The Affiliate Ad Taxes: Why You Should Care
Yesterday, the Amazon.com affiliate program terminated all Colorado affiliates from its program. Amazon had previously carried out similar affiliate terminations in other states including New York. Why? Affiliate Tax laws. Today Nickycakes is going to talk about what these tax laws are, why you should care, what is being done about it, and how you can get involved.
What are Affiliate Taxes?
Please note, Nickycakes is far from a lawyer. Sometimes legal stuff is a little difficult to decipher. If any of this is wrong, you should be doing your own research anyway.
“Affiliate Tax” legislation refers to laws introduced in recent years in many states that attempt to require businesses operating outside of that state to charge sales tax to customers from that state if they have affiliates in that state advertising for them. Huh? Ok, so, Amazon being the obvious example, doesn’t charge sales tax for states they don’t physically operate in. If you are in New York, you don’t need to pay sales tax on books ordered from Amazon.com. Simple. Well, New York would LOVE to get a piece of the sales tax action from Amazon, so they passed a law in January 2008 that said Amazon, and other merchants operating outside of NY, to collect sales tax from customers in NY if they had affiliates advertising for them in the state. Seems like a slam-dunk for NY, right?
So, can they really do this? Well, it depends. Obviously states can make and pass laws, but there has been some question as to the constitutionality of the affiliate tax laws:
Quill Corp. v. North Dakota
In 1992, the US Supreme Court ruled in a case between Quill, an office supply retailer, and North Dakota, who was trying to charge them use tax (use tax is kinda like sales tax but for services) because they had a “physical presence” in the state because their product ordering system was given to their North Dakota customers on floppy disk. Apparently North Dakota though that having software on a floppy disk in North Dakota qualified as a physical presence, and wanted to charge them “use tax” because the 24 tons of Quill product catalogs sent to their North Dakota customers had to be disposed of by the state. The North Dakota supreme court ruled against Quill, somehow, which was later overturned by the the US Supreme Court. The US Supreme Court said that in order to establish “nexus” (a fancy word for physical presence in the state), Quill needed to have offices, branches, employees, warehouses, etc. inside the state. They also noted, and this is important, that imposing such taxes on out-of-state businesses would be a huge burden on interstate commerce, because merchants would be required to keep track of the individual tax laws for thousands (over 6000 currently) of different tax jurisdictions.
Amazon.com v. New York
In May 2008, Amazon sued the state of NY over the recently imposed sales tax laws. They claimed that there was no “substantial nexus” because the affiliates in NY were never employees or contractors of the company. They ALSO said that if they were required to pay sales tax because they were paying people in NY to advertise their products, then OFFLINE retailers would need to pay similar taxes if they paid magazines and newspapers in NY to print ads for their companies. There is also the huge concern that they would be paying sales taxes even though they see zero benefit from the use of those tax dollars (taxation without representation). The case was dismissed by the NY State Supreme Court in January 2009. Amazon has since appealed, and their case was heard by the NY State Court of Appeals in November, and have been waiting since then for a decision.
What’s This Mean for Affiliates?
So how does this impact affiliate marketers? Well, after the state of NY imposed the tax, Amazon immediately removed ALL New York affiliates from their program. It makes sense for them to do so, because one of the main draws for Amazon customers is the lack of sales tax. Not only would they lose customers if they had to pay these taxes, but they’d also have to go through a prohibitively expensive process of keeping track of tax laws for different areas. So they just cut everyone off. So now, not only does NY not get any sales tax revenue from Amazon, but they get less income tax revenue from the affiliates who were previously making money in their state. It is clear that the lack of sales tax requirement is much more valuable to Amazon than the business generated by affiliates (and rightly so!)
But it didn’t stop in NY. Several other states have enacted such laws and had Amazon drop them from their program. You can see a basic map of the affiliate tax laws imposed so far, courtesy of Commission Junction, below:
So this is obviously starting to affect more and more states. The most notable being California, which currently has such legislation being debated.
And things don’t stop with Amazon, either. These laws apply to ANY online merchant with affiliates in affected states. The two main problems, as stated above in the Quill case, are the taxes themselves (plus the whole taxation without representation thing), and the prospective nightmare of retailers having to keep track of all the individual tax laws. It’s much easier for, say, a mom+pop online retailer to cut off affiliates rather than have to stay current on 50 states worth of tax law and frequently update their billing accordingly. Take, for example, online retailer Drs. Foster and Smith, a very popular pet supply retailer. They yanked their affiliate program about a month ago, not because they didn’t want to pay sales tax, but because they just couldn’t keep up with all the individual state law changes. Just a note: this is a pretty obvious case of hindering interstate commerce, which the SCOTUS was trying to specifically avoid in their Quill v. ND decision.
As you can see on the map above, Colorado is listed as having the legislation “Defeated”, but yesterday Amazon terminated all Colorado affiliates. Why? Well, the bill actually passed, but due to the efforts of many affiliates speaking up and attending sessions and speaking up, they were able to get the State Senate to rework the bill so it wouldn’t require Amazon to pay sales tax in the state just for having affiliates there. Unfortunately, they left in some stuff in the bill that WOULD require Amazon and its associated stores, to do extra stuff like inform Colorado customers that they were supposed to be paying sales tax, even if it wasn’t legally required, or something of that nature, so Amazon still shut down all their affiliates apparently due to the extra hassle this would create for everyone. Again, the state loses income tax revenue, the affiliate loses a job, and Amazon is relatively unaffected.
So, yes, you should care, because this could affect you. Even if you live in a state where a similar law was overturned, because the law can be re-introduced even after it is defeated. In Maryland, for example, an affiliate tax law was defeated last year, and was just recently re-submitted.
What is Being Done?
Luckily for affiliates everywhere, many companies have many dollars invested in affiliate marketing, and don’t like having their many dollars threatened. The Performance Marketing Association was formed a couple years ago to help keep people informed about affiliate marketing in general, to help connect people in the industry, and to generally make affiliates look good, and they’ve been doing a pretty great job. PMA has organized “grassroots” campaigns to get these affiliate taxes shot down by speaking with state government officials and organizing affiliates and others in the industry to show up at hearings and be heard. Rebecca Madigan from PMA was kind enough to provide most of the information in this post, and they are definitely the most informed when it comes to this issue. They have set up google groups for the individual states in which there is upcoming affiliate tax legislation in order to properly organize a defense.
They’re not the only ones, of course. It seems local business associations have been getting involved as well. In the recent Colorado tax hearings, for example, there was apparently a good amount of opposition support by the Colorado Association of Commerce and Industry and the Colorado Technology Association.
What Can You Do?
Well, the Performance Marketing Association makes it easy to get involved if there is legislation being proposed in your state. There are several ways to not only be informed of new developments in affiliate ad taxes, but to help get the taxes shut down. Remember, state lawmakers are influenced a great deal by REAL people who are affected by the laws they make. If they see that a law they are proposing is affecting a real person, especially putting small business owners out of business, it matters…a LOT. Here are some links to get started if you’re interested in staying up-to-date or helping out:
Currently if you live in Maryland, the latest battle has just begun as a new affiliate ad tax was just proposed. Now is the time to get on board, join the maryland google group and get started fighting Maryland SB 824. They use google groups for this because the associations who are in favor of the affiliate tax also like to send people to the hearings, and if the information is public, they will use it to try to bring more counter-support.