What does the law do?

Basically, it’s California’s way of trying to circumvent a federal law regarding collecting sales tax in a state where a business has a physical presence, be it a store front, a warehouse, distribution center, mailbox, what have you. The new law includes affiliate marketers in California as having a physical presence. California law makers would have you believe that it would increase tax revenue at a time when the state is heavily in debt and the base tax rate reverted from 8.25% back to 7.25%.

What will it really do?

The lawmakers either ignored, or failed to realize, the fact that those same affiliate marketers the law relies on are the same ones who pay income tax to the state on the commissions they earn from affiliate marketing – from companies like Amazon.com. The enactment of this law will also require businesses to be able to track the different state, county and city tax rates around the country and charge buyers accordingly.

And…

Additionally, California is forcing tax collection onto companies that are not even in California, as long as they have an affiliate program. Owners, employees and representatives (besides affiliates) of those companies do not get to vote, nor enjoy any benefits of their tax collection. They don’t drive on our roads, they don’t use our emergency services, and they sure as hell didn’t get a say in the matter.

What happened?

Simply put, Amazon.com dropped 25,000 California-based affiliates from their affiliate program in order to continue to avoid collecting sales tax from California residents. Just like what they did in Illinois and Colorado! Some numbers were crunched on CalWatchDog… In 2009 California received $124 million in income taxes from affiliates.

So, instead of the up to $500 million Skinner says might be collected, it might be just $152 million. And notice the key word “static.” That means the estimate assumes Amazon won’t fire its affiliates; and the affiliates won’t be hurt and many of the shut down, or move to more accommodating states.

Let’s do the math: If only $152 million is collected, but $124 million in income taxes are lost (as Runner says), then the net would be just $26 million. That’s less than $1 per Californian.

What does that mean?

California will not be getting any of the sales tax they so desperately wanted from Amazon.com sales. California will no longer be getting income tax revenue from commissions that would have been derived from sales sent to Amazon.com. Companies and individual affiliate marketers will leave California, taking with them their income taxes, sales taxes and any revenue that the state could have generated off of them and/or their businesses.

So, who’s behind this?

It’s not just California lawmakers that are responsible for this, and I’m not going to place the blame on voters. There was a large lobbying effort by big box retailers like Wal-Mart Stores Inc., Target Corp., Best Buy Co. and Barnes & Noble Inc. Note that these stores also have affiliate programs, but because they already have a physical presence in presumably every state, they already have the mechanisms in place to collect sales tax. They’re looking to thin the herd.

How do you really feel?

I fought over this issue a couple years ago and succumbed to the idea that it was just a matter of time. I still have a glimmer of hope that it can be removed/reverted and we can go back to business as normal. Some California lawmakers cannot possibly be so blind as to not see that this is a lose-lose situation. We may eventually get to a point where the federal law is rewritten to address the diversity and complexity of the Internet age. Until then, we all lose out with laws like this.

This is a huge relief. As it is, with the recession, I’ve seen a fairly substantial decrease in online revenue, but it usually ebbs and flows, so I may do better next month. We’ll see…

Thank you for all the support in contacting politicians and the media. It looks like we applied enough pressure to have a positive effect on small businesses in California. Let’s hope other states will follow suit.

As you may already know, there are proposed California bills that could require the collection of sales tax for online purchases similar to bills proposed in other states and that could resemble the law that recently passed in New York State. At this time, a hearing date for AB 178 has been set for April 13, 2009. As with all laws, if passed, these laws may or may not apply to you and your business.

Commission Junction is headquartered in California and impacted by the current California budget crisis. Nevertheless, we are opposed to the recently proposed legislation and are working with a lobbyist and other groups in hopes that we can influence the rejection of the bills’ passage. Rest assured, we recognize that our industry and many of our clients may be impacted by these bills.

The application of the bills is dependent on particular business and factual circumstances, and Commission Junction is not in a position to provide legal and tax advice regarding the bills. However, we encourage you to perform the appropriate due diligence as it relates to your business. You may be contacted by advertisers in the Commission Junction network as they perform their due diligence.

Additionally, following are two sources of information on the proposed California bills that you may find helpful:

• Link 1
• Link 2

If you feel that you need more counsel on the bills, we recommend you seek independent tax and legal advice.

For more information, links and resources for what you can do and who you can contact, please click here.

I won’t get into the specifics about the New York issue as I am still admittedly rather ignorant on it and there is plenty of information out there already. What I want to provide is the information I’ve found on the California bill, introduced by Charles Calderon (D) and Nancy Skinner (D). It appears that the California bill is much more air tight than New York’s. Here is the section that applies to affiliates and referred sales via links:

(5) Any retailer entering into an agreement with a resident of
this state under which the resident, for a commission or other
consideration, directly or indirectly refers potential customers of
tangible personal property, whether by a link or an Internet Web site
or otherwise, to the retailer, if the cumulative gross receipts or
sales price from sales by the retailer to customers in this state who
are referred pursuant to these agreements is in excess of ten
thousand dollars ($10,000) during the preceding four calendar
quarterly periods. This paragraph shall not apply if the retailer can
demonstrate that the resident with whom the retailer has an
agreement did not engage in referrals in the state on behalf of the
retailer that would satisfy the requirements of the commerce clause
of the United States Constitution during the four quarterly periods
in question.

If a company is located in California, they currently have to charge tax to California residents. From what I understand, the law will change as follows: Companies outside of California will have to tax all purchases made by California residents if the company has any affiliates located in California and those affiliates’ sales account for $10,000 or more of their quarterly sales. Once that mark has been reached, all sales made that quarter to California residents become taxable.  The reasoning behind this is that politicians believe the merchant is soliciting business, rather than simply advertising. The merchant would have the incredibly difficult task of proving they brought in less than $10,000 in California sales via California-based affiliates in order to not collect the tax. The answer for the merchant who does not want to deal with those taxes is to drop affiliates in California.

I asked Kevin Webster, of 72Kilowatts.com, about the situation, specifically how it affects those of us in affiliate marketing and if it affects in-house ad sales or CPC revenue. This is what he had to say:

1.) It directly impacts the merchant and the consumer. The affiliate is not involved in the tax process. However, some merchants will dump CA affiliates in order to avoid having to collect the sales tax.

2.) Your second question is a good one, as your law is worded a little different than the NY law. I read it that it affects ALL kinds of online advertising. But a lawyer will have to look at that more closely.

Once the affiliate “nexus” is created, meaning it’s determined that a merchant does $10k per quarter to CA residents from CA affiliates (again, can be tough to determine, so many merchants just assume they “do” to avoid trouble), then ANY and ALL sales by that merchant to CA residents become taxable.

The affiliate question then becomes removed from the equation. In other words, affiliates are being used to set the criteria, but once it’s set, they no longer matter.

Please take action: Contact Californai State Assembly, California State Senate, Twitter Schwarzenegger, Revenue and Taxation Committee Members

- Nancy Skinner – Tel: (916) 319-2014 (staffer: Liz Mooney)
- Charles Calderon – Tel: (916) 319-2058 (staffer: Tom White)

You can also leave comments on the bill here.

Do not just call or email – write letters too!

If you call and speak to a staffer, chances are the message will go nowhere and will probably lie to you, especially if you ask for a hearing date in order to speak out against it. They do not want the opposition! And don’t simply contact the co-authors, one of which is the Chairman for the Assembly Revenue and Taxation Committee. Write to your own Assembly Member and Senator as well. The earliest committee vote is, apparently, scheduled for March 5, 2009.

If passed, this bill may very well mean that many smaller merchants may go out of business. The manpower required of small business owners (staffing, collecting, paying, etc.) may be too much for them to bear. For those affiliates who have a lot of their eggs in one basket, and if that basket were a merchant who would would rather drop you than to deal with the taxes, you need to be ready, or else risk having your business destroyed.

Not that this is scary enough as it is, but consider that the two states to look at this law are New York and California. As these two extremely large states, in terms of population and revenue, will become examples, other states are sure to follow. As states, such as California, introduce bills like AB 178, affiliates and businesses will look to move elsewhere. This will be very detrimental to any state considering such action. As one affiliate pointed out, “Politicians will take the way that gives them the better image within their own state. Choice – collect tax from out of state merchant or raise other taxes that get noticed (school, property income…)”

For more information check out the California Affiliate Forum, New York Affiliate Forum, 72Kilowatts.comand NYAffiliateVoice.com.

1. Affiliate Marketing – Some of the big networks in affiliate marketing include Commission Junction, Linkshare, ShareASale, among many others. Don’t fall into the trap of believing that you can throw up a page full of banners and generate an income. Having too many ads is a sure way to drive away your visitors. Tailor your ads to your posts and you can not only provide a service, but make more money than having random, un-related ads on your blog. For more information on affiliate marketing, I strongly suggest you join ABestWeb.
2. Paid Posting – There are several options available for bloggers who wish to get paid to post. One of which is the recently redesigned PayingPost.com which will, if approved, present opportunities to you that you can choose to accept and blog about. If your post meets the requirements, you can earn a few bucks per post. Keep in mind that your blog will need to be somewhat established first. What’s great about this option is that you can earn while doing something that you’d be doing anyway, blogging. If you wish to post an opportunity for bloggers, click here.
3. In-house Ad Sales – Many people overlook this option, opting only for affiliate ads or adsense for banner and link advertising. By offering site sponsorship directly (see 125×125 ads to the right and the advertising page), you can control the price, the ads and it can be a much more guaranteed form of income. Some advertisers can also help you by sponsoring, or providing prizes for contests. If you think it’s too hard, look into OpenX, formerly phpAdsNew, to serve the ads and PayPal to handle subscriptions. It can be fairly automated. If that’s still too hands-on, check out Bidvertiser and PerformancingAds.
4. Contextual CPC Ads – Contextual ads are those that display depending on the content of they page of your site on which they reside. There are many pros and cons of using Google Adsense (see sponsors ads to the left) or Yahoo! Publisher Network to serve contextual CPC (cost per click) ads. If done correctly, they can generate substantial revenue. But there are many marketers out there looking to swindle new bloggers out of their money by offering them the road to quick cash. Your success with contextual CPC advertising generally depends on the traffic to your blog, whether or not they have a high level of ad blindness, and the content of your blog.
5. Contextual Links – Rather than having CPC banners and ad blocks on your blog, you can have CPC links directly in your posts. These ads are usually set to appear differently (i.e. two underlines) so as to not confuse the visitor. Once the link is moused over, an ad bubble pops up. One such network is Kontera – you can run this in addition to Adsense and not be in breach of terms.