27

Mar

Arguments Against CA’s New Sales Tax Bill Targeting Affiliate Marketers

Posted by: Jeremy Reither

Just like New York did in mid-2008, California is attempting to pass new legislation that would levy a sales tax california based businesses and individuals who make money online through affiliate marketing – a form of internet marketing in which advertisers pay publishers only on commission (a percentage of sales generated, for example).

After seeing how the NY legislation affected the affiliate marketing industry there (negatively), affiliate marketers in California are none too pleased with the new AB 178 Bill making its way through Sacramento. I recently read a pretty concise description of the bill, and what I consider fairly strong argument against it (see below).

Disclosure: I do make some money from affiliate marketing, and sure, I might prefer not to pay taxes on that income. But I don’t rely very heavily on that income, so I can offer a more objective opinion than some whose livelihoods are primarily tied to affiliate marketing.

That said, I disagree with the tax proposal in the bill for one major objective reason: affiliate marketing is a form of advertising; not sales. How can you rightfully charge sales tax on advertising revenue?

That statement – about affiliate marketing being a form of advertising (not sales) – I first read in an email from Brook Schaaf (a guy who’s pretty well plugged into the affiliate marketing space). Brook runs an agency called Schaaf Consulting that offers outsourced management of affiliate programs. His full email summarizing the bill and his arguments against it is below.

On Mar 24, 2009, at 10:18 AM, Schaaf, Brook wrote:

Hi All,

I have been involved in fighting California’s AB 178 with the Performance Marketing Alliance and others and wanted to give a review of the situation and where we’re at.

What is AB 178?

AB 178 is a California version of New York’s “Amazon Tax” that has not yet gone to committee. This bill is a constitutionally-dubious attempt to leverage in-state affiliates as tax nexus, which is to say – a physical presence in the state for out of state retailers. This means that out of state retailers would be obliged to collect and remit sales taxes for California.

Why Should I Care?

Bills like this will have a chilling effect on the affiliate marketing industry. When New York passed their bill last year, hundreds of merchants with affiliate programs removed all their New York affiliates, decimating the income of some affiliates. The number of merchants dropping affiliates probably would have been higher except that affiliates had to engage in a “solicitation” activity, such as sending emails. Many more merchants simply forbade their affiliates from sending emails.

It is worth noting that California’s bill is written in such an overly-broad way that it would potentially apply to any sort of advertising medium at all, including television, radio, Google Adwords, networks, newspapers, agencies, etc. It is intended to apply only to affiliates so the bill may be re-worded.

In short, the bill will diminish dollars in the affiliate space and give us all legal headaches.

What Are Arguments Against AB 178?

* This bill will diminish the revenues of California small businesses, probably to the point of insolvency for some. This decrease in income and other tax revenue for California is likely to exceed any income from the sales tax.

* The bill is currently written in overly broad language and will cause confusion and hesitation in the marketplace.

* Most merchants are not in a position to collect taxes even if they want to because tax law is complicated and development resources are lacking. (If you think it takes a long time to get a pixel posted…)

* This bill is probably unconstitutional because affiliate marketing is a form of ADVERTISING, not SALES. (This is the single biggest point most outsiders don’t seem to understand.)

Are There Other Such Bills?

Yes, currently Hawaii, Connecticut, Tennessee, and Minnesota are also considering bills. Hawaii had a hearing yesterday and the bill passed in committee

What Are We Doing About It? What Can I Do About It?

You can write to your publisher base to alert them to the issue and spur them into action! Write a letter directly to the state legislators or sign the group letter.

Next Tuesday, on March 31, Karen Garcia and I are organizing a legislative visit day.

On April 13, the bill will be heard in committee. Everyone should come up for this, if possible – and bring affiliates!

This bill is also being fought by the California Chamber of Commerce and the California Taxpayers Association.

Brook Schaaf, Schaaf Consulting
http://schaafco.com/

While Brook obviously points out several issues he has with the bill, and some of them tug at the heart strings a little (if you’re a small business owner), the one that really hits home for me is the last one: “affiliate marketing is a form of advertising, not sales.” That is the bottom line.

The danger of this bill is that it’s a slippery slope. If you consider affiliate marketing a form of sales, then who’s to say that other forms of advertising aren’t considered sales as well? Legislators are trying to make the argument that because there’s a performance incentive tied to the revenue of affiliate marketers, that it’s a form of sales. But those incentives are just a product of the incredible trackability and measurability of marketing on the internet. Let’s not punish marketers for using technology to make the cost of advertising more equitable for advertisers.

FYI: The information you need to write letters and get involved, if you feel so inclined, is on the Performance Marketing Alliance website.

More arguments against the bill:

• ReveNews
• 5 Star Affiliate Programs

Sponsored Link:

Affiliate Program Management from Pepperjam