Advertising Tax Effect: Drs. Foster & Smith Shuts Down Its Affiliate Program

You read that right. Today Drs. Foster & Smith, a pet medicine retailer our of Wisconsin, has shut down its entire affiliate program due to the Advertising Tax that has passed in 3 states and is being considered in many more. Oh, and it is effective immediately!

The reason stated was not that Drs. Foster & Smith didn’t want to collect sales and use tax for these states, as onerous as that may be.  Rather the reason was that Drs. Foster & Smith has been advised that it may be subject to state income tax. So rather than attempt to comply with a moving and often nebulous target they have simply decided to shut down their affiliate program.

The e-mail we received is below. I wrote more detail of the implications of this and suggestions for state legislators on my blog (italics and bold added by me for emphasis).

It is with great regret that we have to inform you that we are shutting down affiliate marketing at Drs. Foster and Smith effective immediately  February 22, 2010.  This closure is across the board in all states with all affiliates and is not related to you only as one of our affiliates.

We regret having to do this for a variety of reasons, not the least of which is that so many of you have done a great job for Drs. Foster and Smith and will be adversely affected by the loss of revenue from Drs. Foster and Smith sales.  Thank you for all you have done to promote our company on your web sites.  We apologize for the hardship and inconvenience that this creates for you.

The single reason for the decision at this time is the moving target of the ever-growing patchwork quilt of state legislatures that are considering nexus legislation relative to affiliate marketing and sales tax. It has become increasingly difficult to determine who is considering such laws, where they are in the process and what the ramifications are in each state.  What affiliates may not be aware of is that such nexus situations do not only relate to sales tax collection, but potentially state income tax for a corporation as well.

We wish there was clarity on this issue from state to state and nationally, but there isn’t.  So until this matter is cleared up nationally, we are shutting down all affiliate marketing.  We apologize for any hardships this brings to you and your team.  We have greatly appreciated the work that you have done on our behalf.  The sudden nature of the move by California to reintroduce legislation late last week and to push for a quick vote, emphasized the ever-changing nature of this issue and our need to be ahead of such votes and decisions.

With our appreciation for your contribution to our company,

Sincerely,

Drs. Foster and Smith Affiliate Marketing Team

The company raises a legitimate concern. Even as a retired certified public accountant I hadn’t thought of the impact of nexus on filing corporate state tax returns. I can see how that would be a concern to any CFO. Killing the entire program seems a bit extreme. Why not leave it in the 3 states that don’t have sales tax and as an international program?

What do you think is going to happen to affiliate marketing this year?

About David Lewis

David Lewis is the CEO and founder of 77Blue which operates online shopping websites. Prior to that, he worked in business development at GoTo / Overture. David was a product manager and accountant in past lives. In 2006, David won Commission Junction’s Horizon Award for Innovation and was a finalist for Linkshare’s Golden Link Award. You can find David on Twitter @thedavidlewis.

Website: http://davidlew.is

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