Affiliate Tax: Industry Under Attack – Part 2

As we were first wrapping our heads around the affiliate nexus tax, one of the first questions we had was trying to figure out how it would be implemented. For example, if a consumer clicks on an affiliate link where the affiliate resides in a state with the affiliate tax, does that mean the consumer must pay sales tax on checkout, or does that mean the state wants to collect after the fact sales tax on those items from the company running the affiliate program. In the former scenario, we’re looking at a pass through type of tax where the user might not even know any better. In the latter, the user doesn’t pay any additional amount of money only the company, meaning the company pays two times, once to the affiliate and once to the government. Neither is a particularly attractive option. If the users must pay sales tax when going through an affiliate link but not through a link supplied directly by the company, the user pays more. The companies, more indirectly, pay through potential brand harm. If the user pays the same but the company pays a penalty for allowing affiliates, the company loses directly. In the first scenario, there is a strong case for terminating affiliates. In the second scenario, it’s a forgone conclusion.

From my own personal experience, I seem to notice when I have to pay sales tax online, but I would be hard pressed to name specific stores where I do and don’t. As I learn more about the proposed laws, it starts to make sense as to why some charge and some don’t. Looking through brief summaries of proposed and existing laws specifically for affiliate marketing, it’s easy to see why companies would want to simply stop their affiliate program. The vast majority want the companies to hand over names of customers in their state who purchased and pay a tax on them. A handful are even more uncomfortable, wanting the companies to hand over the details so that the state can bill the users. Can you imagine getting a bill from the government for shopping online via an affiliate link that you didn’t even know you clicked through to purchase?

If you were to do the same research as we, namely reading articles from those covering the topic as different states considered the passage of an affiliate nexus tax, in the comments of these articles, you see many statements such as these by actual affiliates. These two come from the comments section of an article written by the PMA’s Rebecca Madigan for Capitol Weekly, a publication addressing California legislative changes. The article was written in August 2010 when the debate on passing this affiliate tax was just starting to heat-up. Writes one affiliate, “Since I make my living advertising for retailers that are primarily out-of-state companies, I will have no choice but to move out of California and take my tax dollars with me.” Echos another, “If CA legislators pass this bill, then I (and many others) will generate no income and will not be liable for any CA income tax. And Amazon will not have any Nexus so will not have to pay sales tax. In effect, CA will actually lose money. No sales tax from Amazon and no income tax from us affiliates.” It’s hard to blame these affiliates for feeling that way. Unlike those of us who also live in high state income tax domiciles and consider moving out of state to pay lower taxes, at least we aren’t threatened with losing our income due to a tax change.

On this side of the fence, it’s easy to wonder how those in the legislature could be so misguided. For us, the flow of dollars and the impact that cutting affiliates would have comes as naturally as 2+2 does to most people. Taxing affiliates is not closing some loophole. It’s flooding the ship. It’s the lawmakers acting like performance marketers, using a loophole to try to create revenue. Except, in this scenario, instead of the savvy waiting for the slow to catch-up, it’s the reverse. It’s some out of shape high school bully trying to hit Bruce Lee; where he thinks he’s being swift, his movements come across like the fight scene in the first Spider Man. They’re not surprising anyone. That doesn’t change the dire health of many of the largest states economies and the need to look for creative solutions. That they might find affiliate marketing an attractive option is easy to understand, especially when big box retailers are complaining and moving their political might. More and more it feels political than just a tax decision. From a pure issue standpoint, and as already echoed on the HasOffers Blog on this topic, treating affiliates like in-state sales people is just ridiculous. They are affiliates – independent business owners not even contractors for that business. It would be like not working with an ad agency who did the TV commercials and saying anyone who bought because of those commercials was subject to a tax.

No way around it. The affiliate tax issue is a confusing one, not too dissimilar from trying to dig into the Department of Education rules around Title IV funding and the impact on the buying of leads. For better and worse, the state by state passage has much more concrete results – no more affiliate programs in those states. As for where we stand today, the PMA reports that since 2008 the affiliate nexus tax has passed in three states: New York, North Carolina and Rhode Island, and they have “beaten it back in over 15 states because affiliate marketers in each state have gotten involved in helping us [The PMA] reach legislators.” We will be putting our money where our mouth is and supporting the work of the PMA. View the PMA’s site for state by state coverage of the issue and to support them.