Affiliate Tax: Industry Under Attack – Part 1

While we like thinking of ourselves as up to date on many of the major issues in the performance marketing world, the uncomfortable reality for us is that there are so many that we both don’t follow and cannot claim anything close to expertise. Usually, we console ourselves by assuming that if we don’t follow it and/or if we do not have expertise in the matter, it must not be worth knowing. The ignorance is bliss approach. In this case, following that method will only result in a rude awaking, and what makes this more interesting for us is that it really is an issue that doesn’t impact us today. What makes it worth paying attention to, though, is that this is the equivalent of turmoil abroad but one that will eventually have global implications. It’s the equivalent of bandwidth prices increasing steadily in India instead of a jellyfish outbreak in the Northern tip of Australia.

Performance marketing today has some elements of e-commernce, but as we’ve written several times, that is only one part of the performance marketing landscape. That is the more traditional world of affiliate marketing – seo traffic and coupon sites. The other half is our world, that of arbitrage, intrigue, and showmanship. The two sides rarely cross paths. We’ve described it as comparing the world of adult marketing to mainstream. The risk taking behavior exists in both as does the entrepreneurialism, but there is a cultural divide that seems to keep the two sides from overlapping little. The same is true here. The two sides overlap infrequently, and the issues keeping them up tend not to overlap equally. Whereas one side has been upended by the affiliate tax legislation, ours has not. As more states pass and consider legislation, ours continues along its colorful ways. While we have no evidence to suggest it will change immediately, the affiliate tax issue has become large enough that it could at any moment spill over into our world. If it did, it would do so with a force greater than any tweak to deliverability that has ever taken place. In other words, it’s time to take the tax seriously.

The affiliate tax is one of four related taxes involving the internet, referred to in some places as “eTaxes.” As summarized by StopeTaxes.com:

There are four primary eTax efforts: the Digital Goods Tax, the Amazon Tax, the Streamlined Sales Tax Project, and the Internet Access Tax.”

Digital Goods Tax

The “digital goods” or “iTunes” tax allows states to collect taxes on music, movies, books, ringtones, and other digital goods that are purchased from an online retailer in the same state you live in. So, New York can tax residents who buy from a New York retailer, but cannot require a North Carolina retailer to collect a tax and send the money back to New York. Many of these states tax digital goods as part of their definition of “tangible personal property”. Currently 18 states impose a tax on digital downloads.

Amazon Tax (or “affiliate nexus tax”)

The “Amazon Tax” allows states to reach well beyond their borders to collect taxes on residents who buy any good from virtually any online retailer around the country. The effort assumes that if an online retailer advertises through a company that is located in one state, say California, then that third-party advertising affiliation is strong enough for California to require the out-of-state retailer to collect taxes on California residents.

Streamlined Sales Tax Project (SSTP)

The Streamlined Sales Tax Project aims to extend tax collection to out-of-state online retailers just like the Amazon Tax; however, it does so by establishing a cartel of state legislators and tax administrators that can rewrite states’ tax codes under the guise of simplifying them.

Internet Access Tax

As the name suggests, some states have begun considering new taxes on connecting to the internet, even though federal law preempts such action under the Internet Tax Freedom Act that was recently reauthorized by Congress in 2007.

Each of the above impacts companies and consumers, but the affiliate nexus task has a direct and existing impact on affiliate marketing. The underpinnings of the affiliate tax stem from the 1967 U.S. Supreme Court ruling of Bellas Hess v. Illinois that states could not require companies without either property or employees, i.e., a physical nexus, in the state to collect sales and use tax. That ruling was reaffirmed in the 1992 Supreme Court Case Quill v. North Dakota that says a company must have a substantive nexus in order for the state to require the company to collect sales taxes. The challenges to the states laws are, as a result, constitutional challenges. Some states have denied similar laws passing feeling it violates existing rulings; whereas, others clearly felt otherwise.