Before moving on, let’s define a few things in case this is unfamiliar or unclear.  Full details (specific to CA) found here.

• Nexus is the level of connection with a state necessary under the U.S. Commerce Clause to permit the state to impose a tax or a sales tax collection duty on out-of-state businesses doing business in the state.
• Sales tax is imposed on a state’s retailers based on gross receipts from the sales of tangible goods.
• Use tax is imposed on a state’s consumers who purchase goods from out-of-state retailers.
• If a sales tax is not collected, consumers are supposed to submit it as a user tax.  But, honestly, who do you know that does that?

If you were a merchant with retail trade presence in NY, this had zero effect on you.  Online retailers without a trade presence in NY were faced with the choice of now taxing customers or removing affiliates who reside in NY from their program.  The negative impact is obvious; any affiliate registered in NY lost a revenue stream if they were dropped from the merchant’s program.  That merchant also potentially lost a revenue-driving affiliate or put another hurdle into the customer’s purchase decision process (charging sales tax).

Similar to the legislature passed in New York, several states (CA, CT, MN, HI, IL, TN, & NC) are now considering enacting their own that will affect retailers’ taxable nexus. Digging a little deeper, under these bills, a retailer making taxable sales is presumed to be soliciting business through an independent contractor (affiliates) if that retailer enters into an agreement with a resident of a state under which the resident, for a commission or other consideration, refers potential customers. In many cases, this provision only applies if the cumulative gross receipts from sales by an affiliate exceed a certain amount (I’ve seen ranges of $2k to $10k).

The problem with this is that affiliates are not exactly independent contractors.  In my opinion, the fact that they are called affiliates, in this case, is misleading.  It does not mean the same in the online marketing world as it does elsewhere.  While there are many affiliates with fairly large businesses, a good amount of affiliates work from home & are the independent/entrepreneurial people we should be rewarding, not penalizing.

As a retailer, the short-term & easy solution would be to remove the affiliates if the legislature is passed, state-by-state.  However, there is a good possibility this will gain momentum throughout the rest of the states.  If it becomes nationwide & your initial action is to kick out affiliates, you will have a difficult time getting them back.  There is also speculation that the legal language could be written loose enough to include the likes of search engines & interactive ad agencies.

I am sure you are quickly realizing how this makes zero sense.  In fact, precedence was set for this 20 years ago.

There is growing support from the likes of Google, LinkShare, Commission Junction, & many affiliates in general to get in touch with their local representatives & media outlets to spread the word, educate lawmakers & help defeat these bills in each state.  It seems as if lawmakers do not truly understand the impact this would have & are ignoring what has taken place in New York (many retailers completely dropping affiliates in that state).  Those supporting this legislation are simply seeing a pool of money that is not being taxed.  They do not understand that this is going to put more people in the unemployment line (less taxable income) & decrease sales for an online retailer in that state.

Here is a status by state; I probably will not do the best job at keeping this updated, though I will be actively aware of the issues.  Much of the information I have gleaned here has come from the resources listed at the bottom of this post.  A lot of the important due diligence & legwork has been done by Melanie Seery, Brian Littleton, & Missy Ward…at least their sites have been the resource for the majority of my content.

• Connecticut: SB 806.  The  Joint Finance Committee vote was held on 3.26 & the bill was  approved.  The joint bill is now filed with the Legislative Commissioners’ Office. After fiscal analysis it will go to the Houses for vote & then on to the Governor.
• California: AB178.  The bill was officially referred to the Committee on Revenue & Tax. The committee has set a hearing date for April 13.
• Minnesota: SF 282 was supposed to be reviewed by MN’s Senate on 3.24, but was delayed. No further notification has been given on when it will be reviewed.
• Hawaii: HB 1405.  The process will probably take another couple of weeks. I believe that the next steps are the 2nd & 3rd reading followed by the House vote, then on to the Governor.
• Tennessee: SB 1741 & HB 1947.  Has been assigned to the House & Senate’s sub-committees.
• North Carolina: HB 558 & SB S487.  Both Houses sent the bills to their Finance Committees earlier this month.
• Illinois: Have heard this may be underway, but do not have any details yet.

I encourage you to not only read what’s been written, but also dive into the bills, by state.  It is not enough that we merely contact local representatives & send an email or letter.  If you want to persuade lawmakers, you are going to have to educate them.

What You Can Do

• Educate yourself & others.
• Spread the word.
• Keep on top of the issues.
• Speak directly with those in the online retail & affiliate marketing industries who are close to this.
• Contact your local representatives.
• Use your network to find out what media contacts you have.  If you have none, make them.
• As an affiliate; find out what retailers are in these states as there will be a material impact on your business.
• As an online retailer; don’t make any rash decisions & think long-term.  Ensure your online marketing team, agency, etc. & all key decision makers are tuned in & are looking at this strategically.  Openly communicate & collaborate with your affiliates.

Resources

• NYAffiliateVoice (Melanie Seery)
• ShareASale Blog (Brian Littleton)
• California AB178 for Dummies Podcast (Missy Ward)
• Affiliate Tax Laws Forum (ABestWeb)

Follow Along

• Twitter Search for #advertisingtax
• Twitter Search for #affiliatetax

Related Posts

• 5 Things I’m Sure Your Clients are Thinking or Doing
• Help Us, Help You – Internally Selling Upward
• Help Us, Help You – Getting Yourself Connected

1. Shifting marketing dollars to performance-based channels – email, paid search, affiliates, & search engine optimization (SEO).  The latter wouldn’t require much of an incremental investment if people simply adhered to the principles of good copywriting & building structurally sound web sites.  SEO is not that simple, but those 2 sure cover a lot.
2. Realizing the rise in average cost-per-click on search engines was up higher than it should have been.
3. Considering investing in things that will improve conversion, user experience, & customer service.
4. Determining how to best reach customers on a more micro level (customized & more personal interactions)
5. Asking you to do more with less.

If none of this is going on, I would say you are either extremely lucky or in big trouble.  The former because you (& your client) are then, somehow, isolated from the current economic factors.  The latter because your client is considering bringing things in-house or are talking to other, cheaper, agencies.  Or it could be because you simply suck…I know a few agencies that fit that bill.

As a Friday bonus, I’ve included a translation of the above for the cynics…

1. The byproduct of performing your necessary due diligence.
2. Digging a bit deeper to understand the cause of rising costs.
3. What you should’ve been doing all along…how dare you treat your existing customers like commodities.
4. Building & maintaining loyalty in an increasingly competitive space.
5. What most like to call Doing Your Job.

Related Posts

• Retailer Nexus & The Advertising Tax
• Help Us, Help You – Getting Yourself Connected
• Bad Email Marketing