have to decide if they want to collect sales tax (and pay state income tax?) if they want to advertise in AdWords. Oh, and every eBay transaction will be subject to California nexus. This is getting interesting. Let’s just hope that our state legislators don’t kill California’s tech sector… and especially not small business here.

{ 5 comments… read them below or add one }

thedavidlewis February 23, 2010 at 7:25 pm

Oh, I forgot to add that companies that decide to comply with the collection of sales and use tax and remit that to the states might wind up (if Drs. Foster & Smith is correct) with a notice of tax due and penalties for not filing state corporate income tax returns. Nice!

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Michael Ngo February 26, 2010 at 10:13 pm

Awesome write up

Reply

Paul March 5, 2010 at 5:32 pm

Even when California goes broke, these progressives still won't get it. They tried it in the USSR, Cuba, South America and many other places. Even though it doesn't work, they still think they can find a way to make it work here.

I think we actually need a huge state like California to fail before we wake up and revolt against the system.

Reply

Baje March 5, 2010 at 10:33 pm

At a time when unemployment is growing because of the economic downturn why would intelligent people introduce this? I can't see any real benefits coming from this.

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Chris March 12, 2010 at 10:37 pm

Actually, they do collect tax in Canada on services–it's called federal Goods & Services Tax or GST.

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