AffiliatesNeeded.Com What's New In Affiliate Marketing

Editor’s Note: The more points of view that are put out about Illinois Governor Pat Quinn’s ratification of the ill-conceived affiliate nexus bill HB 3659, the more chance the industry has to come together and have a discussion on the matter. ReveNews and industry veteran David Lewis wrote an excellent analysis of the law, the tax, and put forth a pragmatic proposal on how it should be dealt with. With his permission we have published it here in its entirety. By request comments have been turned off. Enjoy:

Yesterday Governor Pat Quinn of Illinois signed HB 3659 into law. There is plenty of background on the so-called Advertising Tax / Affiliate Tax / Amazon Tax / whatever you call it so I will give some basics and then move on to a view of solutions that might work.

The Basics

Consumers are required to pay sales tax regardless of whether or not a retailer collects it. Retailers who do not have nexus, a physical presence in a state, are not required to collect sales tax, leaving the burden on the taxpayer. Most individuals do not pay the sales tax (also known as use tax when not collected by the retailer). In an effort to collect this tax, some states have passed laws that make an affiliate relationship the equivalent of nexus for retailers.

There are two main problems with these laws:

1. These laws may not be legal. In 1992, before eCommerce began, the US Supreme Court ruled in Quill v. North Dakota that only the federal government had the right to pass laws related to interstate commerce.
2. These laws may decrease, not increase, revenue for states enacting them. When out-of-state retailers such as Amazon and Overstock.com terminate their relationships with affiliates, these affiliates will lose revenue, be less competitive with other affiliates and, in some cases, flee the state. This results in lower income tax and sales tax and higher unemployment payments.

Where are the relationships?

While I am extremely biased on this issue, I like to take a non-biased approach. I have been looking for a solution that works for both sides and doesn’t wind up having the states spend a lot of money fighting this in court.

The only perfect solution would be for Congress to enact a law requiring the collection of sales tax for the entire country. That levels the playing field in the US and, unlike in affiliate marketing where foreign companies can step in with a new-found advantage, foreign companies are less competitive due to shipping costs so they can’t take advantage over companies within the jurisdiction of the new law. But Congress won’t pass a law that will feel like a new tax to consumers/voters and where someone else (i.e. state legislators) get to spend the money.

The state of Illinois does not have a relationship with Amazon. It has a relationship with FatWallet which has a relationship with Amazon but that is not enough to create nexus. Better yet, the state of Illinois has a relationship with its residents. Residents are two things in this relationship: Shoppers and taxpayers.

In fact, it is the resident, not the store, who has the requirement to pay sales and use tax. Stores are the conduit to the collection of the tax similar to employers for income and employment taxes. You may be wondering why employers have to collect taxes and remit them to the government but stores don’t have to. Simple: It is a federal mandate. Plus, an employee establishes nexus for their employer in a state while a shopper does not create nexus for a store. Were Congress to define a shopper as establishing nexus, this would all be over.

Who do states have authority over? Taxpayers!

States can mandate what taxpayers need to do, say when they file their annual tax returns. States also have agencies that license accountants and enrolled agents, the only people licensed to prepare tax returns.

Think about how the Feds finally got Al Capone… that’s right, it was for tax evasion! There is your answer: Tax returns.

The Illinois Department of Revenue figured that out and added line 22 to the form IL-1040 for 2010 (pdf). It is a required field for “Use tax on internet, mail order, or other out-of-state purchases.” Your next question should be how effective has collection been? You might assume that it wasn’t effective and that’s the reason for HB 3659. The only problem is that very few individuals have filed the IL-1040 with this new line. Believe it or not, with all of the yelling and screaming going on the Illinois legislature, there has never before been a line on the IL-1040 for individuals to pay their use tax. I did some digging and there has been form ST-44 (pdf) for payment of use tax but it was not referenced in the 2009 IL-1040 instructions.

It seems to me that the best course of action for Illinois to take (or any state for that matter) is to let line 22 take effect and roll out an education program to inform taxpayers about this requirement. In addition, leveling fines for non-compliance would work as well. [Disclaimer: I report my online purchases on my California form 540.]

What about tax preparers?

When a tax professional, whether a CPA or an enrolled agent, prepares a tax return, they are required to sign it. They state that to the best of their knowledge, the return is correct.

Illinois has a use tax worksheet as part of the IL-1040 instructions. Why not make it a form that gets included with the return? Better yet, if this is such an important issue, require that both taxpayers and tax preparers must sign it. Again, educate taxpayers that they must pay use tax.

Plus, every state has a department that certifies CPAs. In Illinois it is the Department of Financial & Professional Regulation. As part of continuing professional education, the state could require training regarding use tax. I don’t know how it would be more than 10 or 15 minutes but it sure would get the point across.

Tax software can help

Intuit and other makers of tax software like to maintain good relations with the various makers of tax forms (e.g. Illinois Department of Revenue). The states can ask Intuit to have a question posed to taxpayers and tax professionals before a return can be printed or filed electronically: Did you pay your use tax? Of course, it could also be a required field that doesn’t have an override.

Some states may also be able to require this. While the Federal government cannot copyright documents that it produces (they belong to us, the people), most states can. If the tax software companies want to use these forms, they will have to agree to certain terms.

An alternative solution

When I met with state legislators and their staffs in Sacramento and their home offices in Los Angeles, I was surprised that they always asked me for an alternative solution to raising the money if they didn’t pass this bill in California. It baffled me why I should be required to have one. This is a bad bill. To me, it would be akin to my proposing to close all of the prisons in the state to save billions of dollars annually. No one would do that because there are negative repercussions to it. Well, killing small businesses is bad in my book.

I finally have a solution: The states have legal relationships that they should work with to collect use tax. Stop trying to improperly use affiliate relationships to (quite possibly illegally) establish nexus. The best part for lawmakers is that under my plan, they don’t need to take sides between small businesses (e.g. affiliates) and the big box retailers (who donate millions to politicians campaigns).

As for Illinois, HB 3659 doesn’t go into effect until July 1. There is still time to put it on hold and give line 22 a chance to work.

UPDATE (9/1): Commission Junction posted on its website that AB 1625 will be heard today. Last year the Governor vetoed a similar measure, and we are told that the Governor has not altered his position on this new tax; however, despite this, we are concerned about last minute political compromises. If you are in California, we urge you contact your State Senator and Assembly member!

You may have read on ReveNews that Overstock was considering terminating its California affiliates and that it likely wouldn’t unless AB 1625 passed. AB 1625 is a bill that authorizes the legislature to enact statutory changes to the Budget Act of 2010. It is assumed that proponents of the bill will include changes to the definition of nexus, or presence in the State, to encapsulate any out-of-state store with online affiliates who are based in California.

Last year, Overstock terminated its relationship with California affiliates after the prior nexus tax bill AB 178 passed. Governor Arnold Schwarzenegger vetoed the legislation. At that time the Governor’s office called Overstock’s President Jonathan E. Johnson III and issued a statement that Governor Schwarzenegger would not let such a bill pass. He is still governor. [Author's Note: I think that the bill will become law if Jerry Brown wins the gubernatorial election in November but not if Meg Whitman wins.]

Déjà vu

Well today it happened again. We just received an e-mail from Commission Junction, Overstock’s affiliate network, informing us that we have been terminated from its affiliate program (see below). Technically CJ’s policies require a one-week notice so I assume that Overstock is sending a message to state legislators that this is what will happen should they enact AB 1625 into law. [Author's Note: I cannot find any information that would show that AB 1625 was passed by either house of the California Legislature.]

Dear Cashbaq,

We regret to inform you that the Commission Junction advertiser Overstock has chosen to expire its affiliation with you effective 7-Sep-2010.

If you would like to locate another advertiser in the network to partner with, login to your Account Manager (http://www.cj.com/login.jsp) and visit the Get Links tab.

Best Regards,

Client Services
Commission Junction

It looks like Overstock is playing chicken with the California Senate again:

If you are an affiliate manager, please wait until after the bill passes, the Governor vetoes it and the Legislature doesn’t have the votes to override the bill to terminate us. We’d really appreciate it.

Now that I have your attention, Overstock may terminate its California affiliates tomorrow. The State Legislature is once again considering a bill that would make the Affiliate Nexus Tax law in California. If you are not familiar with this legislation, it defines affiliates as salespeople in order to establish nexus (the legal word for presence in the state) to out of state retailers (namely Amazon and Overstock).

We’ve been through this before. It started out as AB178 a couple of years ago. Kerri Pollard, General Manager of Commission Junction, and I went to Sacramento to testify before the Budget and Finance sub-committee. As my cab pulled up at the State Capitol, I received an e-mail that the bill was pulled by its sponsor. It turns out that there weren’t enough votes to get it out of even the sub-committee.

Now its here… again. Last year it was passed under the cover of darkness and the Governor vetoed it. Overstock terminated us last year as part of the process. Only after the Governor vetoed the bill and issued a statement that he would not allow the Affiliate Nexus Tax to become law did Overstock reinstate all of us. Fortunately, CJ’s policies give us all a week before the termination takes effect so we would have time for the Governor to use his veto stamp (can’t you just picture it in slow motion… the stamp dropping onto parchment on the Governator’s desk…. cigar in his mouth (yes, it would be in the tent outside the Capitol)).

If you are a California publisher in the Overstock program, contact your state senator… NOW. Forward Overstock’s letter and explain how AB1625 (the current form of the Affiliate Nexus Tax) will hurt small businesses in your senator’s district. If you need more information or drafts of similar letters, take a look at the Performance Marketing Association’s website.

Also, there was a good op-ed piece by Loren Bendele in today’s LA Business Journal.

If you didn’t get Overstock’s letter, here it is. Remember not to beat up Overstock for this. This is a bad law that will hurt California’s small businesses and will not generate any revenue.

OVERSTOCK.COM, INC.
6350 SOUTH 3000 EAST
SALT LAKE CITY, UT 84121
PHONE: (801) 947-3100
FACSIMILE: (801) 947-3144

August 30, 2010

Dear Cashbaq:

Overstock.com values your advertising efforts, and hopes to be in a position to continue our business connection for years to come. However, as we notified you in February, there is a measure under consideration in California, likely to be voted on tomorrow, which, if it passes, will likely result in the termination of our business connection. We are urging you to contact your Senator in the California Legislature immediately to oppose the affiliate nexus tax.

By tomorrow the California Senate will have to consider the new tax, which appeared in the Assembly’s final budget proposal as AB 1625 (Section 1), or it will die for this year. In order to pass, AB 1625 needs a 2/3 majority vote. Its chances of passage are unclear; consequently, your efforts in opposition will be highly effective.

Last year the Governor vetoed a similar measure, and we are told that the Governor has not altered his position on this new tax; however, despite this, we are concerned about last minute political compromises.

You will find information on how to contact your State Senator at this location on the Performance Marketing Association’s website.

Please waste no time in contacting your Senator today to oppose the affiliate nexus tax.

Respectfully,

Jonathan E. Johnson III
President Overstock.com, Inc.

Over the weekend, Facebook posted the following notice in my account:

Facebook Gave You 10 Free Credits! You received 10 free Facebook Credits (a $1.00 USD value). Use them to buy premium items in your favorite games on Facebook. Go play!

Well, I only find one app to be useful: Scrabble. I used Farmville twice and Yoville once… both with my son sitting next to me begging me to try them out. Once was enough (the second use of Farmville was to give my son a gift that was available only on that day. That is not a judgment of those games. They just aren’t for me).

Note: The other Facebook app that was useful was Statustalker which Craig Ogg, Keith Bussell and I created to enable Facebook users to comment on each others’ statuses. Facebook loved the idea so much that they built it into the site.

While I have no use for the free coins, I had to post a snarky Facebook status about it. It was:

Can I buy a vowel in Scrabble?

with the Facebook notice. This lead to a surprising series of comments…

What does Aunt Naomi have that I don’t?

Don’t answer that question. Aunt Naomi commented that she got 15 free coins. Another female friend told me that she got 25 free coins. A few others had similar amounts. #WTF

I’m sure that there is a wide range of amounts that Facebook users received. Please add yours to the comments section below.

Testing 1, 2, 3

Facebook obviously is testing different amounts. What I’m wondering is it based on past behavior or is it to evaluate the effect of coins on future behavior?

Facebook informed me that my 10 coins had a value of $1 so my friend with 25 coins got $5 of value.

Is Facebook rewarding behavior of people who play games? My anecdotal info says no as two of the people have each played one game and received different levels of coins.

Are women worth more to Facebook? The small sample size I have says yes. This would be inline with the fact that most social gamers are women.

Is Facebook trying to see if coins motivate people and what level motivates people with different psychographic and demographic profiles? I’m guessing this is the one. Facebook must have given coins to 100 million users or more. That is a statistically significant sample. The value that I was given is nothing as the coins can only be used to buy things that have a marginal cost of zero. Give away millions of dollars of free stuff, learn from it and then knock of Zynga and other providers. That sounds like the model here.

So let’s see if we can get some data and figure out what’s up. I assume that there will be a lot more now that Facebook has learned from Zynga, Second Life and other social networks that have been using payment systems for years.

Last week, Missy Ward, co-founder of Affiliate Summit, reignited the age-old discussion about what we call our industry. Is it affiliate marketing or performance marketing? Are we affiliates or publishers? Are they merchants or advertisers? Either you think this is important or you are thinking What?! Who cares?!? Still I think the topic is worth a few minutes of your reading time.

What’s in a name?

In years past, I didn’t want to be called an affiliate for two reasons. I don’t really care much about one reason anymore. That one is that there are so many people who give Affiliate Marketing a bad name. There are bad actors everywhere. We’ve come a long way to marginalize these guys… yes, but we still have a long way to go. Either we clean it up or someone else will do it for us.

The more important issue then, and HUGELY important today has to do with what the term affiliate means and how it is being used against us. I am not an affiliate because affiliate links are just one way that we monetize our sites. Why focus on that reason? Of course, the last time I brought this up, Shawn Collins, co-founder of Affiliate Summit, expanded Affiliate Marketing to include just about everything that we could include for monetization. I don’t think that AdSense is an affiliate program but Shawn does (or at least did). I don’t think that we’ll ever agree and entering into a cyclical argument is pointless.

Enter the California State Legislature… and many other states as well

When we went to Sacramento to lobby against AB178 (aka the Advertising Tax) we were told by our advisers not to focus on monetization types or compensation. It seems that to create nexus under the Advertising Tax, an affiliate needs to be compensated on a percentage of sales basis (aka cost per acquisition or CPA). So if we have a link on Cashbaq to a product being sold at Overstock and Overstock pays us a percentage of sales for that product, Overstock would have nexus in California and would be required to collect California sales tax if the Advertising Tax were to pass.

If you drive two three miles down the road to Shopzilla, you would see their nice offices. They too are located in the city of Los Angeles, but they won’t create nexus for Overstock with a link to that same product at Overstock for the same price. Why? Because a link to that same product at the same store for the same price would be compensated on a Cost Per Click (CPC) basis. Shopzilla isn’t an affiliate because of the way it gets paid. That’s advertising.

Are you following this? Neither are our state legislators, such nuances are beyond them. While there is no logic to the taxation we can follow the consequences of such actions to their logical conclusion.

The Logical Conclusion

Ultimately, I don’t care what as an industry we are called. Legislators will define us in their own terms regardless of whether we call ourselves performance marketers or affiliates. The threats to our industry are more important than a debate about what shingle we hang out. Should the Advertising Tax pass and become law in California, many Web-only stores will terminate their relationships with their affiliates. Pure and simple.

The largest ones will be able to switch to a CPC compensation and keep their relationships with their advertisers (Note that loyalty sites will have great difficulty under this scenario and will have to have fewer stores, move out of state or shut down). That means smaller companies will bear the brunt of the burden of such a tax. Many will be forced to shut their doors. Of course, the irony is that small business are generally the ones that lead the economies out of recessions; and California is so heavily tech dependent.

A Personal Note on Dinner

Oh and Missy, dinner is at 7:00. Don’t be late!

You probably haven’t heard about my state’s referendum on the Advertising Tax. It’s not a ballot proposition. It’s the gubernatorial election.

Politics are complex. Many readers will bristle at my boiling down California’s election between Democrat Jerry Brown and Republican Meg Whitman to a single issue.

[To set aside all other issues I'll just say that politics in the United States today (and California for sure) are not working they way they should. Personally, I don't want to see the State Legislature and the governor's mansion controlled by a single party. Neither has shown the responsibility in governing to deserve it.]

AB178 / AB2078 / etc…

The Advertising Tax began in California as AB178 a couple of years ago. It was co-sponsored by Assm. Charles Calderon, a Sacramento veteran who has many years of fighting for good causes and effecting change, and new-comer Assm. Nancy Skinner. Unfortunately, they were sold a bad bill by a lobbyist for many of the trade unions. What do the trade unions know about online sales? Just the false promise of increased sales tax revenue.

No one bothered to evaluate the negative effect the legislation would have on California’s small businesses such as mine. AB178 couldn’t make it out of the Revenue and Tax sub-committee and was snuck into the State’s budget in a trailer bill at the eleventh hour. Governor Schwarzenegger vetoed it and made a strong statement about it after Overstock terminated 100% of its California affiliates. We were reinstated into the program the next day.

The State Legislature is consider both New York and Colorado versions of the bill. There is a coalition of large and small businesses fighting these bills. We’ll see what happens with it.

The Advertising Tax, Jerry Brown and Meg Whitman

I haven’t seen any statements from either candidate about the Advertising Tax so you might be wondering why I boil the election down to this one issue. Simply put, if Jerry Brown wins, I predict that the Legislature will pass the most encompassing version of this bill in the first 90 days of its session and Governor Brown will sign it. It will be hailed as significant legislation to generate revenue and level the playing field for brick-and-mortar and online stores. The next day California’s affiliates will see significant portions of their revenues disappear as stores that do not have nexus in California terminate their California affiliates (Amazon and Overstock probably will do so prior to the legislation taking effect).

Other stores might decide to go the route of Drs. Foster and Smith and simply close down their affiliate programs in total.

In the end, there will be few stores that start to collect sales tax from California residents and the State will see its income tax revenue decline as affiliate move out of state, sell to out-of-state companies, go bankrupt or simply just have their revenues decrease. I don’t see this as a good solution for California… and I think that Meg Whitman will veto every version of the bill, not to help eBay which is opposed to the legislation but because she understands the harm the bill will do to California’s tech industry and that it won’t help the State or brick-and-mortar stores.

I’m voting against the Advertising Tax!

A great thing happened this week: Google went transparent. Well, kind of.

Google announced that it pays 68 percent of its advertising revenue to publishers on AdSense for content and 51 percent for AdSense for mobile. Hmmmm, anti-trust lawsuits it’s dealing with in Europe. But more likely, I have a sneaking suspicion with the FTC ’s ever increasing interest in our industry. Many of us have been saying for a long time that if we don’t regulate ourselves, the government will.

Let’s see. Yahoo killed Search Submit Pro (aka Paid Inclusion / nee Inktomi) at least seven months prior to giving its search results to Bing. The service ran almost on autopilot. Sales had been outsourced for years. It was as good as free money.

Remember the FTC regulation last year that bloggers were up in arms about? Those weren’t aimed at bloggers (at least not most bloggers). It was aimed at the nutraceutical ads that were on Yahoo’s home page (and many other places on the Web).

Google could just be seeing the regulation writing on the wall and adjusting accordingly.

In case you missed the news, and it was easy to miss as Twitter waited until 6:15 pm PDT to announce it, Twitter bought Atebits, the two-person company that makes Tweetie.

I wrote about the acquisition on my blog and the implications for Twitter app developers.

This morning I woke up to the following tweet from @wporter:

@thedavidlewis What’s the difference between a #Twitter developer & an affiliate? Not much.

Wayne raises an interesting point. Is there a difference between the way that Twitter may have just pulled the rug out from under a group of app developers (and might do it again with its own built or bought image server, etc.) and what affiliates/publishers often feel happens when they are successful with merchants?

Wayne, @samharrelson and I have had a few tweets on this today but the short form of Twitter (~115 characters when you reference two people) and Twitter’s complete lack of threading for conversations (or the ability to follow or even know about such conversations) means that I am going to try moving the discussion here and opening it up to the ReveNews community.

So, what do you think?